Creating a Monopoly using Customer Service

By: Steve Ross | 30-Apr-2019

Today, I wanted to discuss using customer service as opposed to price slashing to build your customer base. In a recent court ruling here in the Garden State, as reported on NJ.com, that was upheld by two appellate court judges, the case involved Speedway Gas Stations. The ruling is citing an 80-year old law that regulates prices and prohibits retailers from selling gasoline "below the net cost of the fuel plus all selling expenses." I would have to assume such a law coming into effect just as WWII was getting started had a lot to do with protecting residents from being taken advantage of. It likely was also done to prevent businesspeople from disrupting the economy during a time of conflict by creating a price war.

John D. Rockefeller set the precedence for this need, arguably the richest man in the history of the United States with a net worth estimated to be around $409 billion in 2018 dollars. He created a near monopoly in Standard Oil Co. by undercutting his competition. The argument Speedway was trying to make was that the state law violated the company's civil rights.

My goal in this article is not to debate this ruling, but instead to consider the alternative. Where instead of undercutting the competition, the company could merely over service the market, thus having the same effect of giving customers more for less.

Imagine if you will, you pull into a gas station that has the same gas prices as every other station. The attendant promptly and with a smile comes up and gets your gas started, they grab the windshield squeegee and give the windows a good cleaning. They pull out a rag and wipes down your mirrors and your headlights. Next, they ask if you want your washer fluid topped off and then before you leave they offer you an air freshener (conveniently brandishing the company's logo), maybe a lollipop for the kids or a treat if there's a pup in the car. If you used a credit card to pay they say "Thanks for coming in, Mr. Ross." If you received this type of service consistently every time would you go back and become a loyal customer of this place? You paid no more for the gas itself, and potentially purchased washer fluid or maybe even other 'add-ons.' I know I would probably have a new preferred gas station.

However, what about all the extra time that would take per car? Well, from a business standpoint, perhaps the 'undercutting model' was that instead of selling gas at $3.00/gal, you undercut the gas station across the street by dropping the prices by $0.10 to $2.90. If the average purchase per transaction is 10 gallons of gas, you're "undercutting" strategy 'loses' you $1.00 per transaction, in hopes of gaining customers. Good business sense says you've likely forecasted that by dropping the price by $0.10, you'll increase your volume by at least 2x that amount. Under the 'customer service model,' if you were to bring in just ten additional customers every hour, you've already made more than what payscale.com reports as being the average hourly rate for gas attendants at $9.60 per hour.

To expand on this, when I go to a gas station, I'm usually there for about 5 minutes, and there are typically four other customers there at a minimum. At this rate, you're putting approximately 60 cars per hour though, so let's conservatively say 50. If the goal of undercutting prices raised this to 100 people, the overall profit would go from $1,500/hour to $2,900/hr, a $1,400 profit increase. Instead, if you leave the cost at $3.00 per gallon and put just 97 people through by using the customer service model, you would make the same profit and cover the cost of your new hire. Considering the slight increase needed to break even and the break-even point being lower than the undercutting model, this seems like a win-win.

Again, the goal of this article is not to justify why a company shouldn't be competitive with prices or be allowed to set their pricing. It is to encourage leaders to think differently about how to achieve their goals. In the example above the company is already making more profit after a 20% increase in customers and realizes the same gain at just 97% increase in customers. When laws, brand expectations, market requirements, budgets or anything else prohibits you from lowering prices, consider over delivering to "build your monopoly".

This example happens to be a gas station because it's in the news, but this model has clearly worked for companies like Disney, Apple, and Amazon, some of which continue to increase their prices because the demand continues to grow, but at the heart of it all, it started with a focus on customer service!