Wednesday, June 21, 2006

Service first, then get paid for it - Classic Economics

A summary of how things are being done, all of which are from classic, hard-knocks economics. You deliver the service and then you get paid for it. Anyone in manufacturing knows this to be the case, but we consumers only see the point of paying before you get the service.

What is working is to give introductory services for low or no cost, then upsell to higher-cost services, particularly high-end custom (tailor-made) work. Chris Anderson talks about this in how people are creating markets from The Long Tail:

"Here are some classic scaling down tactics:

* Self-service: give customers all the tools they need to manage their own accounts. It's cheap, convenient, and they'll thank you for it. Control is power, and the person who wants the work done is the one most motivated in seeing that it's done properly.
* 'Freemium' services. As VC Fred Wilson puts it, 'give your service away for free, possibly ad supported but maybe not, acquire a lot of customers very efficiently through word of mouth, referral networks, organic search marketing, etc, then offer premium priced value added services or an enhanced version of your service to your customer base.' Free scales down very nicely indeed.
* No-frills products: Some may come for the low cost, others for the simplicity. But increasingly consumers are sophisticated enough to know that they don't need, or want to pay for premium brands and unnecessary features. It's classic market segmentation, with most of the growth coming at the bottom.
* Crowdsourcing. From Amazon reviews to eBay listings, letting the customers do the work of building the service is the best way to expand a company far beyond what employees could do on their own."

In rural communities, this is more widely known, since you have to attract and sell to the customer in front of you - repetitively, and who is a Long Tail denizen, no matter how you slice it. For all the groceries in Wal-Mart, the Farmers' Market still has more customers than produce - because they deliver better (quality/flavored) goods just the way that customer likes them. Repeating surveys show that people would rather pay slightly more for locally-raised produce and meat than buy something shipped in from (literally) God-knows-where.

Wal-Mart might be getting a large percentage of the local traffic, but only a minority (5%, perhaps) buy all their goods there. Per Pareto, probably 20% of their customers are getting them 80% of their business. This leaves 80% of their customers to buy a minority of their needs through Wal-Mart and the rest through other venues. These other venues only survive by servicing niche/Long Tail markets. I don't get my tires through Wal-Mart as I'd rather pay someone else who only does tires - so my tires stay inflated and last longer. I raise food on my farm and sell the excess off the tailgate or at Farmers' Market locally. But once in awhile, I'll get a Wal-Mart Poor Boy sandwich pre-made, like I occasionally get a craving for a fast-food hamburger or milk-shake.

In smaller communities, companies have to deliver the best service in order to keep getting business. Anyone can sell a milk shake. But some do it a lot better. "Big Box" stores and franchises don't deliver on anything much better than price and speed. I've recently started gravitating away from commodity feed/fertilizer companies locally toward a small outfit who is much farther away in order to get my questions answered and also to transition my farm over to organic (which is cheaper to operate and gets much better prices on local markets).

The "Big Box" coop actually sells to the larger grain dealers (ADM) and so is dependent on making every farmer produce identical (commodity) grain. Anecdotal evidence shows that I can get even three times as much for organically-raised grain, which isn't so regulated as to moisture content, etc. This is as the companies who are producing food are seeing that people will pay more for organic-based foods, so they pay the producers more.

The interesting thing about organic food production is that you can always "fall back on" commodity sales if you can't line up someone to buy your organic produce. I was recommended recently to plant food-grade soybeans as you can always sell them as a feed-grade commodity if they aren't quality for food-grade. But you can't plant feed-grade and get food-grade out of it.

Wal-Mart will always be a Big Box store. But the profits, particualrly for small producers, will always be in the niche/Long Tail markets. But the smaller producers are nimble enough to get into and out of these niches before they become commodity-based. Again, in farming, you have to produce first, then get paid for it.

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