Case Study: When You Have to Choose Between Core and New Customers

It was the morning after the Phoenix race. Erica Jackson, CMO of Mendoza Marathon Corporation, had risen early to watch people register for next year’s event, and she expected an enthusiastic crowd. But when she arrived at the field, she saw only dour looks and slumped shoulders.1 CASE STUDY CLASSROOM NOTES 1 Bertini and Tavassoli teach the original case in their undergrad and executive courses to examine the role of core customers in growing a company’s brand and bottom line. Is it OK to upset your loyalists along the way? She spotted Alan Kurtz, MMC’s chief operating officer, and headed over to join him, but a racer intercepted her. “Do you work for Mendoza?” he asked, sounding annoyed. Erica looked down at the MMC logo on her water bottle, remembered her matching hat, and knew she was outed. She’d joined the company six weeks before, after a long stint as CMO of Atawear, a sports apparel firm. An avid runner, she was excited to work with CEO Danny Mendoza, the former Olympian and founder of MMC, which ran races combining ultramarathons and military-style obstacle courses. The events had started as a personal challenge among Danny and his friends but now had grown to more than 50 races across Canada, Europe, and the United States. Danny couldn’t compete in or even attend all the races himself anymore, but he encouraged his staff to participate as often as possible. Staying connected to MMC athletes—especially the “Mendoza maniacs,” as the hard-core racers called themselves—was vital to him. “This is a nightmare,” the racer said. “I didn’t even compete yesterday, but I had to drive overnight from L.A. to get here to register. I took a day off work, and now the line isn’t even moving.” “You can register online,” Erica began, but the racer rolled his eyes. Erica sighed. During her first weeks on the job, Danny had encouraged her to go on a “listening tour,” meeting with MMC staff and athletes, and she quickly learned that the registration process was a huge pain point, frustrating both diehards and first-timers. Racers had two options: compete with thousands of others to register online when slots went on sale (which was usually fruitless; a recent GQ article had noted that MMC bibs sold out faster than Springsteen tickets) or stand in line for a limited number of tickets at the race site, typically with a few hundred other racers. Showing up in person improved the odds and was what enthusiasts typically opted for, claiming the online madness was for amateurs. “What’s your name?” Erica eyed the racer’s bulging biceps and MMC tattoo. He was clearly serious about training. “Toby, 11.” This was how Mendoza maniacs introduced themselves:2 name and number of races completed. “This is maddening. I’m a dedicated athlete, but my wife has had it with the amount of time and money I put into training. The huge time sink just to register makes it even worse.” 2 The maniacs are an important customer group, but they’re not the only one. The segment that fuels MMC’s brand is not necessarily the same as those that boost its profits. “I’m Erica, zero—so far. And I can tell you we’re absolutely working on it. We haven’t nailed down the details, but we’re getting there.” The line started moving, so Toby threw her a skeptical look and shuffled forward. Erica turned to find Alan right behind her. “Making big promises?” he teased. “Well, he’s right,” she retorted. “We have to makes things better for the Tobys of the world.” Exclusive Membership The following week, Erica and Alan met with Danny to go over the new registration scheme, which Alan had been working on for the past year. His idea was to introduce an exclusive membership program, tentatively called Mendoza Access, which offered advance entrance to any race for a $1,500 annual fee. Market research had shown that committed maniacs like Toby were already shelling out that kind of money3 —sometimes more—just on travel to registration sites. And many signed up for multiple events in case later they weren’t able to get into their first choice. This meant they took bibs that then went unused, exacerbating the scarcity problem for would-be racers. The new plan would offer a hassle-free entry process while boosting revenue. Erica thought Alan’s proposal made a lot of sense. She’d seen VIP programs work well in her previous role, and she was eager to put in place a process that worked for everyone. 