In This Chapter

If you’re going to invest time, money, and energy developing products and services to offer your customers, shouldn’t you offer what your customer wants? This is the goal, of course, but the challenge is to determine exactly what the customer wants. Certainly you may have some idea, but given the costs of development, you want a greater level of assurance than your own gut instinct that what you are going to develop will actually be successful in the marketplace.

One of the best ways to determine what your customers want is to ask them—get them involved in the decision-making process. This chapter shows you how you can reach out to your customers to get their insights and obtain the data you need to make good decisions on new or updated products and services.

Market research enables you to gather additional information about a particular subject to make better decisions. Let’s look at an example. You run a small shop that does screen printing on flags. You would like to expand your business to include screen-printed banners. You might begin to research the market for screen-printed banners by considering what companies would be your competitors in this area, the types of banners they produce, the costs of those banners, and what kind of customers they sell their products to.

This kind of research can be done fairly easily using the World Wide Web.

You might then ask your current customers if they have any interest in purchasing screen-printed banners. You can do this through voice-to-voice interviews with members of your customer council (our first choice; see Chapter 10) or by surveying current and past customers. The responses you get from your customers will inform your decision.

There are a variety of resources for gathering market research data. Certainly you can get top-quality research reports on a variety of subjects from Gartner Group, Forrester Research, NPD Group, and other such organizations. But these can be costly, and in many cases you may need to be a member organization to purchase research studies.

Don’t discount the variety of market research resources available to you at low or no cost, including the following:

Let’s consider how you can use your company’s customers and vendors to generate good product and service development ideas. Assume you sell project management training programs, and you deliver these programs both in person and as online tutorials. You want to do some research to determine the best options for expanding your services to offer consulting services in addition to the training programs. You decide on the following approach: you’ll survey customers to determine their interest in hiring a project management consultant. (One best practice here is to use a powerful survey interface like the one offered at www.surveymonkey.com.) You will survey the following groups:

For the last group of businesses you want to survey, you decide to purchase a list of names and e-mail addresses from a variety of project management associations. You are confident that these individuals will give you good information, since they already belong to a project management association. Because you purchased an “opt-in” list of individuals who have agreed to receive such queries, you can set up a survey for this group as well.

Additionally, you research competitors and the types of project management consulting they provide to their customers. This gives you an idea of the options available to support customer needs.

Vendors and suppliers are another way to collect data to make decisions around product and service development. Maintaining close ties with your vendors and suppliers is always a best practice and certainly one that pays off when you want to do a bit of information gathering. Vendors and suppliers work with other businesses besides yours and likely have some great information they can share with you. Although you can’t expect them to share confidential information about other businesses or your competitors, they do see what is happening in a variety of businesses and may have a broader perspective of the marketplace based on the work they do. Any information they provide can help you decide where to invest money in new product development.

Continuing with our example, the company may choose to reach out to its own freelance instructors to learn about what they are seeing as project management consulting needs in the marketplace.

Don’t forget about your employees when considering ideas for new products and services or for changes and updates to current products and services. Some of them are on the front line with your customers every day, and they often know what customers have on their minds.

You probably know how much a specific customer purchase is worth to your organization, but have you ever wondered about the dollar value of your long-term relationship with a given customer? If your business model incorporates any form of repeat purchase—and most do—then you will want to understand the likely lifetime value of your customer. Understanding this value is an essential best practice that helps you make good decisions about your investments in customer acquisition.

Let’s look at an example that will demonstrate how to determine the value of a customer for your business. Your business provides computer networking consulting services. Your typical customer spends $800 per engagement. You service your customers, on average, four times a year, bringing the business $3,200 per year in revenue per customer. Your net profit from that average revenue per customer is $2,000 per year. The lifetime of a customer is, on average, four years, making each customer worth $8,000 in net profit. This information ultimately helps you determine how much you should be willing to pay to gain a new customer. Let’s say that currently you pay $300 in marketing and sales to acquire a new customer. Given that you have determined your customer’s lifetime value is $8,000, $300 is quite reasonable as a cost of acquisition.

Of course, if yours is a new business, it is going to be harder to calculate the value of a customer. You should make an effort to start to gather the data, however. For now, make intelligent estimates. Keep records on your customers so you can, over time, track the value of a customer to your business with increasing accuracy.

