Using the Hierarchy of Needs to Understand Your Customer

At Joie de Vivre, we've found Maslow's pyramid to be a helpful tool to focus on the needs of our customers. What do you expect from a hotel experience? It probably depends on a variety of influences that helped you choose that particular hotel. If you read a great review of the hotel in Travel & Leisure or friends raved about their experience on Facebook, you are likely to have heightened expectations. Similarly, the marketing materials—the website, a blog post, a salesperson—can influence your perception of what you're going to receive. And of course, the price you pay is a big determinant of what value you expect to experience from your purchase.

In my company, we apply the five levels of Maslow's Hierarchy of Needs to the hotel experience (please see the figure on the following page). We believe a guest's physiological needs are met by finding a clean and comfortable room and bed. In fact, in the Stage One era of the proliferation of chain hotels across America, hotel guests were just becoming acquainted with the idea of traveling, as President Eisenhower's construction of a vast interstate highway system created a red carpet for middle-class Americans to travel like never before. During that era, companies like Holiday Inn addressed their customers' physiological or safety needs by wrapping drinking glasses in paper and covering the toilet seat with those odd sanitized wrappers. There was a time when that form of sanitation was the hallmark of a good hotel. Today, if I walk into a hotel with one of those wrappers on the toilet, I'm a little worried. Times change, but unfortunately, some companies don't. Many companies don't acknowledge that customer expectations naturally evolve. What is your industry's analogy to the wrapper on the toilet? Are you ahead or behind the curve with respect to evolving at a pace that at least keeps up with your customers' needs?

Moving up the pyramid, our customers' safety needs are met by a variety of factors—from whether the parking lot is well lit to whether the hotel provides guests electronic card keys (which are much safer than traditional metal keys) to the nature of the neighborhood where the hotel is located. Social and belonging needs are met by the friendliness of the staff and whether the guests feel some kinship with their fellow guests. Esteem needs are met by a personalized service approach from the staff that helps guests feel truly like VIPs—whether it's the front-desk host remembering their names or perhaps receiving an unexpected upgrade to a suite. Finally, a guest's self-actualization needs are addressed when the hotel creates what I've termed identity refreshment, an experience that I'll describe in more detail later in this chapter. Suffice it to say, identity refreshment is a bit like taking an aspirational bubble bath.

The reality is, if we don't get the foundational basics right (like having plumbing that works), most of our customers aren't going to be all that interested in aspirations or the art on the walls. It may be less exciting to focus on the basic blocking and tackling of hotel cleanliness and safety, but our customers' base needs can loom large when they're not properly satisfied. Execution is essential for companies that create baseline customer satisfaction. In some industries, your differentiating strategy may be best served by being the world's leader in meeting the base needs of your customers, although that's rarely the case.

You can create a Hierarchy of Needs pyramid for your company based on the product or service you are offering the marketplace. Just know that, similar to any Maslow-inspired pyramid, what's at the bottom tends to be more tangible or physical (features), what's on the middle level may have more of an emotional or intellectual payoff (benefits), while what's at the top is more transformational or even spiritual in nature.

The Nature of Customer Expectations

At Joie de Vivre, we've found that using this visual approach to describing our guests' Hierarchy of Needs is a powerful way for our employees to understand how to deliver on our customers' expectations. Customers bring with them a preconceived notion of what they're going to experience at our hotel. Unlike the shoes you buy in a store, our guests don't get to sample the product before they essentially buy or rent our product for the night. Often a guest's first experience with our product in the physical realm (as opposed to the process of making the reservation) is when they show up at our doorstep. The moment of truth for that guest comes with the initial impressions they have as they walk into our lobby for the first time and, ultimately, are escorted to their room. Many of your customers have the same experience with your product. They may not buy it “sight unseen” because they have likely gazed at your product on your website. But they are often buying it “sight untouched.”

Think of your customers' expectations as a horizontal line. Call it the baseline. If in reality you deliver below the baseline, the variance between that line and what you deliver can be defined as “disappointment.” In fact, if you're below that baseline, you don't even make it on the Customer Pyramid because actually meeting expectations is the foundation of this relationship. This chapter focuses on the risks and rewards associated with meeting your customers' basic expectations. Peak-performing companies know that they have to get the basics right at the base of the pyramid, but they won't likely outdistance their competitors by purely providing basic customer satisfaction.