3 Participants in Ironman races spend from $8,000 to $35,000 a year and an average of 20 hours a week on race preparation. “Does the $1,500 include the cost of registration?” Danny asked. “No, they’d still be paying the $350 entry fee,” Alan replied.4 “But if you consider that they’re already paying for between two and six registrations, flights, hotels, and meals—not to mention the time they waste getting to the sites—this is a much better deal.” 4 An alternative strategy would be for MMC to increase the registration fee. Or it could adopt a dynamic algorithm where prices fluctuate in real time (or close to it) according to demand—a common approach among sellers of services with fixed, perishable capacities such as airlines, hotels, and car rental companies. Ride-sharing services, such as Uber, also use this approach with surge pricing. “And this will open more slots for other racers—people who haven’t run with us before?” “That’s the idea. With Mendoza Access members signing up only for the races they actually plan to run, we’re estimating an overall gain of several thousand spots,” Erica said. “We’re actually being more inclusive with the Access program without raising registration fees. It’s a win-win.” Danny had been clear that he didn’t want a proposal that raised prices across the board5 —keeping the fee relatively affordable was important to him. Alan and Erica had presented this solution because it was more targeted, focusing on price increases only for those willing to pay to avoid hassle and to save on registration fees. 5 Price increases can have serious consequences for brands. When Netflix raised the cost of its service by 60% in 2011, 800,000 users canceled their service and the firm’s market cap plummeted by more than 70%. “And we’d be doing all of this without significantly adding to our costs, which is what Carlton is looking for,” Alan said, referring to the private equity firm that had recently invested in MMC. Danny knew his brand was underexploited, and Carlton had promised to help him expand MMC’s customer base (and thereby boost Carlton’s own returns) while staying true to the company’s ethos of challenging people to push their physical and mental limits. “Telling me it appeals to the suits won’t help your case,” Danny said. “I don’t care what they think.” Erica and Alan exchanged a quick glance. They both knew he was under pressure from Carlton to improve the bottom line, but he hated focusing on profits. When he talked about expansion, it was in terms of getting more people to embrace the MMC lifestyle. “I care about our racers.” “Access members will get other perks too. VIP passes for spectators, a subscription to our magazine, and discounts in the store,” Alan noted. Erica could tell Danny still wasn’t convinced. “Why don’t we float it by some of our fans?” she said. “Like in focus groups? What is this—1989?” Danny grumbled. “No, online. Facebook, Twitter. Let’s get a sense of how people will react. We don’t have to share all the details, just the general idea.” “They’re going to love it,” Alan said. “And if they don’t, they’ll learn to.” Social Sentiment “These are actual quotes?” Danny asked incredulously a week later. He was reading through a report Erica had handed him. “‘For $1,500, the membership card better be made of unicorn skin!’” he recited. “‘Buy access to run with filthy-rich weekend warriors who paid to cut the line instead of real athletes? No thanks.’” Erica cringed inwardly.6 She’d been just as surprised by some of the heated responses and was starting to feel less sure about the proposal. She knew better than to be swayed by a few vocal people online, but even in her short tenure as CMO, she had come to realize how much Danny valued each and every racer. 6 Was Erica smart to suggest testing the idea this way? Would it have been better to ask for feedback in a more structured, less public manner? “The response has been mixed,” Alan admitted. “Mixed? These are brutal,” Danny said, reading another. “‘MMC is now just a bunch of money-sucking corporate vampires who don’t care about the people who made these races what they are.’ That doesn’t sound ‘mixed’ to me.” “We need to look at the overall picture,” Erica said. “There were three times more positive responses than negative. Quite a few people said, ‘Sign me up!’” Danny was still focused on the comments. He read another: “‘I get that you’re running a business, but this is insulting. Why don’t you just send Danny over here to kick my puppy?’” “Should we pull the plug?” he asked.7 7 Can MMC ditch the program now without repercussions, or has the damage already been done? “No,” Alan said firmly. “There’s risk, no doubt. But the people who comment on social media are the most vitriolic, and even if you tally up the negative comments, it’s a small minority of our Facebook followers. If we lost those people, it wouldn’t be the end of the world, especially if we wind up with 3,000 new Access members. This is about growing the brand—and our revenues. I know you don’t want to piss off our core fans, but we have to attract a larger group of customers.8 8 If the top athletes no longer want to participate, will other racers take their place? Or will the brand be hollowed out without its core group? “Look at Porsche,” he