InstantQ

The most important thing that we’ve learned from our startup is that it’s important to listen to your customer. That may be obvious (and oft-repeated), but it’s super easy to get off track. You think that you know what the customer wants, and you spend a month building it, and before you know it, you have something that isn’t useful to anyone. Or you talk to someone who once talked to a customer, and they tell you what to build. The problem with that is that, by the time that the message gets to you, it’s so garbled that you can’t make heads or tails of it.

So here’s the strategy that we’ve been following recently. This seems to work better than anything we’ve done previously. I can’t say that we’ve mastered it, but we are definitely students of this method.

1) Talk to potential customers. Tell them that you don’t want to sell them anything. Just ask them what they want. Listen, and take copious notes. Then thank them, and leave. It’s pretty rare that someone comes and asks them what they want without trying to take something, so they will probably remember you next time you show up.
2) Repeat this process until you get a clear picture of what the customers want. They may not all want the same thing, but if you learn to ask the right questions, eventually the feedback will converge in one direction. In our case, it took about a week (and maybe 10-12 interviews) to do this.
3) Build what the customers asked you for. Probably good to code heads down for a week or two.
4) Validate the idea by showing your demo to customers. Show it to the original customers you solicited feedback from, as well as some new people. They may tell you some contradictory things, so you may have to discard some of the feedback. They will probably address some of the concerns that you need to deal with in your sales cycle. Some of this will involve learning what to say. Other things will necessitate building new features.
5) Repeat steps three and four until someone tells you they want to buy the product.
6) Make these your beta customers. Constantly solicit feedback, and keep them happy. If something is hard or confusing for them, figure out how to make it easier.

I think that, if you can do these things, you should be able to build something people want.

One of the largest barriers to demand pricing is that customers associate price with prestige or quality. Higher quality products typically carry higher price tags, while bargain-priced products typically involve tradeoffs. Everyone is skeptical of a product that promises top quality at a discount price. In fact, many products have deliberately inflated prices, which may actually convince customers that they are higher-end than material characteristics would imply.

The Demand Pricing Paradox

On the other hand, when a business lowers its prices, customers may assume that quality has also declined. This presents a problem for demand pricing, which involves manipulating prices to optimize overall profits. If it is possible to slightly reduce prices in the short-term and make it up on the margins, a demand-pricing strategy would be successful. However, some customers would take the lower price as a sign that quality has decreased. If not properly managed, this effect may actually decrease overall profitability.

Large and well-established businesses such as hotels and airlines have some insulation from this, since their long-term image serves to pad short-term fluctuations in price or quality. If a well-known luxury hotel offers their $600 suite for $300 on an off night, customers will think that they have gotten the deal of the century. On the other hand, if a restaurant offers a coupon to reduce their meal price from $50 to $25, first-time customers will think that they are eating a $25 meal. In order to effectively use demand pricing, strategies need to be developed to combat this. These strategies help to mitigate some of the effects of cutting prices.

Strategies For Lowering Pricing

The following are only a few of the strategies that businesses can employ. I believe that a successful approach involves apply multiple strategies simultaneously. I encourage you to think of more and post them in the blog comments.

