Operations

Willingness to Pay
Willingness to Pay Jonathan Poland

Willingness to pay (WTP) is a measure of how much a customer is willing to pay for a product or service at a specific time and place. It is an important concept in economics and is often used to evaluate the potential success of marketing strategies such as pricing, branding, and sales.

Willingness to pay is determined by a number of factors, including the value that a customer places on the product or service, their income, and the availability of substitutes. It is typically expressed as a range, with a minimum WTP representing the lowest price at which a customer would be willing to purchase the product or service, and a maximum WTP representing the highest price they would be willing to pay.

Marketers use willingness to pay to assess the potential success of different pricing strategies. For example, they may conduct market research to determine the WTP of their target customers, and then set prices that fall within that range in order to maximize their sales. In addition, marketers may use WTP to evaluate the effectiveness of branding and sales strategies, and to make decisions about the allocation of resources.

Overall, willingness to pay is a key concept in economics that can provide valuable insights for marketers. By understanding the factors that determine WTP, marketers can develop effective pricing, branding, and sales strategies that help to maximize their revenue and profits. The following are factors that are known to impact willingness to pay.

Businesses vs Individuals

In many cases, businesses are willing to pay more than individual customers. For example, airlines make great efforts to charge business travelers more with yield management techniques.

Means

An individual’s income, disposable income and wealth.

Preferences

Enthusiasts for a particular product may be willing to pay more than those who view a product with indifference.

Values

In many cases, customers are willing to pay more for products that align with their values. For example, a customer may be willing to pay more for solar electricity than electricity generated with a fossil fuel.

Value Proposition

The value that is offered by a product or service. For example, a dog walking service may represent freedom and be extremely valuable to some customers.

Emotions

A brand that is able to instill positive emotions may command a higher price point as customers purchase with emotions as opposed to cold logic. For example, a pleasing customer experience may lead to emotions such as gratitude that make a customer less price sensitive towards a business.

Quality

Quality such as durability tends to command a higher willingness to pay.

Reviews & Recommendations

Social information such as recommendations and reviews. A primary factor in industries driven by reputation systems such as the hotel industry.

Brand Recognition

Customers may be willing to pay more for a brand simply because they recognize it.

Situation

If you’re stuck at the airport with nothing to drink, you may be willing to pay more for coffee. Brands may avoid charging more in this situation as it can build a sense of resentment. Charging more in a desperate situation such as a disaster is ethically questionable and potentially a compliance issue.

Final Offer
Final Offer Jonathan Poland

A final offer, also known as a best and final offer, is a negotiation tactic in which a party submits an offer on a take-it-or-leave-it basis. This means that the offer is presented as the final offer that will be made or accepted, and no further negotiation will take place. Final offers are often used in situations where the parties have reached an impasse and are unable to come to an agreement through further negotiation. By presenting a final offer, the party is attempting to put pressure on the other party to accept the offer, or risk losing the opportunity to reach a deal. Final offers can be effective in resolving negotiations, but they can also create tension and may not be suitable in all situations. The following are illustrative examples.

Goods & Services

A customer offers $500 for an antique. The sales person claims there is no way their manager would approve a price that low. The sales person requests the customer think about it and submit a final offer closer to $3500 before the item is sold to another customer. This puts the customer in a corner as the sales person is suggesting they will only accept one more bid that needs to be much higher.

Assets

Multiple buyers have submitted bids for a home. The seller requests all buyers to submit a best and final offer within three days. This prevents an incremental bidding war where each of the buyers can discover exactly how high the other bidders are willing to go. When each bidder is only allowed to make one more bid, they may bid high as they have great uncertainty about how high the competition will bid. This may work to the sellers advantage if they are confident the buyers are motivated to win the bid. Otherwise, bidders may simply resubmit their most recent bid as final.

Employment

An employer offers a candidate a salary of $90,000 despite a recent salary history of $140,000. The candidate claims they will not accept a salary under $140,000. The human resources representative claims it is very unlikely this would be approved as it is out of the range for the position. They ask the candidate to submit a final offer for the lowest salary they would accept. The candidate submits $140,000 as they feel the employer is bluffing and is willing to match their previous salary. This bid indicates the candidate will have to walk away from the offer if their salary demand is not met.

