by Colin Jowell

I belong to a neighbourhood gym. If I was evaluating the offer as a professional marketer, I would have to note that the equipment could be newer, the place could have better light, a little more ventilation, and slightly less, well,  “colourful” characters. All of the above drawbacks do not feature at the chain gym mere metres away. And yet I stay, and have done for years.

The reason is simple: they never charged me an exorbitant joining fee, and they didn’t have a lock-in contract. Having spent a cumulative 14 hours trying to extricate myself from a chain gym contract in the past - this got me over the line. (That last gym insisted on being sent a fax, which seemed to get “lost” alarmingly often.)

No doubt if I were explaining this to the Marketing folks at the chain gym, they would shake their heads and say I don’t understand their business. Unfortunately, I suspect I might. The low monthly fees that they have been using to squeeze out the local players are subsidized by overselling the capacity of the gym. They’ve been counting on people not to turn up, but keeping the revenue by trapping them into contracts.  They get away with it, because people trade off the waste of a gym membership they don’t use with the guilt of not having one at all.  Not every business is so lucky…

To the winner go the spoils of breaking the rules. When mobile phones were new, the networks would charge for voicemail retrieval, until one realized that people were turning off voicemail as a result. The net effect of making it free was that the call cost was more than offset by the callback the voicemail promoted. It sounds extraordinarily obvious not to charge ten cents for something that given free will earn you a dollar, but the failure to understand opportunity cost and protect known revenue is all too common.

More recently, T-Mobile US cut its two-year contract, and stopped charging customers a fee for handset subsidies when the original contract for it had passed. These may sound like obvious moves in a competitive Telco market, but these changes have delivered over 600,000 new customers in the second quarter of 2013.

Customers don’t want to be treated unfairly. And companies that recognize unfair rules and change them tap into a winning strategy. This is not a new learning by any means: every small business owner or new challenger to a market should have the classic biblical story of David and Goliath somewhere in the back of their minds. The notion that a contender, no matter how unlikely on the face of it, has the power to overcome a seemingly far larger and stronger competitor is empowering - encouraging one to think differently about the category. It may be an oldie, but it’s still a goodie.

Things to think about:

  1. Don’t excuse economics as the reason for customer unfriendly policies: someone is bound to cotton on.
  2. Are you benchmarking against industry leaders to emulate them, or beat them?
  3. Are you putting a barrier in your business that your competitors may not face?