Now let’s look at the other side: What is your value to the customer? Before spending a lot of time and money developing any new product or service, you will want to make sure it delivers customer value.

In other words, why do people purchase from you? Specifically, when people make repeat purchases from your organization, why do they do that? Determining the answer to this question is another essential best practice for your small business. Suppose you learn, through surveys and conversations with your customers, that they keep coming back to you year after year for the following reasons:

This information should affect not only your product and service development, but also your promotional, hiring, and planning processes.

You may think you know what is important for the customer—why they do business with you and purchase your products and services. The truth is, though, that you need to ask the question of the customer, and you need to ask regularly. Through in-depth person-to-person interviews, informal discussions, and annual customer feedback surveys, you must constantly ask variations on the question: Why do people purchase from your business? What does it take for them to recommend that someone else make a purchase?

Your customers probably include varying types of individuals or businesses. Each customer group may have different perspectives on what matters most. By segmenting your customer base—for example, by individual customers and business customers—you will be able to better track spending and repurchase behavior.

When you understand what is important to your customers as it relates to your products and services, you are in a better position to design your new products and services to suit their needs—to provide value. If you find in your research that your customers are purchasing from you simply because they have been doing so for a while and there are no other alternatives currently available, don’t waste time and money developing new products and services until you figure out what’s wrong with your current offerings—because you definitely have a problem. It’s only a matter of time before another vendor enters the marketplace.

The authors know of a situation with a small business whose owner truly believed he provided a great service to his customers and thought they were thrilled with him and his business. After many years of offering the service but never really having an in-depth conversation with his customers, he started to talk to them and learned that they weren’t completely happy with his service—particularly his business’s customer service. Their perception was that service was poor or nonexistent. They bought from him because there was no cost-effective alternative.

This was a wake-up call for the business owner! Here he thought all was going well, only to learn that his customers felt cornered into contracting with him because of a lack of alternatives. He knew that if a competitor entered the market (and, frankly, it was just a matter of time), he’d soon find himself out of business. He spent a significant amount of time with his current customers to learn what they wanted from his business and made changes in his processes and procedures to satisfy their needs.

The best way to understand the buying behavior of your customers—and therefore types of new products and services that would interest them—is to understand exactly who your customers are. That means learning more about your customers than you already know and being ready to do some digging to find the answers to these questions:

The more you know about your current customers, the better you can predict what additional products and services they will purchase and where to target your marketing efforts to attract new customers.

We know of one business that offers various business analysis training programs on topics such as requirements gathering and working with stakeholders. They took a copycat approach to developing new products: if their competitors came out with a new training program, they did the same. They didn’t bother to ask their customers if they were interested in that new program. Instead, they simply followed their competitors.

The problem is that they invested significant money in the development of training programs for a specific discipline only to have their customers tell them, “Gee, that’s great, but we already purchase that program from XYZ Company, have done so for many years, and are happy with the relationship.” Had the company bothered to survey its customers, it would have learned that its customers would have preferred to see improvements made in the company’s current training programs and even see those particular programs expanded. Customers were not interested in purchasing new training programs beyond the areas already offered by the company.

The lesson of this example is that it pays to partner with your customers. Invest money in development in those areas—products or services—that your current customers are interested in. Nothing does more to secure a relationship with your customers than listening to their needs and responding to them—whether by enhancing your current products and services or by developing cutting-edge offerings that address their challenges.

Customer councils are an excellent way to keep in touch with your customer and get feedback on developing new products and services.

For example, let’s say you own a small deli and are considering expanding your offerings to add french fries, onion rings, and fried seafood to the menu. Before you make the purchase of a fryer and other relevant equipment, you want to be sure the investment will be worth it. You invite some of your regular customers to a free lunch to get their thoughts. You learn from these customers that they are actually trying to eat healthier and would prefer lower-fat, lower-calorie offerings rather than fried food. You decide to go a step further and survey individuals in town who might choose to purchase from your deli. A simple survey sent to them reveals that they, too, would prefer a wider range of healthier choices. After processing all of this information, you decide to offer a variety of salads, fresh veggies, and fruit for your customers.

There are numerous best practices to draw on when setting up your customer council:

Suppose your business sells employee assessments that gauge whether candidates for a position will be a fit for the business culture. You want to expand your services to include assessments for succession planning and employee development efforts. You meet with your customer council to determine their level of need for such assessments and whether they would purchase those assessments from you should you choose to offer them. Here’s what you give back to your customers for the information they provide you:

Once you’ve developed a new product or service, ask members of your council to serve as beta testers at highly discounted rates or for free during a trial period. In exchange, they will provide you feedback and get a sense of ownership in the product or service, which breeds loyalty.

