Life etc

For lack of a better name, it is called the SAS System.

Or ‘The Slow And Steady System’.

All the words are important.

The Problem Statement

You have a product, and it costs you USD X per unit to produce. You check the market, and the market price is say X+40%. To enter the market, you want to reduce the price, say something like X+35%. But there are inherent problems there, of course, ranging from the psychological (if it’s cheap, it must be worthless) to the economical (your competitor lowers the price  just enough so that you can’t survive for long). But look at this from another angle.

You have a product/service costing USD X. You keep the price on the very low side, i.e. USD X+15% and because you are offering it much below the competition, you get a lot of customers (IF you market it right, which is another post in itself, easy). Those large number of customers will be happy to get a product that is normally available at USD X+40%,  at a cheaper price. And more and more people will want to buy the product/service.  Pretty soon the large number of customers use up most of your resources – including the all-too-important customer service –  and this sucks pretty much all the inspiration out of you to keep at providing a top level service/product. So, how do you keep the number of customers low, yet just high enough to be comfortably in the green.

You filter customers.

This idea is of course not new. The really good product/service providers almost always choose their customers. Most of the companies do this by offering a product at a higher price. It is better to have 10 customers paying you USD 100 than 100 customers paying you USD 10, so the saying goes. It is a saying, so it must have some value, which it does. But again, look at it from another angle.

With 100 customers paying you 10 dollars, you get 100 customers who already trust you to pay you for your product/service. And another saying tells you that it is much, much cheaper and easier to sell to existing customers than to find new ones.

The solution is something that I think I have found.

Limit the number of customers – more like a club. Of course, this again is not a new concept and some of the big weights in the new business order have already suggested to follow a membership model rather than just a customer model (Seth Godin, for example).

I call it a system because it helps in getting the right attitude about business; a system is a set of processes that start long before the product/service reaches the eventual customer (member, in this case).

Let us take an example of an actual club to drive this point home. The Lahore Gymkhana charges about PKR 700,000 for new members. Compare that with The Royal Palm club (also in Lahore) that charges, I think, PKR 1,200,000 approximately. Whereas the Royal Palm does not make you wait that long, the Lahore Gymkhana, with its seemingly ‘cheap’ membership fees, has a waiting period of – now wait for it – a waiting period of 18 years. Yes, eighteen. So, if you want to become a member of the Lahore Gymkhana, you pay 700,000 in advance to start using the service after almost two decades. I think that is the SAS System at work. They are comfortable with the amount of money they are making currently (as it is a club, their concept of a ‘profit’ is automatically different than a for-profit business). So they limit/choose the members with even a more strict approach. With the money they make, they spend on improving their service to their existing customers, who end up spending more and more within the club (E.g. The discounted departmental store/bakery, the new and improved golf course, the swanky gym, all developments that took place within the last 7 years or so).

So what are the implications of this SAS system?

The implications are not entirely huge, but they are not as subtle either. Consider this: I am starting a small enterprise, selling blog hosting. I want it to be the best product in the market but I don’t want to price it that expensive; I want myself to be able to afford it and use it. At the same time, I don’t want it to come off as worthless, which it is not, and neither I want to be not-inspired to follow up with outclass service, which I am not. So I limit the number of customers per year that the business will take in. And I mention it to the customers, that you are part of, say a total of 50 or 60 customers that will be ‘allowed’ to be a member for the year 2009.

It is slow, but not in a bad way. It is slow so that it gives you, as the product/service provider to give it your all, and tweak and improve. It gives you as the provider to actually ‘filter’ clients, and it gives the clients a good, cheap deal to work with. As the slow bit makes you take in clients in small groups, you ‘can’ give it a premium price, but that will reduce the number of people who can benefit from your product and most importantly, it will make it harder for you to search for the premium customer. The customer stays comfortable with the product/service, you stay comfortable with the bottom line that keeps you afloat and the business going; slow and steady.

It is steady and in a good way. It gives you as the product/service provider a solid foundation to build your business on. After a certain time, the number of customers themselves will be large enough and your business will slowly grow into it rather than quickly become obese.

The only drawback – if you are too washed-up in the get-rich-quick idea of business – is that it is not, well, it is not get-rich-quick.

The SAS System is how business should work, how it should be made to work. The advantages are clear. The foremost advantage lies with the customer – and is usually the case, I am the first customer of my own enterprise, so if I like the product/service, then it is a good hint that others will too.

I will be posting here, how this little enterprise works out following the so-called SAS System.