Agreements

Trade agreement negotiations hit a sticking point on the tariff rate for information technology services. One side claims a proposed rate of 25% is untenable and asks the other side to come back with a final proposal closer to 0% if they are serious about closing the deal.

Sticky Prices
Sticky Prices Jonathan Poland

Sticky prices are a common phenomenon in many markets, and they can have a significant impact on the overall economy. These prices are often resistant to changes in supply and demand, and they can persist for long periods of time even in the face of economic forces that would normally push prices in the opposite direction.

One possible reason for sticky prices is the existence of contracts or agreements that lock in prices for a certain period of time. For example, companies in a particular industry may agree to maintain their prices within a certain range in order to avoid competition on price. This can lead to prices that are “sticky” because they remain unchanged even in the face of changes in supply or demand.

Another factor that can contribute to sticky prices is the existence of psychological barriers that prevent prices from changing. For example, consumers may be resistant to paying higher prices for a particular product or service, and this can make it difficult for companies to increase their prices even when it is justified by changes in the market.

Sticky prices can be a source of market inefficiency and can lead to suboptimal allocation of resources. However, they can also provide stability and predictability in the economy, which can be beneficial for businesses and consumers.

Here are some examples of sticky prices:

  • The prices of certain products, such as gasoline or food items, may remain relatively stable despite fluctuations in supply and demand. This is often because consumers have a strong preference for these products and are willing to pay a certain price, regardless of the market conditions.
  • The salaries of certain workers, such as teachers or government employees, may remain unchanged for long periods of time even if the demand for their skills increases. This can be due to the existence of collective bargaining agreements or other factors that prevent wages from changing.
  • The prices of certain assets, such as real estate or stocks, may remain relatively stable even in the face of economic shocks. This can be because investors are hesitant to sell these assets at a lower price, and they are willing to hold onto them even if it means accepting lower returns.

Upselling
Upselling Jonathan Poland

Upselling is a sales technique that involves encouraging customers to purchase higher-priced, add-ons, or upgraded versions of products or services that they are already interested in. It is a common tactic used by salespeople, particularly in industries such as retail, hospitality, and travel.

Upselling can be effective for several reasons. First, it allows businesses to increase their revenue by selling more expensive or upgraded products or services. Second, it can improve customer satisfaction by offering customers additional value or features that they might not have considered otherwise. Third, it can help businesses differentiate their products or services from those of their competitors.

However, upselling can also have drawbacks. If done improperly, it can be perceived as pushy or manipulative, which can damage customer relationships and hurt the business’s reputation. Additionally, upselling can be risky if it involves selling products or services that customers do not need or want. In these cases, customers may be dissatisfied with their purchase and may be less likely to return to the business in the future.

Overall, upselling is a common sales technique that can be effective for increasing revenue and improving customer satisfaction, but it should be used carefully to avoid damaging customer relationships.

Premium Versions
Offering premium versions of products such as flower arrangements that are sold at several levels of quality.

Options
Optional features such as a catalog of options for a car.

Customization
Allowing a customer to customize the design or look of a product such as color.

Services
Services such as support or professional services. For example, software may be sold with consulting services. This allows the vendor to establish a close relationship with the customer that may lead to extensive future business.

Risk
Risk related products such as an extended warranted or insurance.

Financing
Offers to finance a purchase with a credit product.

Complementary Items
Cross-selling items that complement the product. For example, offering wifi access plans with mobile devices.

Popular Items
Offering popular items that aren’t necessarily complementary to the product. For example, an ecommerce site may suggest a best selling book as an add-on for a purchase of strawberry jam.

Priority Items
In many cases, upselling is focused on selling items that are a strategic priority for the seller. For example, a store credit card may be difficult to upsell but may be the priority as it allows a firm to establish a long term relationship with the customer.

