Saturday, February 16, 2008

Analogy #155: The First Dose is Free

Back in the early 1990s, there was a new retail format being developed in the US—pet food superstores. At the time, the industry consisted of a few small chains scattered around the nation. One of the largest firms was Petsmart, which at the time only had a handful of stores in the southwestern US.

The company I worked for during this period was considering entering the pet food supermarket business. Therefore, I went down south to visit a few Petsmarts to see what the concept was all about.

I started talking to one of the store managers. He began to brag about Petsmart’s success in selling very profitable high-end dog food. He said they had a program of always giving out free samples of this dog food. The store manager told me that once a dog tasted this high quality product, the dog would be hooked and would refuse to ever eat again the cheap stuff sold at the grocery store.

Since these pet food superstores were about the only place to get this higher-end dog food, the owners would be forced to keep coming back in order to satisfy the cravings of their dog. That made it worthwhile for Pestsmart to give away the free samples.

I thought about this for a moment and then said to the Petsmart store manager, “So, you’re like a drug pusher. As they say, the first dose of heroin is always free.”

Although I think drug trafficking is despicable, I must admit that it is very profitable. Some of that profitability is due to the illegal, immoral, and brutal tactics they use, which I do not condone. However, I think that some of those profits are based on sound business strategies.

The purpose of this blog is to distill some of those sound business strategies used by drug traffickers and apply it to legitimate businesses. Perhaps, like Petsmart, we can find something to apply to your business to improve your performance.

There are three principles about the drug pusher’s strategy which I would like to discuss.

1) Apply the Principles of Customer Lifetime Value (CLV)
Drug pushers know that once they get you hooked, they can make a whole lot of money off of you, because you will keep coming back….over and over and over again. The lifetime value of all of those return visits to buy drugs is huge.

With each customer providing such a long string of profits, it doesn’t take a math whiz to figure out that you can spend a lot of time and money seeking new customers and still come out on top. The lifetime of profits more than make up for the costs of customer acquisition.

That is why some drug pushers spend a lot of time and money trying to build trust with a potential customer base. They know that in the long run, they will get a hefty return on that investment. They’ll even throw in free samples to get the deal rolling (more about that later).

So here are some questions for you:

a) Have you developed a compelling enough position in the marketplace that once a customer gets hooked, they want to keep coming back? Is there something unique which you offer that they cannot get anywhere else?

b) Do the tactics in your strategy serve to strengthen customer bonds over time, so that customers will see the benefits in coming back over and over again for their needs? Two examples: First: using a frequent shopper program which rewards customers in a way that makes returning to you more beneficial than going elsewhere. Second: Getting to know the customer in a way so that you can use that knowledge to serve them better than a competitor who does not know them as well.

c) Once you have the compelling strategy with the bonding tactics, are you spending enough time and effort to bring new customers into your program? Have you calculated your customer lifetime value, so that you know how much you can afford to spend on customer acquisition and still come out on top?

2) Sampling Beats Talking
Drug pushers know that they can talk forever about how good drugs will make you feel. However, in the long run, the best way to get this fact across is to let you experience the drugs first hand. Hence, the phrase “the first dose is always free.”

There is an organization called Trendwatching, which tracks consumer and business trends. They named one of these trends “Tryvertising” (see link). The idea is that we are such an over-advertised society that mere words have become less persuasive. If you really want to get people interested in your product, get them to try it out.

Some examples from Trendwatching:
a) Small one-use sample packs for toiletries
b) Getting your products placed inside hotels (furniture, home furnishings), so that people can try them out while staying at the hotel.
c) Free trial of a Sony handi-cam camera while at the London Zoo.

My favorite example is Charmin bathroom tissues. Proctor & Gamble designed high quality, high-end portable toilets to place in high traffic locations, like New York’s Times Square. They even had some color coded so that you could choose between a stall that had Charmin Extra Soft toilet paper or Charmin Extra Strong toilet paper. A chance to try before you buy.

So my question for you is this: Are you getting your product into the hands of your customer, so that they can experience the benefits for themselves? You can talk strategy to the customer all you want, but personal experience can be so much more compelling.

3) Vigorously Defend Your Territory/Position
Drug dealers don’t like it if someone else tries to invade their territory. They will defend their territory to the death (literally…hopefully the death of the other guy).

Drug dealers understand the value of exclusivity. If you are the only game in town (or in a particular area), then you will be more profitable. Now I’m not recommending that you murder your competitors or engage in illegal activities which restrict competition. However, there are strategic moves one can make that can have a similar impact.

For example, the more you make your selling proposition unique (or patented), the harder it is for others to invade your territory/position. If you continue to innovate, you can always stay one step ahead of the competition, so that they can never catch up with where you are. You can develop strategic partnerships so that you have the exclusive rights to products or technologies.

Also, if you build up your capacity to satisfy a market faster than the competition, you can suck up all of the available opportunity and not leave an opening for the competition. This could include sucking up all of the available real estate for a store, all of the shelf space in a store if you sell the product, or all of the raw materials if you are a manufacturer. These types of hustling activities were mentioned in more detail in the blog “Pursue, Pursue.”

So the question I have is this: Are you just sitting back resting on your past (and letting others catch up or pass you by) or are you actively defending your position by fortifying it against attack?

Although much of what drug dealers do is not something to emulate, there are still a few things we can learn from them. We can exploit the concept of lifetime value, get into tryvertising, and/or vigorously defend our turf.

We try to convince our children to “Just Say No” to drugs. However, it is a tough battle when drug pushers use the tactics mentioned above. These can be powerful tools to overcome even strong initial resistance.

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