What do customers really want?

Our traditional commercial practice has evolved from the basic form of trade where one farmer creates a surplus of grain say, which he then trades with another who has an extra sheep perhaps. This form of trade is an exchange of things that both parties value.

Of course there might be a difficult negotiation to agree what the relative values were. That is, how many sacks of grain are equal to one sheep? Only much later in human evolution did the common denominator of money come be used to replace one side of the trading process.

However after exchange comes excess and developed societies all show the same tendencies to use their increasing disposable income to acquire more things than they need to survive but then find they have no space to store it all.

An article ‘The Golden Hoard: Why People are Stupider than Squirrels’ on The Economist website reveals that in the USA the result of this is that in one in ten families use more than 50,000 ‘temporary’ self storage locations to ‘squirrel’ their stuff away, usually for months if not years and the growth of such facilities in the UK has exceeded 8% annual in recent years.

So the drive for personal ownership of stuff drives the contractual process but what about business buying?

In theory the corporate business should be more driven by the utility of using things to support their commercial activities and so should be buying things to use them productively and not to simply keep them in stores and disposing of them when no longer needed.

However many organisations will still have inventory on their accounting books which is well past the equivalent of the ‘sell by’ date for foodstuffs in the supermarket. Why do they do this? It is simply to avoid the difficulties of disposal or the effect a large disposal might have on their notional current asset figures in their financial accounts.

An example of Government difficulties in this area were reported by the US Government Accountability Office as long ago as 1979, that ‘Disposal of Obsolete and Excess Inventories Would Save Millions of Dollars’.

However ownership of a product is not required to use it. We can access products owned by others if we contract for its use under controlled situations.

This introduces the option of leasing rather than buying or even operating as a club to obtain access e.g. Getaround which encourages car sharing in the Los Angeles area.

Watch this short (5:08 minute) YouTube video ‘Leasing: The Path towards Sustainable Growth for Europe’ about the role of leasing and how it can contribute to the economy by supporting business investment.

However whole industries can move in this direction and Rolls-Royce Aero engines have been working with their trademarked concept of ‘Power by the Hour’ since 1962 in which airlines contract not to buy engines and spare parts but rather are guaranteed that whenever they want to fly then Rolls-Royce has an engine ready to go on their aircraft wing.

You may also be interested in this article and podcast ‘Power by the Hour’: Can Paying Only for Performance Redefine How Products Are Sold and Serviced? from the Wharton School at the University of Pennsylvania where the focus is paying for performance rather than product.

So the overall message is that there may be more options to satisfy customer requirements than simply making it possible to buy some goods or services.

It does not change the need for a contract but it certainly changes the economics and details of how it will work and crucially whether the asset will appear or not on the asset register of the business and also who is responsible to deal with it when the immediate need is satisfied.

Of course there is still the other side of the consideration which is for the supplier (or even for the commissioner of the contract), which is related to the economic argument. Is the customer requirement one that is possible to satisfy and can it be done at a cost which allows the objectives of the supplier to also be met.

Customers’ wishes cannot be fulfilled at any cost but can only be satisfied if there is an acceptable value transfer otherwise the supplier will (if this happens too often) simply fail and then the customer also has a problem.

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This article is from the free online course:

Contract Management: Building Relationships in Business

University of Southampton