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Matt Douglas, Founder and CEO of Punchbowl.com

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Find Customers Willing to Pay the Premium

For many start-ups (and many companies) one of the primary goals is to find customers who are willing to “pay the premium.” Customers that pay the premium are your highest margin customers, and they’re usually the easiest customers to manage.

George Zimmer, Men’s Warehouse

I was thinking about this concept this weekend, when I went to one of my favorite stores: The Men’s Warehouse. Although I don’t wear suits that often, when I need to buy a suit I always head to the Men’s Warehouse. I’m the perfect target customer for the Men’s Warehouse. I show up, and after a quick look around, I let the sales people take over. They size me up, make sure the fit is right, and quickly get me in a great looking suit. My favorite part of the whole process is when they match the suit with great looking shirts and ties. It’s the classic up-sell technique, and they get me every time: hook, line, and cha-ching… I just spent $700.

And you know what? I don’t care. I know I’m paying a premium, but I’m a happy customer. I could probably go to a department store like Macy’s or Nordstrom’s and get a suit for a $150 less. And I probably wouldn’t bother to try and find a matching shirt and tie. I’m very happy to pay extra for the service and simplicity of the Men’s Warehouse. I always leave the store feeling like I made a great decision. As George Zimmer the CEO of Men’s Warehouse always promises… “You’re going to love the way you look. I guarantee it.”

As CEO of a software-based start-up, it always bugs me when I hear people rave about software products, but aren’t willing to pay the premium. An example: a few people I know have recently told me that they really love a web application (and iPhone app) named “Tripit.” With Tripit, you can easily send pieces of your itinerary to the service, and the application will collect and create a useful travel guide. They have a version of the application called “Tripit Pro” which is available for $49 a year. The Pro service offers many useful features for people who travel often. Even though the service is very useful and the Pro service would be even more useful, these customers aren’t willing to pay the premium.

At Punchbowl, we have our own premium service, and I always find that the best customers are the ones that choose to upgrade Punchbowl and pay the premium. These are the customers that value the service that we provide and are willing to pay a little bit to get even more. I appreciate customers who call me and say “I purchased an upgrade to Punchbowl, and I have a question.” Contrast that to other customers who call me and have an expectation that they should get personalized tech support for free. These are the customers who never pay the premium, and never will.

Perhaps it’s the responsibility of the start-up or company to make a product or create a service that causes customers to be eager to pay the premium. But I don’t think so. The sad truth is that there will always be a subset of customers who desperately seek out the best deal and who aren’t willing to pay anything for a premium service. Regardless of how much utility the product or service brings to their life, these consumers don’t value their time as much as they value keeping another dollar in their wallet.

KEY TAKEAWAY: Steer away from customers who are always seeking the best deal and aren’t willing to pay a premium. Spend more time finding and delighting customers that are willing to open their wallet and pay the premium. If you do this, your revenue and profits will grow faster, and your company will be more successful…. I guarantee it.

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  • http://Anonymousnoreply@blogger.com Anonymous

    $700 is not expensive for suitmatt is bald

  • http://Anonymousnoreply@blogger.com Anonymous

    Careful… this is starting to sound a little like the recent press for Chargify… and that did not go so well for them.http://techcrunch.com/2010/10/11/subscription-billing-system-chargify-missteps-as-it-switches-from-freemium-to-premium/To some degree, all businesses deal with customers who "expect too much" for what they pay. In a Freemium model a large number of non-paying customers who "expect to much" might be an indication that you have not reached the right price point for conversion from non-paying to paying customer. And non-paying customers generally add some value to a company… traffic to the site, click through to partners, word of mouth, usability metrics, etc. So is it so unreasonable for non-paying user to expect some nominal amount of support?This should be an opportunity to listen to what the market is telling you rather than a rant about what you want your market to be.

  • http://www.colinjtwoods.com Colin JT Woods

    You brought up the concept of responsibility regarding the presentation of a premium product. While I agree that the best model (when available) is to just find more customers willing to pay the premium, I think that you have to acknowledge the existing perspective of most consumers.How many times do we find a better deal or a free deal after paying? How many times do we get burned by marginal increases of value when we make the not so marginal increase in payment from nothing to something? The reality is that consumers have been taught to ignore the cost of labor in regards to entertainment, software, and technology. Everything has the illusion of becoming free eventually. Blame google, bit torrenting, and napster, but don't blame the evil selfish consumers.Netflix is the best example in my life of something I perceive as free but really pay $15 a month. I get free movies through my Wii or the mail all the time. I never see the connection between the payment and the value. And the value is a constant even when I don't use it. I would say, of course it is the responsibility of the small business to convince me to go premium. Netflix did it with a gift strategy. My friend did it regarding some music and book purchases with his "vote with your dollar" speech. I think that one of the biggest fears as a consumer is being made to look foolish. I don't pull the trigger on premium because I might find a better deal if I drive down the road a bit.

©2019 Matt Douglas