Sears, Montgomery Ward, General Motors—these faltering stalwarts of twentieth-century capitalism got stuck focusing on the base of the Customer Pyramid. Their unconscious goal seemed to be getting their satisfaction scores high enough so that their customers were just barely over that disappointment baseline. They mistakenly believed that basic satisfaction buys customer loyalty. Clearly, they were wrong.

These companies should have taken note of one of Abe Maslow's most famous quotes: “If the only tool you have is a hammer, everything starts to look like a nail.”⁴ Companies in decline get too reliant on old tools.

Savvy companies realize that customers are learning to expect more and, due to the Internet, have more access to choices than ever before. Northwestern Professor Ranjay Gulati and Booz Allen Hamilton consultant David Kletter published a detailed study outlining that while 59 percent of companies found meeting customer expectations was a significant challenge in the past, 84 percent now consider it to be a significant challenge today. The combination of more discerning customers and companies' relentless pursuits of cost reduction and commoditization have led to more customers falling into that disappointed category. I'm often heard reciting one of my core beliefs: “Disappointment is the natural result of badly managed expectations.” Human beings are wired for disappointment if their expectations are not well managed.

Satisfaction Doesn't Create Loyalty

No company can succeed without addressing its customers' base needs, but too many executives think that simply meeting the basics of satisfaction is a true win for their company. Fred Reichheld and his Bain research teams found that 60 to 80 percent of customer defectors score themselves as “satisfied” or “very satisfied” on surveys preceding their defection. He writes in The Ultimate Question, “Satisfaction is simply too low a hurdle if the goal is superior relationships.”⁵ Reichheld believes that companies should rigorously track customer retention and customer evangelism (how your customers are using word-of-mouth and word-of-mouse on the Internet to spread the word about you, your product, or service) rather than just satisfaction.

Patrick Barwise and Sean Meehan suggest in Simply Better that “most industries are so set in their ways that they have trained customers to accept something like the existing levels of product and service quality.…Sometimes it takes some digging and imagination to unearth important needs that have not been articulated and are not being well met. Note: These are category needs. To unearth them, you need to ask customers, and sometimes non-customers, about what they like and especially what they dislike about the category. This feedback will guide you toward the differentiation that matters.”⁶ This is what Theodore Levitt was suggesting in the quote that opened this chapter. This kind of thinking led Uber and Lyft to disrupt the taxi category.

Barwise and Meehan define a category as “a set of competing choices that, as seen by the buyer, share some key characteristics and provide similar benefits.” For example, when Southwest Airlines' low fares started proliferating beyond Texas, it wasn't just other airlines that were affected—so were Greyhound and Amtrak. Competition isn't limited to just those companies that are playing by the same rules. In fact, if your whole category is barely meeting customer expectations, you and all of your competitors might be vulnerable.

Think Blockbuster versus Netflix. I bet if we reviewed Blockbuster's customer satisfaction scores in the mid-1990s, we might have found that 75 to 80 percent of their customers were generally happy with their video-store offerings. To use Beckwith's model, the industry was in a Stage One period at that time. In retrospect, it's easy to see the flaws in Blockbuster's business plan. Excessive late fees, poorly trained personnel, long lines, limited choice beyond recently released movies (90 percent of Blockbuster's rentals are new theatrical releases, so many stores didn't have a large stock of older or niche-oriented films), and no sense of personalization or concierge function. But if you asked Blockbuster executives who their biggest competitors were back in the mid-1990s, they probably would have mentioned Hollywood Video or some other national chain, as well as the mom ’n’ pop neighborhood video stores.

I had the pleasure of chatting with Netflix founder Reed Hastings about the huge opportunity that faced Netflix when they entered the market in 1997. Reed told me, “Customers are good at telling you on the margins what they're looking for, and maybe Blockbuster was listening to that, but you rarely hear the ‘big idea’ from a customer as they haven't imagined it yet. We knew that movies are very personal and a Web-based service could deliver a much larger selection of unique films as well as the convenience of not having to jump in the car to pick up your movie.”

