Customer Benefits

**Customer Benefits**:

## Intangible Benefits

- Benefits that elude easy measurement – taste, image, emotion. Price is secondary.

- More prevalent in smaller items or indulgences (e.g., Valentine’s chocolates). Larger purchases (car) focus more on tangible/rational benefits.

- Intimate products (go in mouth or on skin) have stronger intangible potential than those that sit on a table.

- **L’Oréal case**:

  - Cosmetics sell “hope in a jar” – no direct link between price and outcome. Small perceived advantages become hugely valuable.

  - Pricing power from intangibles → gross margins >70%.

  - Deep R&D (introduces many new chemicals) and massive advertising (#3 global advertiser).

  - Cosmetics are less discretionary than assumed – demand holds up in downturns.

  - Dividend increased for 50+ years (16% CAGR over past 14 years).

## Assurance Benefits

- Customers pay premium for reliability when failure consequences are severe (parachute, child safety gear, fire alarms).

- Reputation-based – earned over time, almost impossible to compete against.

- Industrial example: industrial gases – small cost but plant shutdown if disrupted → customers stick with proven suppliers.

- Baby food (Gerber), tractors (John Deere), auditing firms (Big Four).

- **SGS & Intertek case**:

  - Testing services provide impartial assurance for complex global supply chains.

  - Strong reputation → pricing power. Scale builds institutional knowledge and lowers unit cost.

  - Lock‑in: clients integrate testers into their IT/operations → high switching costs.

  - Results: >30% margins, high returns on capital.

## Convenience Benefits

- Proximity (neighbourhood stores) – but vulnerable to competition.

- Customer intimacy – direct relationships, incumbency advantage.

  - Strong sales force as advisor for complex products.

  - Bundling (bank auto‑pay, telecom triple‑play) increases switching costs.

## Customer Types

### Retail Consumers

- Fickle, price‑sensitive on some items, spendthrift on others.

- More willing to splurge on intangible benefits, especially for small purchases.

### Corporate Clients

- Larger companies → more objective, procurement departments → rational buying.

- Price matters most where bidding/negotiation and extensive comparisons occur.

- Sellers fare best when:

  - Transaction is low‑priced, approved without senior management.

  - Sale involves “total cost of ownership” – reliability or production savings justify premium.

  - Switching costs are high (e.g., SAP software – painful to change).

- Corporate risk aversion: “No one got fired for buying IBM” → assurance benefits are powerful.