Price Optimization
Price Optimization Jonathan Poland

Price optimization is the process of using data and analytical methods to determine the optimal price for a product or service based on business goals and market conditions. It involves collecting data on factors such as market demand, competition, customer behavior, and cost, and using this data to develop pricing structures that maximize revenue, profit, or other objectives.

Price optimization is different from other pricing strategies, such as sticky pricing or premium pricing, because it relies on data and analysis rather than intuition or long-term strategy. By using formal methods to discover optimal pricing structures, businesses can more accurately predict the effects of changes in price on revenue, profit, and other metrics.

Price optimization is an important tool for businesses that want to maximize revenue, profit, or other objectives. By using data and analytical methods to determine the optimal price for their products or services, businesses can gain a competitive advantage and drive growth. The following are common types of price optimization.

Experiments
Experimenting with a variety of prices and price structures using techniques such as a/b testing. This is particularly common in industries such as online retail where it is easy to change prices on the fly.

Analytics
Using analytics tools to find patterns in historical data. For example, a fashion retailer might discover that their data indicates men in their twenties are price incentive to shoes under $100 but demand quickly drops after this price point.

Economics
Advanced entities such as nations or banks may model the prices of things such as commodities based on economic models that consider supply and demand curves and other factors.

Yield Management
Yield management is the practice of optimizing price at the level of an individual transaction. For example, airlines may attempt to optimize price for every seat in their inventory.

Pricing Strategy
Pricing Strategy Jonathan Poland

Pricing strategy is the process of determining the right price for a product or service based on market conditions, business goals, and the value perceived by customers. It involves considering a range of factors, such as cost, competition, market demand, and the value proposition of the product or service.

A pricing strategy is an important part of a business’s overall marketing plan, as it can have a significant impact on revenue, market share, and customer perception. The right pricing strategy can help a business achieve a variety of objectives, such as:

  • Generating revenue: A pricing strategy can be used to maximize revenue by setting prices at a level that maximizes profit margins while still being attractive to customers.
  • Penetrating the market: A pricing strategy can be used to gain market share by setting prices at a level that is competitive and attractive to customers.
  • Positioning the product: A pricing strategy can be used to position a product or service in a specific market segment by setting prices that reflect the value proposition and target customer demographic.
  • Building the brand: A pricing strategy can be used to build brand reputation and status by setting prices that reflect the quality and value of the product or service.
  • Managing inventory: A pricing strategy can be used to manage inventory levels by setting prices that encourage customers to purchase products before they expire or go out of stock.
  • Winning competitive battles: A pricing strategy can be used to gain an advantage over competitors by setting prices that are more attractive to customers.

Overall, pricing strategy is a crucial part of a business’s operations, as it can have a significant impact on revenue, market share, and customer perception. By considering a range of factors and aligning pricing with business goals, a business can develop a pricing strategy that maximizes value and drives growth. The following are common pricing strategies.

Algorithmic Pricing
Channel Pricing
Decoy Effect
Dynamic Pricing
Everyday Low Price
High-Low Pricing
Loss Leader
Market Price
Penetration Pricing
Predatory Pricing
Premium Pricing
Price Discrimination
Price Leadership
Price Points
Price Signal
Price Skimming
Price Umbrella
Price War
Pricing Objectives
Subscription Model
Value Pricing
Variable Pricing

Types of Infrastructure
Types of Infrastructure Jonathan Poland

In an industrial economy, the production of tangible goods and infrastructure plays a central role. This type of economy has traditionally been seen as a key factor in the development of advanced economies. However, in recent times, advanced economies have begun to shift towards the production of intangible value, such as services, social infrastructure, and information technology. This change reflects the evolving nature of the global economy and the increasing importance of intangible forms of value.

The following are common examples of infrastructure.

