Banner1

Lessons From Peter Drucker

Don't Buy People

William Cohen, Ph.D.
Posted: 09/03/2012

Drucker identified several ways of buying customers, none of them recommended despite their popularity. One could price so low, that there was little if any profit, but since the whole idea was not profit, but to bribe the customer into making a purchase, who cares? This made severe underpricing an acceptable alternative. Or one could be more (or maybe it’s less) subtle: offer discounts, cash bonuses, low or no-interest financing, or some other incentive.

I have referred to buying people. This isn’t just true in marketing. As you will see, the same is true about buying people in attempting to lead them. Now in marketing Drucker was not talking about simply low pricing per se, but rather a low pricing based not on what the customer considers value, but on low price as a bribe to purchase the product or service. Assuming a marketer understands his costs why would he want to bribe customers to buy his product anyway?

Why Do Marketers Want to Buy Customers?

Some years ago a young accountant working for Blue Cross did a little moonlighting during tax season. To break into this established market part time he charged the bargain price of $75 an hour when the going rate in his geographical area was about twice that. Marketers sometimes call this penetration pricing. But if the marketer does it he needs to be careful. Did this moon-lighting accountant get clients? Absolutely! Since he was employed full time he considered this once-a-year work pure gravy and being an excellent accountant, his seasonal practice grew every year. Ten years later he had the opportunity to purchase a private accounting practice and leave his full time employer. His former clientele in his part time business would make up about 20 percent of his new independent practice. However, he did have one problem. He had two classes of clientele, one paying $150 an hour and the other $75. Now this young accountant assumed that his part- time clientele knew they were getting a tremendously good deal due to his full time employment, and maybe they did. However, when he contacted them, announcing his new full time practice and that they would now be charged $150 an hour, every single one of them dropped him. More than a few were angry. Many instantly approached other tax accountants, some not as experienced. They even had no idea whether these others were as good as this former tax accountant or not. Yet they happily paid these others more than $75 an hour, some even $150 an hour. They just wouldn’t pay their former low-priced accountant this amount.

Drucker was Concerned

Drucker tool the automobile industry as a big business example of what not to do. First he looked at the Hyundai Excel. It was Hyundai’s first foray into the American market, and it entered with a bang by a pricing with an eye-opening low price, helping it to be voted one of the best new products and listed as such in Fortune magazine. It set a record for first year imports and Excel’s cumulative production exceeded 1,000,000 within two years. Drucker said it had the fastest growth of any automobile in history. The problem was that to accomplish this, Hyundai had pulled out all the stops and also shaved costs to the bone to enable a pricing bribe. Suddenly the car disappeared from the market. Quality problems played a part. However, as Drucker noted, a marketer must have sufficient profits to reinvest in the business, including correcting quality problems in design and on the production line. Hyundai lacked this due to the bribe.

Drucker didn’t just pick on Hyundai. He said that America’s "Big Three" did the same in attempting to ward off the Japanese who were taking their market shares. All three offered all sorts of sales incentives to woo the customer to buy their cars including discounts, cash bonuses, etc., etc., etc. and they did this again and again. Did they work? Yes they did. In every case and for every program, sales went up. The problem was that when each offer expired, sales nosedived to a lower level than before the incentive started.

The bottom line was that the bribes intended to buy customers attracted few, if any, new or permanent customers. Worse overall both GM and Chrysler lost substantial shares to the Japanese while Ford was barely able to maintain its position.

Think Before You Bribe

Before any marketer decides to buy customers, it’s important to reflect on the objective and how it’s going to play in the marketplace. Yes, I know. A sales incentive or any strategy for buying customers is supposed to allow you to temporarily lower the price without affecting your product’s image or ability to raise the price again later. Is always true? I doubt it. Customers are not stupid. The point is, unless your customer or prospect simply always seeks the lowest price, and that is the primary reason for buying from you, you might just as well lower your price permanently now. Customer or prospects know that you are not granting discounts, etc. because you like their looks or it is a holiday. You can buy customers and you will increase sales temporarily, but if buying customers is your primary differential advantage, as soon as your discounting or other incentive program has expired, your customer is going elsewhere to find the lowest price again.

I don’t think that Drucker was against programs designed to accomplish a specific objective that did not involve what he termed "bribery. So first, you need to think through the question: Why aren’t you getting more sales at your current pricing? Or, if your objective is to break into an established market, exactly how can you do this and still not trap yourself in a low-priced niche?

But What’s Pricing Got To Do With Leading People?

Unfortunately, some leaders, especially new leaders, think they can bribe followers to like them and that those that follow will be happy and be more fully engaged. They really follow the same wrong principles as bribing customers. These leaders want to be seen as "good guys." They think that after those they lead realize what nice folks they are they will be followed forever into the future. Sorry, it won’t work. Sure, this is one way to become popular, at least at first and it may work temporarily. However, sooner or later demands must be made by the leader and then his or her actions will be severely resented.

This is true of political leadership, too. Look at what’s been happening in Europe over the last few years. Many citizens resent the loss of benefits after years of entitlements. When these entitlements are reduced or eliminated in hard times, the people are not only very unhappy, they rebel and take to the streets. The Romans discovered this millennia ago. Their bread and circuses bought the people for only so long. But when the barbarians were at the gates the population could not be induced to respond, even in self defense. No one is immune to the results of mass bribery. Its positive effects only last so long. So we must all keep Drucker’s warning in mind. Don’t bribe people to influence them. Eventually there is a price to be paid by the marketer, leader, or the politician.

Adapted from Drucker on Marketing by William A. Cohen to be published by McGraw-Hill September, 2012.

William Cohen, Ph.D.
Posted: 09/03/2012