continued. “Launching the Cayenne and getting into the SUV market had purists freaking out, but it became a best-selling model and fans didn’t jump ship. The brand’s as strong as ever.” “Do you agree, Erica?” Danny asked. She hesitated. Alan had a good point about Porsche, but her gut was telling her that maybe their case was different. “I’m on the fence. I see where Alan is coming from. I also know you—I mean, we—don’t want to be seen as sellouts, and I can’t help but think of Doc Martens. When they started actively marketing their boots to the masses, the out-crowd of punks, rockers, and artists abandoned them, and the brand lost its cool factor.” “So you’re saying we might make a lot of money, but we’re going to be as uncool as Doc Martens?” said Danny. “I don’t think that analogy holds,”9 Alan said. “MMC isn’t a fashion trend. It’s a way of life, an addiction even. Maniacs may get mad, but no one has to buy Access if they don’t like it. And it’ll take more than this to make them stop racing. Our fans consider themselves part of the MMC family.” 9 Which analogy seems more relevant to MMC’s situation: Porsche or Doc Martens? “But we’re not the only game in town anymore,” Erica said. “Nothing has to be set in stone. We can give it a shot and roll it back if need be,” Alan said. “We’ll apologize and go back to the way things were. Family forgives, right?” Skip the Line Erica was working late that night when Alan’s name popped up on Slack. You working too? she typed. Yup, he wrote back. How’d you think the meeting went today? Not great. I keep thinking about Toby. The tattoo guy in Phoenix? Yeah. He just wants to race, and it feels like we’re trying to cash in on his dedication. Why shouldn’t we—we’re the ones giving him what he wants! Don’t forget, he’s Toby, 11. 11! Do you really think he’ll abandon us now? Question: Should MMC move forward with Mendoza Access? The Experts Respond Michael Bolingbroke, a sports executive, was formerly the CEO of Inter Milan, the COO of Manchester United, and a senior VP at Cirque du Soleil. I CAN UNDERSTAND why Erica and Danny are getting nervous about the new pricing scheme, but there’s no need to throw the baby out with the bathwater. The Access program solves some real problems for the company related to queuing and oversubscribing. The MMC team just needs to do a better job of positioning it as one of several offerings meant to keep customers happy and engaged. Registering for a Mendoza race, or buying a ticket to a soccer match, is not the same as buying a pint of milk. People feel far more emotionally invested about spending their “leisure money”—the typically small amount they have left after paying for essentials like food, housing, transport, taxes, and so on. Therefore, the pressure on such products to deliver is fierce: It had better be a damn good experience. And when you have hard-core fans, the expectations are even higher. I know from my career running soccer clubs that some fans feel as if the brand is part of their DNA. There’s a sense of quasi-ownership reflected in Toby’s MMC tattoo, and in the reaction of soccer fans when owners try to update the stadium or the jersey. They think we’re messing with something they own—and that we don’t have the right to do it. But just because a vociferous minority is yelling doesn’t mean that MMC needs to change its approach. Erica could make the program stronger if she took the time to segment the consumer base and understand the makeup of the various customer types, all of whom have different drivers for their loyalty to the brand. There are surely wealthy racers who would happily pay the Access membership premium, and there is no reason why this product shouldn’t be offered and used to boost the bottom line. Others may enjoy the queuing experience and won’t find the program appealing. Registering for a Mendoza race is not like buying a pint of milk. We had plenty of ideas at Manchester United that we expected our core fans to love—but had mixed results. For example, we thought it’d be great to offer our luxury-box owners the opportunity to have merchandising brought to them in their box. Some of our customers were thrilled to avoid the hassle and crush of shoppers, but others were appalled at the idea. For them, part of the experience was going to the store, interacting with other fans, and touching the products. So for those fans, we created a fast-track checkout. Another idea we tried was to have a soccer legend (an ex-player) stop by the luxury box to say hello. We assumed that this would be a huge perk, and for many of our core fans, it was. But others were upset by the idea. They were not soccer fans; rather, they had bought the luxury box to entertain clients or guests. They worried that having a legend drop in unexpectedly might interrupt important business conversations—or even embarrass them