Airports Bridges
Broadcast Services Canals
Clinics Coastal Structures
Communication Services Consumer Protection
Cycling Paths Delivery Services
Disaster Resilience Structures Docks
Electrical Grids Financial Markets
Financial Systems Firefighting Services
Green Roofs Green Space
Highways Hospitals
Information Services Internet Services
Irrigation Systems Justice Systems
Libraries Long-term Care Facilities
Medical Labs Parks
Police Services Ports
Postal Services Public Lighting
Public Space Recreational Facilities
Recycling Services Research Facilities
Roads Schools
Science Facilities Sidewalks
Solar Panels Technology Platforms
Train Services Train Stations
Tunnels Universities
Utilities Waste Management Services
Water Services Wind Turbines

Good Customer Service
Good Customer Service Jonathan Poland

Good customer service is a service experience that goes above and beyond to meet the needs and expectations of customers, leaving them with a positive and lasting impression of the business. It is characterized by personalized, efficient, and effective support that helps to build trust and loyalty between the business and its customers. Good customer service is also proactive and anticipatory, addressing potential issues and concerns before they become problems, and ensuring that every customer feels valued and appreciated. Here are some aspects of good customer service.

Adaptability
A hotel that works hard to handle special customer requests such as a late night request to move rooms due to perceived problems.

Apologies
A call center (or online chat) employee who apologies immediately when the customer is inconvenience or complains of a perceived problem.

Authenticity
A restaurant that intensely cares about food, dining experience and service as opposed to end-goals such as profit.

Awareness of Competition
A large IT consulting company that doesn’t become arrogant and complacent about the competition such that they retain a sense of humility and urgent need to deliver customer results.

Competitive Spirit
An airline that thanks customers for their business and acts with knowledge that customers have many other choices.

Creativity
Front desk staff who can’t fulfill a customer request for a room change but find another solution to the customer’s problem with the room.

Cultural Competence
Airline staff who speak multiple languages and are good at dealing with customers from any nation and background.

Customer Advocates
A customer service representative who reports a common design complain to the business unit and product design team that can fix it.

Customer Experience
A cafe manager who politely asks a disruptive customer to leave as they are ruining everyone’s enjoyment of the cafe.

Customer is Always Right
A restaurant that takes the pragmatic stance that something is a problem if the customer perceives it as a problem. For example, if a customer thinks your best table isn’t good and wants to sit near the bathroom, don’t argue.

Deep Change
Addressing the root cause of low customer satisfaction as opposed to the symptoms. For example, an airline that upgrades to newer, more reliable aircraft to improve service levels.

Exception Handling
The process of making reasonable exceptions to policy to benefit the customer. For example, an airline that only accepts payment by credit card for food that has a policy of giving food for free to children traveling alone and others without a credit card.

Extra Distance
A mechanic who provides customers with detailed answers when they ask for advice on a separate problem with a vehicle.

Friendliness
A mover who maintains a helpful, approachable and friendly demeanor towards customers such that they regularly achieve high customer ratings.

Initial Response Time
A real estate agent that gets back to a customer in minutes after an email inquiry.

Packaging & Presentation
A department store that offers gift wrapping that is professional to the extent that few customers could wrap as well.

Passion for Service
Employees at a call center who enjoy their work due to an unusually positive team culture and leverage to solve customer problems such that dissatisfied customers are uncommon.

Plain Speaking
Technical support that explains a problem without dumbing it down or engaging in needless technobabble.

Polish
A waiter at a restaurant who has refined every detail of service such as proper placement of things on tables such that they help to create a fine dining experience.

Politeness
A waiter who addresses customers with respect and polite distance.

Professionalism
A salesperson who is professional such that they dress well, speak well, act well and are knowledgeable about their industry, product and customer.

Rapport
A banker who easily establishes rapport with customers due to their personal presence and inherent charm.

Resilience
A bouncer at a nightclub who handles difficult people in a reasonable way without loosing their composure or becoming stressed out.

Respecting the Intelligence of the Customer
Taking customers seriously when they request information. For example, an airline that provides passengers with detailed reasons for a flight delay and conveys an estimated time of departure with the acknowledgement that there is still some uncertainty around the estimate.

Solving Problems
An airline that immediately presents all customers with a useful list of options when a flight is cancelled including an immediate refund, rebooking, compensation, hotel bookings and so forth without a big hassle.