Depending on your business, consider using a wiki as a collaborative environment between you and your customers.

A collaboration site provides a place where customers can share information with each other and with you. Let’s look at an example of how you might use such a site for new product development.

Suppose you own a business that designs and sells storage bags for camera equipment. Your customers are photographers—usually independent—but some are businesses, including newspapers and television stations that have photographers on staff. You are looking to redesign your line of bags to update them with more features. You decide to use a wiki so that your customers can go online, discuss the bags, and suggest changes they would like to see to help them in their jobs. You now have the information you need to design new camera equipment bags that fit your customers’ needs.

Developing a pricing strategy for your products and services is not an easy task. There is quite a bit to consider, such as how your competitors price similar products and services, what customers will pay for the product or service, and how much profit you need. Certainly, the quality of your product affects your pricing strategy. You may have competitors, but if their product or service is not as high quality as yours, you can charge a higher price than they do.

When developing your pricing strategy, have the following information at your fingertips:

As a best practice, evaluate your pricing of products and services on a regular basis—at least annually. Things change in the marketplace—new competitors enter the market, customers’ needs change, economic conditions change—all of which will affect your pricing. In addition, consider how your pricing affects your distributors or resellers. For instance, if you have minimum or maximum pricing requirements or discounting restrictions, you should review those on a regular basis as well.

You might price to get more profits from your current offerings, to increase the amount of sales per unit, or to gain a larger share of the market. Depending on your goal, your pricing strategy will vary. For example, if you want to gain a larger share of the market from your competitors, you may price your product a bit lower than your competitor to gain market share. Of course, as with any pricing strategy, there are pros and cons to such a decision. Think carefully about what you want to achieve and how it will serve your business in the long run. If you price too low now, how will you justify higher prices later? If you do offer introductory pricing, communicate clearly that it is for a limited period of time so as not to irritate customers when you increase the price later.

You’ll need to know the following to price effectively against your competition:

Much of this information can be found on websites, press releases, and public records (for public companies).

The price you set for your product (per unit) or service (per hour, per diem, or project cost), less the cost of goods sold determines the gross margin of that product or service. Refer back to Chapter 12 for information on determining profitability of products or services sold to customers.

If the products you offer are of higher quality than your competitors’, you may be able to command a higher price. Benchmarking information you gather can be of great value in determining how to price your products and services against your competition, and it can be very easy to gather. For example, if you operate a deli, you can certainly test your competition’s quality of product by going to their deli and buying yourself lunch!

You don’t want to charge too little or too much for your services and products. Your goal is to find that happy medium. In addition to looking at what your competitors charge for similar products and services, consider the following when determining your price:

All of these issues will have an effect on your pricing. For example, you don’t want to set your “standard” price too low if you know you frequently offer customers discounts of 10 to 15 percent. Similarly, for products that are in a later life cycle and are moving toward becoming a commodity, you will not be able to set as high a price as a product or product line that is newer to the market.

Let’s assume that you sell Microsoft certified training programs, specifically Microsoft Office, Windows Server, and similar programs. However, many of these programs are commodities and are sold by so many training companies that you are forced to keep your prices low just to remain in the marketplace. This factor is affecting your business’s ability to turn a profit. Therefore, you decide that to keep your business successful and increase your profits, you need to expand your offerings to products that are not as popular but still make sense for your business, in that your marketing and sales processes do not have to change significantly.

Based on your research, you realize that some Microsoft products such as Sharepoint, Project Server, and similar enterprise-level products are increasing in demand; however, very few people are qualified to train and consult in these products. By offering these products, you are able to command a higher price, differentiate yourself from the competition, move yourself out of the commodity market, and begin to offer advanced services that your competitors do not yet have. You are staying a step ahead of the competition!

Consider holding a focus group session to determine how to price new products and services. Hire an expert to facilitate the session. Rather than focusing exclusively on your product, have the focus be on the type of product or service you offer. The focus group facilitator provides attendees with a detailed description of the product or service and asks the group a variety of questions to tease out what price range they would be willing to pay for that product or service under a variety of conditions.