Understanding Customer Behavior and Market Dynamics

Bob and Sally (changed for confidentiality purposes) decided to get into the travel business. Even though they both knew the travel business is very competitive, after doing their research they decided that they could compete by serving a very select market niche in the travel industry. Their company had a limited number of competitors for that niche, and Bob and Sally noted that all those competitors had poor websites, no online chat, limited hours, bad graphics, and limited online booking systems – none of the things we expect from well-built, customer-oriented websites.

After building a robust website with all the features one expects from a good website and spending a lot of money on marketing to drive traffic to the site, sales took off. Over a period of four years the company doubled revenues every year, achieving in year four over $3 million in sales. However, even at this level of sales profits were slim. After year four, sales leveled off, and then began to slide backwards, even though Bob and Sally were spending more than ever on Google ads. What went wrong?

In analyzing the business, it was discovered that in the four years since the business was started, all the company’s competitors had rebuilt their websites. All the competitors added online booking, online chat, better graphics and better laid out websites. Bob and Sally no longer had a competitive advantage when it came to their website. Their website looked much like their competitors, and it was apparent that their competitors had basically copied everything Bob and Sally had on their website. An analysis of customers showed that while the business gained a lot of new customers each year, the customer attrition rate was very high.

Further investigation determined that even though the business was a niche business and the customers traveled frequently, many customers decided to book directly with the resorts on their next trip. Apparently when those customers traveled to the resorts, the resorts collected customer email addresses and marketed directly to Bob and Sally’s customers. Further, a survey of customers showed very limited customer loyalty – while a few customers were very loyal, most seemed to book from whatever website came up first in a Google search, and many customers could not even remember the travel company they used the last time they made a reservation.

Bob and Sally operated on very slim margins. Most resorts offered a 20% commission, but by the time Bob and Sally gave any sort of a discount to get the order, and paid credit card processing fees, there was a very limited amount of profit to cover fixed overhead and advertising. Therefore, the company was not able to build a significant capital base.

In looking at comments on various websites, Bob and Sally’s company often got poor reviews for something that occurred at the resort, such as getting a room where the air conditioning did not work, or getting an old room, even though such matters were completely out of control of Bob and Sally. Bob and Sally also noticed that the resorts sometimes held back the best rooms and only sold those rooms to the resort’s direct customers, and sometimes rooms could be purchased on major websites like Expedia for less than Bob and Sally’s wholesale cost. Further, Bob and Sally would enter into contracts to purchase blocks of rooms at a specified price, only to find that the resort would drop its price and be under-cutting Bob and Sally.

Eventually Bob and Sally sold the business off to a competitor.

Lessons to be learned:

In Bob and Sally’s case there are several lessons to be learned.

Competitive advantage – Bob and Sally’s initial competitive advantage of having a superior website that made booking travel easier was easily duplicated by competitors.

Brand loyalty – Even though Bob and Sally had repeat customers, most of their customers had no brand loyalty, so ongoing customer acquisition costs to keep filling the pipeline with new customers was very high, eroding profits.

Competition from Supplier – The company’s main supplier of product, the resorts, were competitors, because the resorts marketed directly to Bob and Sally’s customers, and due to the resort’s cost structure, could offer programs and prices Bob and Sally could not match.

Control of the Customer Experience – Booking a vacation might only take a few minutes, but the customer could be at the resort for a week or longer. There was no way that Bob and Sally could control the experience the customer had at the resort, and Bob and Sally’s reputation was tarnished by things that happened at the resorts.

Control of Inventory – Bob and Sally had no control over inventory. The resort could sell any rooms it wanted, to whomever it wanted to, at whatever price it wanted to sell those rooms at.

What should Bob and Sally have done? This is a classic case of getting into a business without properly understanding the market and the customers for a certain type of product. Research and a little thinking could have identified all the problems with the business model. Could they have done something differently? Yes. However, the fixes to many of the problems their company faced may have been extremely costly (more money than Bob and Sally had) or may have been impossible to implement. One of the most difficult challenges faced by an entrepreneur is passing on a project, when market obstacles cannot be reasonably mitigated. You only get so many kicks at the can. You don’t want to waste years trying everything in the book to salvage a business whose strategy is fundamentally flawed.