Sympathy
Trying to understand the situation of the customer at the emotional level. For example, a customer who is angry after being billed incorrectly as they feel they are being cheated. In this situation, a customer service representative may immediately apologize and clearly state that the money will be immediately refunded if the bill is wrong before quickly working to identify the billing error or confusion.

Talent
Customer service is a talent that involves difficult to acquire skills such as emotional intelligence, communication, personal resilience, self-discipline and personal presence. For example, a talented bartender in a busy establishment who achieves high order throughput while dealing with a large number of communication issues without losing their friendly and professional demeanor.

Tolerance & Inclusion
Service representatives who treat everyone well regardless of their background, identity or language abilities.

Transparency
Transparency is fair and open communication. For example, a hotel that communicates a renovation project at booking time with precise details on how the customer may be impacted by the work.

Treating Customers as Individuals
Treating customers as people as opposed to a faceless crowd, stereotype or wallet. For example, a theme park that avoids the sense that crowds are being herded by staff.

Turnaround Time
Fulfilling obligations to customers quickly. For example, a restaurant that has food on the table quickly during the lunch rush as many customers have a short and strict lunch break.

Objection Handling
Objection Handling Jonathan Poland

Objection handling is the practice of addressing and overcoming concerns or hesitations that customers may have about making a purchase. When a customer expresses an objection, they may be seeking additional information or reassurance, or they may be trying to negotiate a better deal. The goal of objection handling is to reduce the customer’s concerns and move them closer to making a purchase. This may involve providing additional information, addressing specific concerns, or addressing underlying objections. By effectively handling objections, salespeople can help convert interested prospects into paying customers.

Anticipating objections is a strategy that involves predicting the concerns or objections that people may have to a proposal and planning a response in advance. In some cases, this strategy may involve framing a proposal in a way that is likely to generate an objection that is easy to overcome. For example, a salesperson might pitch a product or service at a high price, knowing that the customer is likely to object to the cost. The salesperson can then offer a discount or other concession to address the objection and make the customer feel like they have successfully negotiated a better deal. The goal of anticipating objections is to increase the chances of closing a sale by addressing potential concerns before they become roadblocks.

The following are common objection handling techniques.

Active Silence
Anticipating Objections
Bogey
Call To Action
Choice Architecture
Customer Motivation
Influencing
Message Framing
Nudge Theory
Overchoice
Perceived Risk
Plain Language

Sales Objections
Sales Objections Jonathan Poland

A sales objection is a concern or hesitation that a customer has about making a purchase. Identifying and addressing these objections is an important part of the sales process. Common objections may relate to the price, features, quality, or risks associated with a product or service. Salespeople can address these objections by providing additional information or reassurance, or by challenging the customer’s assumptions. By understanding and responding to objections, salespeople can help overcome obstacles and move closer to making a sale. The following are examples of common sales objections.

Price
A customer is concerned that an electric car is beyond her budget. The salesperson runs a calculation of how much she will save on gasoline over the course of the lease.

Features
During a sales pitch for a software product, an engineer on the customer side points out that the product doesn’t integrate out of the box with other products the customer uses. The sales engineer discusses the features of the product that allow for quick custom integration.

Quality
A customer for a corporate telecom services contract points out that he has had bad experiences with the speed of the carrier’s network. The salesperson directly disagrees with the customer and points to recent hardware upgrades across the network.

Risks
A customer considering a real estate purchase as an investment expresses a concern that the property could drop in value. The sales agent simply agrees that this is a risk and moves on.

Uncertainty
A customer for business software offered by a small company points out that she has never done a deal with such a small firm. The salesperson points to the company’s client list that includes a number of large reputable firms.

Excuses
A customer does a test drive of a sports car and then says they are concerned about the car’s safety record. The salesperson senses that the customer isn’t seriously considering a purchase and cuts the conversation short by politely offering their business card and wrapping up.

Bogey
A customer for solar panels claims that she is concerned about the aesthetics of the panels during price negotiations. The salesperson senses that this is a bogey and calls the customers bluff by saying that aesthetics are important and she shouldn’t buy if she doesn’t feel comfortable. The salesperson then states that the price is as low as it can go.

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