• Don’t publicly name the business. If only a few people know of the deal, most people will be unaware of the price manipulation. Hotwire does this by not telling customers the name or exact location of the hotel until after they make a purchase.
• Only focus on high-end brands, or offer multiple product lines that segregate high-end and low-end customers. I’m always amazed by how many people don’t realize that Lexus is made by Toyota. If Toyota offered a $50,000 passenger car in the US, no one would buy it. Even though the Toyota is a high-quality car, the company realized that it needed brand discrimination. Toyota actually makes a Lexus that is essentially a souped up Camry, but the products are targeted at different customers. Even if your products are the same, make sure that you can clearly differentiate them in the customer’s web site.
• Offer exclusivity. I can think of a few ways to do this.
  • The first is a limited-time deal. If a discount is only available for a limited time, it doesn’t reduce the value of the product. You have to be careful about this, because some limited time offers last for too long to have any psychological effects.
  • Another possibility is to limit quantity. If only a few are available, then the rest will naturally be sold at full price (again, be careful to actually limit the quantity).
  • The final option is to offer some sort of group discount. Everyone knows that it is cheaper to buy things in bulk, so if you only offer a bulk package, it can be significantly cheaper than a smaller package. Groupon.com effectively does this, among other things, by requiring that deals exceed a minimum number of customers.
• Offer a Bundle. The prix fixe meal is a good example. The dessert and appetizer doesn’t cost much to make, so why not offer them for nearly free. The customer thinks that he has gotten a deal, when you’ve really managed to unload a slow-moving entree (day-old salmon, anyone).
• Require the customer to “pay.” You can actually charge them money, or you can make them do something that provides value to you. So long as the customer “pays,” you don’t lose value. For example, you could offer your customer a 20% discount on their next meal if they give you their email and the contact info for five friends. As a side note, people are surprisingly willing to whore out their friends’ contact info, but that’s a whole other article. It also helps if you charge something that the customer can only provide once (like their first-born child).
• Classy product and promotion. If you have a really excellent web site, people will perceive your product as being higher end, even if it is dirt cheap.
• Only give discounts to loyal patrons. Once someone loves you, they are less likely to lower their impression if you drop prices. If you can give them a 15% discount and get them to come 50% more, you win.

As stated before, I believe that successful companies employ multiple strategies from this list. I encourage you to figure out how your favorite retailers or service providers manage to cut prices without losing hard-earned reputation.

If you look at trends of the load factor in airline industry from 1970 until now, you will see a steady improvement (from 0.5 to over 0.8). In other words, planes were half-empty during the 70’s. Today, a full plane is not an anomaly. What changed the game for the airline industry? Deregulation and Internet played significant roles. Deregulation allowed airlines to adjust prices, and the Internet reduced friction (a.k.a. travel agents) in the marketplace and thus made market pricing possible. In addition, Internet services, such as Hotwire and Priceline, provided a novel way for airlines to monetize unsold seats at the last minute. The cost to fly an airplane at 100% capacity and at 50% is virtually the same; therefore each empty seat filled is a gain to the airlines.

Now let’s take a look at the restaurant industry. Restaurants operate at an “almost” fixed cost structure. Rent, utility, and marketing costs are fixed. The kitchen requires a certain number of people to be functional, and since it operates mostly on tips, the wait staff costs a restaurant very little. The only variable cost is raw materials; however, restaurants order many items in bulk, which will expire if not sold. As a result, each empty table is a loss to the restaurants in the same way that an empty seat is to the airlines.

So why wouldn’t the restaurants implement the same last-minute variable pricing as the airlines? Because there is no such frictionless market in place for the restaurants. Traditional coupons provide one way to do this, but brand image is the restaurant’s main concern, and advertising discounts to the public would taint a restaurant’s brand. In fact, coupons can hurt a restaurant’s profitability because they potentially reduce the profit on every check.

InstantQ is a service that allow restaurants to fill the tables by varying prices to increase the demand, while eliminating the negative impacts on a restaurant’s image. InstantQ offers the following advantages over traditional coupons:

1. Protecting identity: The name of the restaurant will not be revealed until customers make a commitment, by forfeiting the ability to see other deals for the day.

2. Controlling a deal’s expiration: Deals issued from InstantQ are valid only for today or only for off-peak hours. This discourages regular patrons from depending on InstantQ deals on every visit.

3. Limiting deal quantities. The number of deals issued is set by the restaurant owners each day. Customers will see a count down on the number of deals remaining. This approach will make customers feel privileged, rather than wondering whether anything is wrong at the restaurant.

4. Targeting recipients. InstantQ will only show or deliver deals to those customers whose preferences match the restaurant’s type and location. Furthermore, InstantQ ranks patrons who haven’t visited in a while higher on the recipient list. Instead of blasting the masses, InstantQ sends deals to people who are most likely to respond.

InstantQ would appeal to those who like to try some new restaurants but are still risk averse. Sending them some incentives before the dinner rush may persuade them to come in. Once they are in the door, the restaurant can make money on alcohol, or even better, on the customer’s return visits.

If your restaurant is having a slow night, why not give InstantQ a try? Contact us at blog@instantq.com