When it comes to the study of business and management, there are few names that can be put along side with Peter F. Drucker. Drucker is considered the “father of modern management” and the lessons he taught still hold true today.
One of the key concepts he discusses is the definition of business purpose, which he elaborates on in The Essential Drucker:
“With respect to the definition of business purpose and business management, there is only one such focus, one starting point. It is the customer. The customer defines the business. A business is not defined by the company’s name, statutes, or articles of incorporation. It is defined by the want the customer satisfies when he or she buys a product or a service. To satisfy the customer is the mission and purpose of every business. The question, What is our business? can therefore, be answered only by looking at the business from the outside, from the point of view of customer and market. All the customer is interested in are his or her own values, wants, and reality. For this reason alone, any serious attempt to state ‘what our business is’ must start with the customer’s realities, his situation, his behavior, his expectations, and his values.
“Who is the customer? is thus the first and most crucial question to be asked in defining business purpose and business mission. It is not an easy, let alone an obvious question. How it is being answered determines, in large measure, how the business defines itself” (Drucker 24).
Indeed, many of us would define ourselves as “real estate investors” or “flippers” or “wholesalers,” and while that’s all fine and good, those words focus on ourselves and not the customer. And as Drucker notes, the customer defines our business.
Related: Yes, Customer Service DOES Matter in Real Estate: Here’s How to Make Yours Top-Notch
In a market economy, the only legitimate way to make money is to give people what they want. Give (at a price, of course), and you shall receive. And while we all know this somewhere deep down, it rarely percolates to the surface when it comes to our day-to-day decision making.
The tendency is to ask, “What do I want?”
Well, I want to buy a property at a low price and to sell it at high price. I want to get a great tenant at a solid rent. I want the bank to loan to me. I want… I want… I want… I want.
This is, of course, the wrong way to look at things. You should be constantly asking yourself, “What does my customer want and how can I give it to them?” Of course, this also depends on who your customer is, and as Drucker noted, that’s not always easy to figure out.
But it’s important to start with the right questions. Every decision should be based on three things: 1) What’s legal, 2) What’s economical, and finally, 3) What the customer wants.
I hate to break this to you, but you are not a beautiful or unique snowflake. What you want doesn’t matter.
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Customer Focus in Practice
Let’s run through a few examples. Say you’re doing a rehab for a rental. You must ask yourself: Who will want to rent this? Are you renting out to working class people, students, Section-8—or are these luxury rentals?
Let’s say it’s student housing. Well, ask yourself what a student would want. Remember, many students are living with friends or just random roommates. They don’t necessarily need a lot of common space. Furthermore, big common areas in student housing are party-magnets, so you need to worry about that as well.
Students also appreciate their privacy more because they aren’t necessarily living with friends and are almost always not living with family. Some students are also notoriously dirty. So having their own bathroom—or at least a half bath—is a huge plus.
Indeed, we’ve built a few houses in Eugene near the University of Oregon recently, and despite an oversupply of student rentals, these units have gone like hot cakes. The reason is that most of the housing that has been built near the university are 4-bed, 1-bath apartments and the like. The houses we’ve built are 6 bedrooms, 6.5 bathrooms. That may sound kind of ridiculous, and for family homes, it would be. But for student housing, they love it. And they are all that matters.
Related: Why Customer Service is So Important for your Real Estate Business
Another example would be a working-class home. The main thing such a customer will be generally looking for is functionality and affordability. In other words, it needs to work and be nice, but it doesn’t need to be too flashy. It’s simply a waste of money to put in Brazilian hardwoods, granite slab countertops, and a gold-encrusted chandelier. In luxury housing, the customer is different, so it’s a different story.
And, of course, when it comes to buying or selling, this is even more important. What every seller wants is different. If all you have is a boilerplate offer to make, you are thinking about yourself like some selfish narcissist. And the customer, in this case the seller, will punish you for such transgressions.
As an investor, you need to see yourself as a problem solver.
If someone is facing a major tax burden if they sell, perhaps allowing for a long close will make them more amenable on price, as it will give them more time to find a property to 1031 into. If they are two weeks from being foreclosed on, a quick close is a must. If that person just can’t get over the idea of selling the property for less than they bought it for or at a price that they will take a loss (very common, even if irrational, mental roadblocks many sellers have), offering a higher price but asking for great terms might make the deal go through. The possibilities are really endless.
Other Types of Customers
This concept doesn’t end with what we normally think of as a customer. The most obvious examples would be banks or private lenders. Yes, to you, the key selling point is how great a deal you have. But why would a lender care about that? They are only going to receive a fixed rate of interest. What they care about is security.
Private lenders, therefore, will care much more about your track record than a deal they will often feel they aren’t well enough informed to properly evaluate. Yes, you need to sell the deal too, but sell it in terms of how safe it is, not how much money there is to be made. And highlight your record. Even if you don’t have a lot of experience, you should emphasize what you do have, even if it’s success in another industry. You are selling your reliability first and foremost.
With banks, it’s important to remember that they have to review financials all the time. Many of the financials prospective borrowers submit are a mess. And if the bank can’t make out where you stand, they will just say no. The clearer your financials and documentation are, the better. I like to turn my document submissions into a bit of a spectacle. It’s not just to provide them a clear picture of your situation, but it’s also, like with private lenders, an effort to impress them and prove your reliability in doing the one thing they care about—paying them back.
Throughout your business, you should be asking, “Who is my customer?” and “How can I add value to them?” It may be a bit ironic, but by turning the focus away from ourselves, we can vastly increase our own success.
Do you use this practice in your business?