“Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business,” wrote Peter Drucker.
I’ve mentioned before that I’m a big fan of Drucker. In this post I’m going to break down his famous quote about creating a customer. We’ll discuss how it applies to what we are doing at Vendo. It’s a useful exercise for us. Perhaps you’d like to try it on your own business.
“Because the purpose of business is to create a customer…”
In the US creating profit for shareholders is currently the dominant view of why a company exists. In Europe a company’s purpose is to create value for stakeholders, a broader definition. It includes shareholders but also employees, customers and people who don’t produce or buy your products but are affected by them. No continent yet believes that the purpose of business is to create a customer. So what’s going on in “Druckerlandia?”
He’s asking for a Copernican shift in focus. It’s dizzying to imagine how you change the way you make decisions as you move from the narrow US focus on shareholders value, to the wide European focus on a balancing value for all who are touched by a company’s activities and back to a narrow focus again, this time on the customer.
According to Jack Trout, “Today, when top management is surveyed, their priorities in order are: finance, sales, production, management, legal and people. Missing from the list: marketing and innovation.”
Innovation is about creating new types of value for your chosen customers. Often this comes from lateral thinking. For example, we’re bringing dynamic pricing to our industry. It’s new to our industry but it’s not new to the world. It has a very long history. It was first practiced thousands of years ago in ancient, dusty markets. The “market-er” working his stall would size up a customer and decide which price to offer him. Sometimes higher, sometimes lower.
Dynamic pricing was revived by the airlines in the 70’s and it was copied by the hotel industry in the 80’s. Lately the explosion of data available on the internet and developments in artificial intelligence have enabled us to do it successfully in our industry. What value does it create for our chosen customers?
We sell our service to people who, in turn, sell digital content online. Broadly speaking they value Vendo’s dynamic pricing in four ways.
First, “Not doing stupid stuff.” Obama’s famous description of his foreign policy approach makes sense to our customers. It’s dumb to give everyone the same price. You lose money. Some shoppers will pay more. You should charge them more so you make more money. Other shoppers will only buy at a lower price. You should charge them less or miss the sale and lose money. Our customers don’t like doing stupid stuff.
Second, “Innovation.” We all got into tech because we like new things. We get to create fresh solutions to old problems. Dynamic pricing is a new thing that didn’t exist before in our industry. It’s cool, it’s the future, and scratching that itch is part of why we are in tech.
Third, “Ability to compete.” Our customers are in a brutally competitive market. Making 10% or 20% more per customer is the difference between profitably buying traffic or watching someone else take your ad spots. As margins get thinner a boost in the range of 10% can mean you get those sales instead of your competitor.
Fourth, “Security.” Change is accelerating. We see it everywhere. It used to be just the old, retired guys who talked about how quickly everything is changing. Now young men in their twenties feel like they can’t keep up with the stream of innovation flowing through the tech blogs. In a rapidly changing world a company that embraces innovation will succeed, other’s won’t. Our customers are frustrated with the self-satisfaction and complacency of the “dinosaur billers” who don’t know how to innovate. They see those billers as mom and pop shops who got lucky (right time, right place) in the 90’s (like Yahoo!) but don’t have a plan for the future. Our clients value our dynamic pricing for what it says about our culture and focus…and our future.
What does it mean to create a customer? A customer is defined as a person who pays a company for it’s goods and services.
Whitney Hess summarizes the process of creating a customer well. “The function of marketing is to attract the prospect. The function of innovation is to transform the prospect. The prospect can’t be changed if they’re not paying attention; they won’t pay attention if they sense they can’t be changed. Both functions, in harmony, are required to seal the deal: to convert a prospect into a customer, to get paid.”
We’d like to explore these ideas more with our customers. We want to know how they apply them to their business and also to our relationship. We’re looking forward to the conversations.