should they fail to recognize the former player. When you have fans who believe they own your product, you have to make changes in collaboration with them. Erica and Alan should consider establishing a customer forum—a group that represents the full spectrum of racers, not just the maniacs—and then holding brainstorming sessions to discuss the Access program. MMC could say to this group, “We all know that race bibs are going unused, which isn’t good for anyone. How do we solve that problem?” Of course, while it’s essential to keep your core customers engaged, if you are going to grow your brand as MMC wants to, you need to broaden your appeal. Instead of pulling the plug on Mendoza Access, Danny and his team should position the program as one of many options the company offers its customers. Huib van Bockel is the founder of TENZING and the author of The Social Brand. He was formerly the head of marketing for Red Bull UK and Europe. IF DANNY AND his team move forward with the Mendoza Access program, they’re essentially delivering the message that cash is more important to the company than the dedication of their maniacs. They risk irreparably damaging their brand by alienating those core customers. Whether the maniacs—or any MMC racer for that matter—can afford the $1,500 is irrelevant. Asking your biggest fans, especially ones who tattoo your logo on their bodies, to shell out even more money to continue doing the events they love isn’t a smart way to grow your business. Erica and Alan could certainly find other ways to build the brand while addressing customer pain points. First of all, it’s a mistake to think of the long queues and the challenges of registration as a negative. Having a product that’s harder to get than a Springsteen ticket is a problem that most companies would die for. When I was at both MTV and Red Bull, we organized events where lots of people couldn’t get hard-to-attain tickets, and it only increased the power of our brand. When something is scarce, people want it more. MMC should use this to its advantage. Imagine the PR value of a tagline like: “It’s harder to get into a Mendoza than Harvard.” Instead of giving people a way out of the long lines, Erica and Alan should find ways to make the waiting more fun by encouraging them to engage, swap stories, and build relationships. Second, if your main problem is people being blocked out of races, an obvious way to grow your business is to organize more events. But proceed with caution: Don’t create overcapacity. At MTV, we sold out an awards show in the Netherlands every year. One year, we moved to a bigger venue, and we had empty seats—which made the event feel less fun and exclusive. The leaders at MMC should keep their finger on the pulse, so they know when they’re reaching the tipping point where it becomes too easy to get into a race and they risk having undersubscribed events. I’d also recommend tackling the multiple-registration problem head on. MMC could raise the registration fee (after selling Danny on the idea, of course) to deter customers from signing up for more events than they can participate in—or simply forbid the practice and put penalties in place for no-shows. That might ruffle some feathers but would probably antagonize hard-core fans less than the Access program since it will generate more spaces without asking them to pay more. Finally, instead of exploiting maniacs’ willingness to pay, MMC should focus on rewarding their loyalty. It could set up a Mendoza Maniacs Club where once you’ve completed 10 races, you get access to premium perks, like never having to queue again. Such an approach would mean giving up an opportunity for extra revenue, but it would have the benefit of not annoying the maniacs to the point that they abandon MMC. It’s a mistake to think of the long queues as a negative. Erica’s right to be concerned about competition when she says they’re no longer the only game in town. People could defect for other races if MMC doesn’t cement customer commitment to the brand. But participants who have completed 10 MMC races already have high sunk costs—a loyalty program would make it even less attractive for them to switch to a competitor. In theory, almost anyone can cough up $1,500, but a Maniacs club will keep the diehards loyal and give the starters something to aspire to. The next time Erica speaks to an annoyed customer in a queue—let’s say “Sarah, 9”—she can smile and say, “Just one more race, Sarah. One more race.” HBR’s fictionalized case studies present problems faced by leaders in real companies and offer solutions from experts. This one is based on “How Far Can the Ironman Go?” by Marco Bertini, Nader Tavassoli, and Sergio Nuñez Alvarez, from London Business School.

Case Study: When You Have to Choose Between Core and New Customers

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