Peter Drucker: Creating Customers

Peter Drucker – one of the great intellectual thinkers of the twentieth and twenty-first centuries – asks a question: “What is the purpose of a business?”

Have you ever stopped to ask yourself that question? Or, perhaps more importantly, have you ever asked yourself what is the purpose of “your” business?

As I was reading Drucker, I stopped to think and see if I could answer this question myself for my law firm. The obvious answers seemed to be: to make a profit, to build a brand, to serve society or maybe to do good things for my employees or to make my customers happy or something like that.

Drucker; however, says simply:

“To create a customer (emphasis added)”

Wow – when you hear that, it zings doesn’t it – you aren’t just going out to get customers – you are creating them……and that is your true purpose!!!

Drucker goes on to say that there are only two things that every business MUST do. Everything else is white noise. If you do these two things you have a chance at great success and if you don’t, then most of the time the converse.

Can you think of what they are? I couldn’t till he told me – the two things are very simple:

To innovate
And to market

I remember reading all of this and feeling like I had been struck. Of course!!!!

If you don’t innovate, then you are selling what everyone else is selling and you have no pricing power. By the laws of perfect competition, your pricing power erodes as you are effectively selling a commodity.

And if you don’t market the product, then people not only don’t know about it but they also don’t know why they should want it.

If you really spend a moment and think about all of this it is both exciting and liberating at the same time – it is so simple – to succeed in the business world you just keep in mind that the “purpose” of your business is to “create” customers and the way you do this is by “innovating” and “marketing”.

That’s the whole ballgame.

Heady stuff isn’t it – this Drucker guy?

Consider Apple for a moment. What would Wozniak have done without Jobs? He would have tinkered and tinkered till someone stole or used what he did, or employed him, or until the industry just moved past him.

And what would Jobs have done without Wozniak? What would he have had to sell? Nothing at all.

They were the ultimate people in innovating and marketing.

And talk about creating customers. No one did that better than Jobs. I truly love his incredible statement:

“Don’t give the customers what they want – show the customers what they should want!”

So – as you read this – I ask you – do you have as your purpose “creating” customers – and are you “innovating and marketing” to do it?

Let me take you a little deeper and try to apply this to the real estate world.

I will start with applying this thinking to my (lawyer/law firm) business and then applying it to your (real estate) business.

My law firm is a 70 lawyer law firm in midtown Manhattan, which focuses on real estate.

If I were trying to attract a client to my firm I could say we are really good lawyers – I could even say we were really great lawyers – but would that do much to attract a client to my firm? I sincerely doubt it. People would nod off since they have all have heard that before. Indeed I have met many people before, who say things like “Don’t give me the usual stuff – tell me how you are different”.

So what if I said instead that we are a pure play in real estate law – unlike all other law firms, shunning other lines of business – in order to achieve the top status in our niche? And we have a mission statement to add value to our clients by doing more than just legal work – instead, we also work to build their businesses by making connections and thinking of ideas and structures for them – and that our clients simply love this as it really helps them in ways other law firms cannot and do not.

So am I creating customers here? I think I am. It used to be that clients went to lawyers just for legal advice and assistance in closing deals or handling litigations. Did they think they needed a law firm with a mission to help clients build their businesses? I don’t think they knew that. I think my clients know that now and they really love the special value we create for them because they tell us this flat out all the time. I think we created customers here.

So now let’s apply this thinking to the real estate business.

Imagine a row of buildings with identical products for rent – i.e. a row of gleaming “new” office buildings along the street – all the same – and all beautiful and pristine.

Yuk!!!

It’s all beautiful – and it’s all perfect – and it’s all the “same” as everything else. No customers are “created”. They are everyone’s customers just shopping among identical products. And all an intelligent customer has to do is walk down the street and ask each landlord who will rent them space for the lowest price. And pretty soon someone will put that on the internet and they won’t even have to walk down the street.

So the only thing helping – or hurting – the landlord is the market going up or down. And good luck trying to time the market. Sometimes you nail it and sometimes you don’t. I would hate to be in a business that the only thing separating me from success or failure is my crystal ball that tells me that the future demand for rental space in New York will go up or down.

So now let me give you an innovation I have thought of that I think, if properly marketed, could create some real live customers. I admit that this topic was the subject of one of my speeches a few years ago, and if you heard that, hopefully you won’t mind too much.

I picked office leasing, probably for the reason that it is sometimes maybe thought of as one of the less innovative parts of the real estate world (I don’t agree with that thought by the way). My reason is to make a point that innovations can come up anywhere.

It seems like until about five-ish years ago landlords just leased space to tenants and relied upon tried and true things like:

The location of the property – of course
The niceness of the building

And, then, all of the sudden, all these cool ideas blasted onto the scene. Things like: picking one (cool) tenant like Google to attract other tech companies to be nearby – shared space for multiple parties – exchanges where people of all kinds integrate – incubators – temporary space – co- working facilities — popup stores – and all sorts of “stuff” started to happen. The landlords who were at the head of these trends – i.e. the innovators – took a part of the city that was kind of humdrum (Park Avenue South) and turned it into the hottest part of the city. Rents went up – and the landlords there cleaned up.

And the industry was transformed and continues to transform around us. So here is a thought that might further transform.

It starts out in the mind of the customer – i.e. the tenant – and asks what does a tenant really want? Of course there are a lot of things, but one thing that many tenants want is the ability to cram as many people as possible into a location, but in a manner in which they can work productively, happily and successfully. Indeed, a lot of us law firms think about this a lot. Rent is our second biggest expense – and boy would we like to be able to cram a lot of lawyers into our space without bumming them out.

So how about this – instead of leasing space by rent per square foot – instead start leasing space by Productive Employees Per Square Foot?

Think this through with me for a moment and let’s do some math. If you ask me to take 50,000 square feet of space at $50 per square foot then I am paying $2,500,000 per year. If I can comfortably fit 100 lawyers “productively” into the space then my law firm can achieve a certain level of profitability in that space. As the managing partner of my law firm, that is how I would judge things, i.e. every lawyer I get in the space can bill X hours times Y billing rate, etc.

But if you lease me 40,000 feet at the same rent (i.e. $50 per square foot) and I get the same number of lawyers in the space I achieve the same level of profitability – don’t I? But now I achieve that profitability for $2,000,000 a year, which is $500,000 a year less. Suddenly my business is $500,000 a year more profitable isn’t it? Just because you – the landlord – made it so…..

And you (if you are a landlord) just gave up $500,000 to me – as your tenant – for free!!! You didn’t take anything for it if you just are sticking with the old rules of measurement, i.e. by the square foot.

To achieve this idea all you would have to do is this:

“Innovate” – be creative in how to set up space so that more lawyers can comfortably work in it.

“Market” the idea to law firm tenants like me that I should pay more for this kind of space or, in other words, that I should evaluate the value of the space I am renting by this new metric.

Then you have “created a customer” (i.e. me) who will purchase office space based on Productive Employees Per Square Foot.

This would mean you ignore the “market” and what everyone is doing and what everyone wants. Instead – just like Steve Jobs – you are telling the market, and your customers, what they should want!

And suddenly you have created customers who buy their space based on Productive Employees Per Square Foot.

If this is marketed successfully, then you are possibly making a lot more money from the same office building.