Make 80% happy...

Simple products and economies of scale can be a strength. On a camping trip in 2011, I wondered whether the company renting us our rather basic vehicle had found a better model than those offering all the sophisticated equipment.

Simple products and economies of scale in a fleet of motorhomes

When we were looking for a vehicle, we also saw models with big televisions and lots of other equipment. But the reviews described things not working and disputes when vehicles were returned.

According to what I was told, our rental company had three sizes of vehicle with the same type of engine. There was less to break, and the mechanics didn’t have to know lots of different models.

Fewer variants can make operations easier

I imagined shared spare parts, simpler support and bulk purchasing could keep costs down. The rental company could also be more generous about small things because they were easier to handle.

I hadn’t reviewed the company’s accounts. My assessment was based on the conversation, our choice of vehicle and the reviews I’d read.

You don’t need to make every customer happy

Some people want the big television and all the extras. It’s okay to say no to them if your business is built for a broader segment with different needs.

It’s better to leave most of your customers very satisfied with a simple solution than to take on every special request and lots of problems. The 80 and 20 percent in the video illustrate my priorities, not a measured breakdown of all customers.

My point was to think about economies of scale and dare to leave things out. Also read Iværksætter til jeg dør about my experiences of developing a business and keeping focus.

I’ve also talked about keeping focus when a big order tempts you.

Simple products and economies of scale: Why we chose the basic vehicle

We’re sitting on our trip around the USA, looking out at all the greenery. The vehicle we’re travelling in is very basic. It’s not a luxury model. But that’s exactly what’s set me thinking.

When we researched what to rent, we looked at several companies. Some had motorhomes with flat-screen televisions and loads of equipment. They practically had a jacuzzi too. Things that slid out and God knows what.

Of course that costs more. But it was the reviews that made us decide against the sophisticated vehicles. People were angry that the flat screen didn’t work properly. Or that this, that and everything else was wrong.

It’s not really surprising. Imagine buying thirty motorhomes to rent out and filling them with ceramic hobs, televisions and mechanisms that move in and out. There’s a hell of a lot that can go wrong.

Expensive equipment also creates high expectations

Customers renting the expensive vehicle naturally want things to work. If I rent a vehicle with a fifty-inch television and it doesn’t work, I get really angry.

I also read reviews where customers described huge demands when they returned the vehicle. One said they’d been asked for ten thousand dollars even though they felt they’d done nothing wrong. Bloody hell, I’m not going anywhere near that.

I can’t judge individual cases from the reviews. But I can easily imagine the conflict. Something breaks without the customer feeling responsible. The company wants its money back and tries to get it from the customer. Then the whole thing blows up.

Three sizes, the same engine and fewer problems

When I called the company we ended up renting from, they told me they’d bought up many of their small competitors. I think it’s become a very large rental company in the USA because it’s done something clever.

The company has three sizes: Small, medium and large. Otherwise, the vehicles are very similar. They all have the same Ford engine, so in practice the mechanics only have to work on one type of vehicle.

There isn’t all that equipment that can break. Of course there’s the engine, the shower and the usual things that need maintenance. But the vehicle is incredibly basic. So there are also fewer things to cause problems.

My impression from the reviews is that this makes customers happier. And the company can be more generous when a vehicle comes back with minor damage or another small issue. They’re repairing something they have plenty of spare parts for. They can buy used parts or use an old vehicle as spares for another.

It also makes support simpler. When a customer calls saying a particular light is on, the mechanic immediately knows what it’s about. That’s different from needing to know ten or fifteen different types of vehicle.

Bigger purchases and lower running costs

There’s a big operational advantage in sticking to those three models. Costs can be kept down, and the vehicles can be bought more cheaply too.

Instead of ordering ten of one model, five of another and seven of a third, you could, for example, order five hundred of each of the three types. That’s my illustrative calculation of why large, uniform purchases can bring hefty discounts.

I’d bet the simple model can make more money than many of the more sophisticated competitors. That’s my assessment from the trip and the conversation with the rental company. I don’t have their accounts in front of me. But what I’m told about the acquisitions fits my thinking.

You’re allowed to say no to demanding requests

Perhaps twenty percent of customers will say: I don’t want to do business with you because I want a fifty-inch television and all the other stuff.

But if you say no to them, you’ll probably also avoid some of the most demanding customers and an awful lot of problems. There can be a crazy amount of money to make from economies of scale and a simple solution.

So when you’re building your business, it’s okay to turn away those twenty or thirty percent. If you’re serving the broad market, try to keep things simple.

Can I get it with the big television? No, you can’t. Then I won’t rent from you. Tough luck. There’s nothing to be done about that.

In return, other customers can look online and see that complaints are about smaller things. An hour’s queue before getting the vehicle. A microwave that was a bit odd. Still irritating, but perhaps that earns three or four stars out of five rather than one.

That’s the picture I saw in the reviews: Around four stars for the simple rental company, while some with sophisticated vehicles were around one or two. Those are my observations from 2011, and my point is the difference between a little hassle and a holiday full of problems.

So think about economies of scale. And have the balls to say no. Have a great summer.

Best wishes, Martin. PS: Here I referred to Aminotastic on 10 September 2011:

http://www.amino.dk