CHAPTER | TWENTY-SEVEN
Be Careful in Using a Bribe
Before you get too upset about the title of this chapter, please consider common definitions of the word bribe. These include:
- Something, such as money or a favor, offered or given to a person to influence that person's views or conduct
- Something serving to influence or persuade
We talked about bribery in Chapter 1. This is bribery in a different context. Drucker identified several ways of bribing prospects, which he called “buying customers.” Despite their popularity, he did not recommend using any of these ways. He wrote that you could price a product so low that there was little, if any, profit. The idea behind this strategy was to persuade a prospect to make a current purchase in the hope that he would buy again at the full price in the future. This made severe underpricing an acceptable alternative to many other pricing strategies. But customers often expect to continue paying the lower price.
Or, you could try to buy customers by offering them unwarranted discounts, cash bonuses, low- or no-interest financing, or some other incentive to purchase. Yes, these tactics might work, but you must be cautious, because these incentives typically work for a limited time only, and then they might result in unwarranted permanent consequences.
Customers Expect Bribes to Continue
Some years ago, a friend of mine, who was a young accountant working for the health-care organization Blue Cross, did a little moonlighting during tax season. To break into this established market, he charged the bargain price of $75 an hour, when the going rate in his geographical area was about twice that. This method is sometimes called “penetration pricing.” But if marketers do this, they need to be careful. Did this moonlighting accountant get clients? Absolutely! Since he was employed full-time, he considered this once-a-year part-time work pure gravy. Being an excellent accountant, his seasonal practice grew every year.
Ten years later, he had the opportunity to purchase a private accounting practice and leave his full-time employer. The clientele of his former part-time business then made up a significant percentage of his new independent practice. But this presented a problem. He had two classes of clients: one group paying $150 an hour and the other paying $75 an hour.
This young accountant assumed that his part-time clientele knew they had been getting a tremendously good deal before, and maybe they did know. However, when he contacted them to announce his new practice and gave them the news that they would now be charged $150 an hour, every one of those clients dropped him. More than a few were angry. Most went to other tax accountants, some not as experienced. They had no idea whether or not these other accountants were as good as their former accountant, yet they happily paid these others more than $75 an hour—a few even $150 an hour. They just wouldn't pay their former low-priced accountant this amount. This example confirms Drucker's warning about this type of bribery.
Car Companies Show Why Drucker Was Concerned
Peter Drucker used the automobile industry as a big-business example to show the reason for his concern about this bribery. First, he focused on the Hyundai Excel. When Hyundai made its initial foray into the American market, it entered with a bang by charging an eye-opening low price, helping it be voted one of the best new products, listed as such in Fortune magazine. The Excel set a record for first-year imports and its cumulative production exceeded 1 million within two years. Hyundai had the fastest growth of any automobile in history.
The problem was that, to accomplish this success, Hyundai had pulled out all the stops and had also shaved its costs to the bone to enable a pricing bribe. Suddenly, the car disappeared from the market. Quality problems played a part. However, as Drucker noted, a manufacturer must have sufficient profits to reinvest in its business, including enough money to correct quality problems in design and on the production line. Hyundai lacked sufficient profits owing to its pricing bribe.1
U.S. manufacturers made the same mistake when they were losing market share to the Japanese. The “Big Three” auto companies offered all sorts of customer bribes. Did they work? Yes, they did. In every case and for every program, sales went up. The problem was that when each offer expired, the sales nosedived to a lower level than before the incentive because the companies attracted few, if any, new or permanent customers. In short, bribery has a limited life expectancy and may cause negative consequences. Overall, both GM and Chrysler lost substantial shares to the Japanese, while Ford was barely able to maintain its position.2
Think Before You Bribe
Before any marketer decides to buy customers through bribery, that marketer needs to reflect on the objective and how the results are going to play in the marketplace. A sales incentive, or any other strategy for buying customers, is supposed to allow you to temporarily lower the price without affecting your product's image or your ability to raise the price again later. The problem is that this assumption is frequently false. If your customers or prospects always seek the lowest price, and that is the primary reason for their buying from you, you might just as well lower your price permanently now.
Customers and prospects know you are not granting discounts because you like their looks or it is a holiday. Through incentives, you can buy customers and you will increase sales temporarily. But if buying customers is your primary differential advantage, then as soon as your discounting or other incentive has expired or is ended, your customer is going to go elsewhere to find the lowest price again.
I don't think that Drucker was against programs designed to accomplish a specific objective over a very short term. However, you always need to ask the question, “Why aren't we getting more sales at our current pricing?” Or, if your objective is to break into an established market, you need to access exactly how you can do this and avoid the trap of being in a low-priced niche (as our part-time accountant did).
When Is a Bribe Not a Bribe?
During World War I, thirty-eight-year-old Douglas MacArthur was a brigadier general. He had been in combat for some time, but had just assumed command of a new brigade in France. After planning an important attack, he went forward and waited in the trenches with the battalion that was going to lead the way. This battalion had never been in combat. He could see that the young battalion commander was nervous. And no wonder. He was required to lead the entire battalion “over the top”—up and outside of the trench that protected them—and attack the enemy head-on to gain the objective.
MacArthur called the battalion commander to him. “Major,” he said, “when the signal comes to go over the top, if you go first, before your men, your battalion will follow you.” The major himself recognized that his leading from the front would greatly increase the battalion's likelihood of success.
Normally, a battalion commander is not supposed to lead an attack from the front. The military tactics manuals say that a battalion commander should be with the group, following the company in the lead making the attack. That way, he is not personally as vulnerable and can better control the attack as it unfolds. But MacArthur knew that there are times when the rules must be violated, and that this was one time.
“I will not order you to do this,” continued MacArthur. “In the front of the battalion, every German gun will be trained on you. It will be very dangerous and require a great deal of courage. However, if you do it, you will earn the Distinguished Service Cross and I will see that you get it.”
MacArthur was saying that if the young major would do as he suggested, the major would receive a high military decoration. By definition, this was a bribe. MacArthur stated what needed to be done to maximize the accomplishment of an important goal. This would require the major to risk his life to an extraordinary degree. In a sense, rather than giving the major an order, MacArthur was stating a promised reward for the act that he wanted the major to perform.
MacArthur then stepped back and looked the major over for several long moments. He stepped forward again. “I see you are going to do it. So, you will have the Distinguished Service Cross now.” In so saying, MacArthur unpinned a Distinguished Service Cross from his own uniform and pinned it on the uniform of the major. That was an extraordinary act on his part and virtually guaranteed that the major would accept his bribe.
When the signal came to “go over the top” and begin the attack, the major, who was proudly wearing that Distinguished Service Cross, ran out in front of his troops. As MacArthur had forecast, the major's troops followed and, as a result, they were successful in securing their objective.3 In a sense, this was a successful bribe. However, it was successful for this one time only, and could not, and probably would not, be used again.
This example illustrates Drucker's warning in an entirely different context. Call them what you will, the use of bribes, either in leadership or in marketing, must be carefully considered in advance. Yes, they can be effective, but only for the short term and only when the objectives and consequences are weighed carefully before the decision is made.
If you are going to bribe customers through your pricing or other incentives, you must be certain that this is for the attainment of a short-term, temporary goal, and that you have thought through an exit strategy for the bribe so that you can get back to the price that should be paid for your goods or services. If not, like Drucker's automobile example or my young accountant friend, you may be in serious trouble.