Co-Opetition - Adam M. Brandenburger [104]
If FedEx were to offer to pay the customer $200 in the event of late delivery, that would cost it, on average, an extra 20 cents per package—the $200 multiplied by 0.1 percent. For the post office to offer the same guarantee would cost ten times as much, or an average of an extra $2 per package.
Right now, FedEx charges quite a bit more than the post office for overnight delivery—$13 versus $10.75. Were FedEx to offer the $200 guarantee, there’d be no way the post office could afford to follow. It would be hard put to absorb the extra $2 cost. But if it tried to pass the extra cost along to the customer, that would erase its price advantage—and that’s the only real advantage the post office has to offer.
What’s the right size for the guarantee? Should FedEx stop at $200? One concern is that if the guarantee were too large, some people might engage in sabotage, preferring to collect the money rather than their package. It’s not inconceivable that FedEx drivers would be put at risk of bodily harm. So FedEx should make the guarantee large enough to get attention, and to represent an honest effort at compensating people for nonperformance, but not so large that some people would actually prefer that the FedEx package not arrive.
If you offer first-class service, you can and should offer a first-class guarantee. It’s a tactic that credibly communicates the excellence of your service to customers. Since competitors who offer inferior service will be hard-pressed to match your guarantee, this tactic also helps you stand out from the competition. By the same token, if you fail to offer a guarantee, you miss an opportunity to tell customers how much better your service is.
Offering guarantees has several other benefits.11 Guarantees are an effective way of committing your organization to provide high-quality service. With the guarantee in place, you’d better deliver or you’ll pay the price. Guarantee programs also help alert you to when and where your system breaks down. Instead of taking the time to tell you they’re dissatisfied, most customers will brood, bad-mouth you to their friends, or simply walk away. Offering compensation for unsatisfactory service gives customers an incentive to let you know when something goes wrong. That means you get a chance to fix the problem as soon as it happens, and you’ll learn how to do better next time. You also get the chance to apologize to the customer—and to show that you mean it by making some recompense. You’re most likely to lose a customer when you’ve just made a mistake and the customer is angry at you. Guarantees let you know when you need to apologize.
A particularly important time to convince people that you’re giving them good quality is when you launch a new product. Offering a guarantee is one way to do this. Another way is a low introductory price or free trials, both of which make it cheaper for people to experiment and see whether they like your product. You also signal your confidence that they’ll like it enough to come back and buy again at the regular price.
An alternative way to signal your confidence in your product is to spend a lot of money advertising it. The challenge with advertising, of course, is how to cut through the clutter and be credible. You not only have to be heard, you also have to be believed. With the launch of its new Sensor shaving system back in 1990, Gillette found a way to achieve both.12 The Sensor was a breakthrough product, but Gillette’s problem was how to convince people of that fact. Why should they take its claims at face value?
To cut through the fog, Gillette launched a high-profile, high-impact advertising campaign. The ads touted the Sensor’s technological advances. But, more important, it was the sort of campaign that got people thinking: “They’re really spending big bucks launching this product. They