Reed was quoted in the New York Times saying he got the idea for Netflix because of a big late fee. The video “was six weeks late, and I owed the video store $40. I had misplaced the cassette. It was all my fault. I didn't want to tell my wife about it. And I said to myself, ‘I'm going to compromise the integrity of my marriage over a late fee?’ Later, on my way to the gym, I realized they (the gym) had a much better business model. You could pay $30 or $40 a month and work out as little or as much as you wanted.”⁷ Thus sprouted the membership idea for Netflix. Netflix created a new expectation line for the customer looking to rent a DVD, and almost overnight, Blockbuster's offering moved from barely acceptable to clearly disappointing. According to Netflix, more than 90 percent of their customers evangelize the service to their friends and family. Any guess what that comparable percentage would have been for Blockbuster back in their heydey? The reasons for the success of companies like Netflix will be explored in the next two chapters. For the sake of this chapter, recognize that you are always vulnerable to a category killer: a new company with an offering that far outpaces the basic satisfaction associated with the status quo.

What kinds of companies are most vulnerable to becoming a victim of the “satisfaction shuffle?” Legacy companies—those that are living on past glory and aren't deeply connected to their customers—have the greatest risk of falling virtually overnight from superior to inferior in the eyes of their customers. McDonald's became a hit more than a half century ago because their product offering—consistent, accessible, inexpensive fast food in a clean environment—became the quality standard by which fast food was judged. Over time, customers' expectations and satisfaction needs grew, while McDonald's became a standardized offering in a commoditized business. Only recently has McDonald's started to evolve its offerings in such a way that it's starting to resonate in the marketplace again. Of course, there are other examples like TWA or Wang that no longer exist because of their inability to see the changes on the horizon.

The larger the organization, the more it tends toward the tangible or it looks to standardize. Bo Burlingham, in his terrific book Small Giants, talks about how companies that lose their mojo forget “about the emotional connection with the consumer…and concentrate on the process of business.”⁸ As many companies get larger, they become more disconnected from their customers, more bland and standardized, more focused on managing to the averages, and thus they end up settling in at the bottom of the Customer Pyramid. Plus, the Marriots and Hyatts of the world can be so insulated from innovators that they have no idea what three Millennials, with no experience starting a business, might be cooking up in their apartment. And, they're so wedded to their existing product that these hotel execs have no clue that home sharing might appeal to a broad segment of the traveling marketplace.

Boutique Hotels as Disruptive Innovators

The American hotel industry has followed Beckwith's three stages of evolution. In the 1950s, the Holiday Inns of the world offered consistency and predictability to a middle-class customer who was just learning what it meant to travel frequently. Other chains like Marriott and Hilton followed suit. With time, the industry evolved to where the big chains started offering a broader product line of choice. Marriott offered its customers a range from the value-driven Fairfield Inn to the Ritz-Carlton (which Marriott purchased in 1998). The focus of the chains was still on predictability, but now they offered a collection of brands targeting various segments of the market. Still, this was merely a replication strategy that didn't allow for much differentiation from location to location.

Prior to hotel chains proliferating in the 1950s, virtually all American hotels were independently owned and operated. By the early 1980s, many travelers were starting to tire of the bland sameness being offered by the chains, and they were once again looking for an independent alternative. It was a ripe time for entrepreneurs like Bill Kimpton and Ian Schrager, both of whom came from outside the hotel industry, to start their boutique hotel companies. (I started Joie de Vivre three to four years after these heroes of mine started their companies.)

Boutique hotels were created based on the premise that just meeting customer expectations wasn't good enough for many hotel guests. Choosing a hotel is a rather intimate product choice. You sleep with the product. You get naked and shower with the product. You experience the product for days at a time and, if it's a memorable experience, for some time afterward. Given the nature of the product, it seems natural that hotels should mirror the aspirations and personalities of their customers. They should also be a reflection of the community in which they're located. So, boutique hotels came on the scene in the early 1980s and immediately started eating away at the market share of the big chains in America's largest cities.

