Do you know what business you are NOT in?

by Ric Merrifield

The title of this post was the original working title of the Harvard Business Review article that I co-authored that was published in 2008.

I still use the phrase often, for the simple reason that it is very frequently the case that where a company makes its money isn’t where we would expect. The fact that McDonald’s is the largest landlord in the world (they buy the entire block their restaurants go on so they control who is next to them) is one of the simpler examples that I cover in the book Rethink. Alice.com is another company I talk about a lot because they (like Costco, but in a very different way) don’t intend to make any money selling the goods that they sell – they make money by taking the age, gender, and ZIP code data of their customers and make that part of the transaction with the people who buy ads and give coupons on that site.

Do you know what business you are NOT in?

My friend Mike reminded me of another example that most of us have encountered – rental car company insurance and gas. I will admit, the first time someone asked me if I wanted insurance and if I wanted to pre-pay the gas, I felt really dumb and figured that if they asked, most people probably did it, so I went ahead and paid for them. As I get older and grayer, I now realize that in a lot of cases the rental car companies are simply preying on the fact that their customers don’t know if their own insurance covers them (or their company insurance if it’s a work trip) and correctly assume that we won’t want to risk it and pay the extra $15/day or whatever it is. The gas up-sell is a slightly different trick (and I do mean trick), where they are making you wonder if you are going to be running late and won’t have time to stop for gas on the way back to the airport, or if you really know how much driving you will be doing on your visit (for a lot of cars, a full tank of gas is over 300 miles worth – I haven’t driven 300 miles in two years of rental cars).

Somewhat similar to this is the cartoonishly expensive items inside the hotel rooms (movies, local phone calls, internet, mini bar). Especially when I am staying in a nice hotel, I am really offended that they want to gouge me when I am in my own roof.

But all of these cases make you wonder if all of these nickel and dime charges are really gravy on top of an already profitable business, or if the rental car or the hotel room are really where they cover their costs and they make their real money on what we think of as incidentals.

I don’t think there are simple universal truths to these questions, but I do think their are some basic guiding principles that organizations can follow.

  1. If your brand is about being a bargain, then customers shouldn’t be surprised to have to pay extra for incidentals, especially if there is clear incremental cost for the product or service in question.
  2. If your brand is luxury, people have already agreed to a price that’s very high, if there are actual costs in the incidentals, just bake that into the room rate or the car rate. If I am at The Ritz paying $400/night on business travel, I really feel like I am being taken advantage of when I am asked to pay $15 a night for internet access when I know there’s no incremental cost to the hotel for that service.

So is Thrifty car rental an insurance company that uses rental cars as the way to get business, or is it really a rental car that happens to also sell insurance for its cars? Great question, but an even better question to ask yourself if you are really clear about your brand promise and what your customers want from you.

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Ric Merrifield is known at the “Business Scientist” at Microsoft Corporation in Redmond, WA and is the author of “Rethink“. He blogs about ways to rethink through getting out of what he calls “the ‘how’ trap”.

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  1. Loved this post. It’s about the basic business model at the core of the business.

    There are quite a few coffee shops I go to that are office space & internet access I pay for one cup at a time.

    • Loved your comment about coffee shops that you buy office space and internet access from one cup at a time. I hadn’t thought about my previous cafe working style in that manner. If coffee shops thought in that manner they’d make sure they have WiFi n instead of WiFi b and they’d have more outlets. 🙂

      @innovate

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