If you can trust yourself when all men doubt you,

If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise:

The Consumer's Hierarchy of Preferences: The Other Side of the Consumer Value Prop

As consumers, we often find ourselves purchasing products that fulfill a certain need or desire, but don't necessarily bring us joy or satisfaction. These items may hit a sufficient number of preferences on the Consumer's Hierarchy of Preferences to make a sale, but they fail to address all of our preferences. On the other hand, when a consumer is completely satisfied with a purchase and becomes an advocate for the company or product, it's because their preferences have been exceeded. This creates what we call a consumer surplus.

Creating a consumer surplus is a goal that great companies strive for, although most companies fail to achieve it. Take Costco, for example. Despite being questioned by investment analysts about the possibility of increasing prices by 3% to double their profit margin, Costco's CEO, Jim Sinegal, has remained steadfast in his refusal. He understands that raising prices would deteriorate the consumer surplus that their value proposition creates. In financial terms, consumer surplus is reflected in lower churn rates and higher customer lifetime value. While raising prices may lead to short-term profits, it ultimately erodes Costco's grip on consumers and drives them to seek alternatives.

Investor Nick Sleep recognized early on that Costco's low margins were a deliberate choice aimed at investing in customer satisfaction through price reductions. By sharing the surplus value with consumers, Costco increases its longevity and ultimately benefits from a higher valuation. However, it's important to note that a company's margins should be a deliberate choice by management and not a result of a struggling industry or business.

Consumer surplus can also be seen in products that convey care and love, such as See's chocolates. For many, the value proposition of See's chocolates goes beyond simply indulging in a tasty treat. It's the conveyance of care and love that satisfactorily fulfills the Consumer's Hierarchy of Preferences, particularly on occasions like Valentine's Day. This is why many couples would not consider gift cards from their significant other as a thoughtful gift, even if the monetary value is high. The lack of care or consideration implied by a gift card diminishes its appeal.

Warren Buffett touches on a similar concept in his speech. He highlights that it's easy to create a cheap and tasty box of chocolate, but much harder to create a product that elicits that warm and fuzzy feeling when received. Like Costco, companies often choose to leave pricing power untapped, rather than maximizing profits at the expense of consumer satisfaction.

In conclusion, understanding and fulfilling the Consumer's Hierarchy of Preferences is crucial for companies aiming to create a consumer surplus. By going beyond the minimum viable product and addressing additional preferences, companies can generate customer loyalty and longevity. Here are three actionable pieces of advice for businesses:

1. Prioritize consumer satisfaction over short-term profits: Costco's refusal to raise prices demonstrates the long-term benefits of creating a consumer surplus. Focus on delivering value and meeting the preferences of your target audience, even if it means sacrificing immediate financial gains.

2. Convey care and consideration in your products: Consumers often seek products that go beyond functionality and evoke emotions. By infusing your offerings with care and love, you can tap into the ineffable aspect of consumer satisfaction and create a more profound impact.

3. Understand the power of pricing: Leaving pricing power untapped can contribute to a consumer surplus. Consider the balance between profitability and customer satisfaction when setting prices, and be deliberate in your choices to maximize long-term success.

By incorporating these strategies into your business approach, you can enhance customer loyalty, increase customer lifetime value, and create a lasting impact in the market. Remember, it's not just about selling products, but about fulfilling the preferences and desires of consumers.