HOW CUSTOMERS BUY

by Donald V. Potter

A customer buys from a unique supplier – the one and only company that can meet a maximum number of his needs. Faced with a seemingly large number of possible suppliers, the customer screens and sorts to find the one best choice.

How do customers make these choices? Knowing the answer to that question, a company will be better able to find and target customers that it has a unique ability to serve.

The Customer Has A Hierarchy of Needs

“As long as two suppliers can meet his needs, the customer moves to the next stage.”

The customer buying process reflects a hierarchy of needs, each of which must be met to the customer’s minimum required level before he moves on to consider the needs at the next level.

These needs are:

• Function. First and most basic, the product/service must do certain things, offer certain features.
• Reliability. The product must perform to the customer’s expected level. The company must deliver on promises that the customer holds important.
• Convenience. The product must be available within an acceptable order cycle time. How long does it take, and what is involved, from the decision to buy a product until the product is in hand?
• Price. What does it cost? What is the best price offered to meet all of the preceding needs?

Customers Eliminate Suppliers One By One

Customers move through these needs in sequence. At each stage, they screen to more or less exacting standards. For example, some customers will demand a great number of features, while others will be satisfied with only the most basic. Customers under time pressure may have stringent requirements for convenience, while others will readily accept a long cycle time if the price is sufficiently low.

As long as more than one supplier can meet their needs at any stage, customers will move on to the next stage. Eventually, though, suppliers will fall to the side until only one remains. For most customers, the choice will be reduced to one before they reach the bottom of the hierarchy. In those rare situations where a customer reaches the bottom with all his needs met and two competitors offering the same price, that customer has the luxury of moving back through the hierarchy and making his choice on the basis of less-than-essential features or “nice-to-have” attributes. In the end, one supplier will emerge with the uniquely superior product/service package.

Companies Should Identify Uniqueness

“Some segments are easier for successful innovation than others.”

To find its market segment and target customers, a company needs to know where it is
the only company to meet a customer need. A company that uniquely offers a widely desired attribute is well positioned for healthy market share.

Companies can offer unique advantage at any stage in the process. Each stage offers a segment for innovation, but some segments are easier than others.

• Functions are often easy to copy, so uniqueness may not be permanent. In addition, an innovative feature may not have broad appeal. (Consider the VCR, with its many bewildering options for timing and taping: most customers would be happy to be able to set the clock.)
• Price may be less important than commonly believed. Only about 15% of customers truly buy on price that is, make their way through the hierarchy and still have more than one supplier from which to choose. Many others
  say and even believe they buy on price, but probing reveals that the real reason was a feature or, more often, reliability or convenience. Furthermore, price is easily copied.

Competing on Reliability, Convenience

Most companies will find that they can offer unique value to many customers, and encounter less competition, by striving for unique reliability or convenience. Such advantages are harder to achieve, but also harder for competitors to duplicate.

Closing Thought

Relatively few of the purchases we make, either as consumers or commercial buyers, are made because of a unique function or because the seller had the lowest price in the market. however, when markets turn hostile, the places managers tend to look for relief are either new features or discounted price. We don’t manage the way we buy.

(Note: This Perspective was written in the context of the economy in 1992. While some of the companies may have changed their policies or indeed no longer exist, the patterns they exhibit still hold today.)

Recommended Reading

For a greater overall perspective on this subject, we recommend the following related items: Analyses: Analysis 26: Sources of Company Share Change Analysis 36: Comparison of Company to Industry on Reasons for Positive Volatility Analysis 44: Customer Buying Hierarchy Definitions Analysis 45: Positive Volatility by Buying Criteria Analysis 51: Loss On Price Index Symptoms and Implications: Symptoms developing in the market that would suggest the need for this analysis. Competitors are changing features of the product Product innovation has accelerated The level of convenience offered to customers has increased Customers are more price sensitive ***