Added On: Wednesday, January 02, 2008

Seth Godin on Nickel and Diming

If you run a business that's "all inclusive" (like a buffet, a resort, a membership organization or even a consulting practice) you really only have two ways to increase your profits.

The first way is to figure out how to get more money out of each customer. That means a surcharge on the special lobster appetizer or a small extra fee for better service. It means coming up with ways to not actually be "all inclusive", to give the customer less unless they pay you more.

The goal of this method is to come up with goods and services that have a low marginal cost (your cost of getting or delivering one more) and a high marginal value (what it's worth to the customer). So, if you can charge the best members of your club a $500 fee for attending a networking event that only costs you $3 a person to host, you're going to see a large increase in profit.

The second way is to figure out how to give your customers more. To be even more "all inclusive" than the competition. To find countless items of low marginal cost and just include them. Why? Because it creates return visits from your existing base, and even better, is a significant investment in word of mouth, the most effective marketing available to you.

The Beaches resort in Jamaica prides itself on great people (true) and on being totally all inclusive (not so true). I was there for a few days for a family reunion and it was pretty clear to me that an MBA on a mission was at work. The nickel and diming adds up. He had scoured the place to find ways to charge just a little (or a lot) more as often as possible.

Wifi is a great example. The marginal cost of hosting one more person on a wifi network is as close to zero as something can be. Charge people more than $10 a day and suddenly you're making hundreds or thousands of dollars of extra profit. Or promise free scuba, but charge people $70 for a checkout course before you let them dive... low marginal cost, high incremental profit.

I have no doubt that this works in the short run. It might even work out to be a viable marketing strategy in some markets. However, the alternative is worth considering. Not only do everything you say you're going to do, but do more.

Offering low marginal cost items for free is a shortcut to generating word of mouth, which is a lot cheaper than buying ads.

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