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.

•  October 18, 2010
•  customer service, strategy
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