Joie de Vivre's innovation was to create an organizing principle that helped us deliver what USA Today called “the most delightfully schizophrenic collection of hotels in America.” In creating our first hotel, The Phoenix, I decided that we would use magazines as a touchstone for the hotel's personality. Magazine publishing and boutique hotels have a lot in common. They both develop products that focus on market niches. (Have you ever wondered who reads some of those oddball publications you see on a long magazine rack?) These products are typically somewhat lifestyle-driven. If the publisher or boutique hotelier gets it right, they develop a deep emotional connection between their subscriber or hotel guest and their product. In fact, Condé Nast, America's largest magazine publisher, launched an ad campaign with close-up photos of subscribers passionately embracing their favorite magazines with headlines like, “It's not just a magazine subscription, it's a torrid love affair.” That's the kind of relationship that boutique hoteliers seek with their most rabidly loyal customers.

We chose Rolling Stone magazine to be the personality of The Phoenix. We also introduced the practice of using five words to define the magazine and the kind of hotel we wanted to create: “irreverent, adventurous, cool, funky, and young at heart.” Every decision we made—from the staff we hired to the uniforms they wore to the design of the guest rooms to the unique services we were offering—had to match up with this list of five adjectives. This organizing principle helped ensure that all parties, from our investors or owners to the designer or architect to the general manager or sales team, were on the same page. This is one pivotal reason why Joie de Vivre has won numerous national awards, not just for our design but for the unique experiences we create.

I didn't realize the magic in this approach until I started talking to our regular guests at The Phoenix and found that what attracted them to the hotel was something intangible. Our biggest cheerleaders for The Phoenix weren't necessarily people who fit the hotel's demographic of young, male, Los Angeles–based musicians with tattoos. The hotel's biggest fans were people who fit the psychographic: the guests who would have used those five adjectives to describe themselves (Dr. Timothy Leary, mentioned at the start of Chapter Two, was a good example of this). In essence, by staying a few days at The Phoenix, these guests experience an identity refreshment when they leave: feeling a little more funky, cool, and irreverent. However, not everyone wants this type of aspirational bubble bath. For example, my mother is not a big fan of The Phoenix. That didn't matter, though, as Joie de Vivre started growing by imagining new niches in the market that were underserved, finding a magazine that defined that segment, creating a unique boutique hotel, and then tapping into this psychographic population and letting them evangelize about the product. A high percentage of repeat customers, big word-of-mouth (and word-of-mouse), and rampant positive press help keep us busier than our competitors for a fraction of the promotional expense.

Over the 24 years I was CEO of Joie de Vivre, we created 52 boutique hotels, each of them based on different magazine personalities – from Wired to Town and Country to the New Yorker. Some of our most interesting hotels are based on a hybrid of two magazines like our Galleria Park Hotel, where Business Week meets Vanity Fair, or our Hotel Vitale, which goes after the post-W (Starwood's brand), pre–Four Seasons guest by marrying Dwell to Real Simple, creating a hip yet holistic and mature ambience for the bourgeois bohemian of the world (what the New York Times columnist and author David Brooks calls “bobos”). In essence, Joie de Vivre recognized that the modern hotel customer was having their baseline expectations met at the big chains, but this customer was looking for something more. They wanted a hotel experience that spoke to them on a higher level of the Customer Pyramid. Yet, Joie de Vivre had a big challenge. It's one thing to create a rock’n'roll hotel that seeks out adventurous and young-at-heart travelers, but when we upped the ante to create an entire collection of niche-oriented boutique hotels throughout the San Francisco Bay Area, we risked confusing our customers when they came to our website. We could imagine our customer saying, “I like the idea that Joie de Vivre has the perfect hotel for my personality, but how do I choose the right hotel among the collection?” As we grew the number of Joie de Vivre hotels, we grew the risk that our guests would end up in the wrong hotel for them, as happened when the conservative president of the American Medical Association (and his wife), who were friends of my parents, showed up at the funky Phoenix for a room. The fright on their faces will stay with me for a lifetime.

Given that “disappointment is the natural result of badly managed expectations,” we needed to figure out a way to better educate our guests about what kind of personality they should expect when booking a stay at each of our hotels. And there were other storm clouds brewing on the horizon that also required a shift in how we educated our guests. While boutique hotels had been the disruptive innovators of the hospitality industry in the 1990s and the early part of the new century, we were about to be disruptively innovated by some new players to the market.

Joie de Vivre on the Brink of Disaster

In the late 1990s, Expedia and Travelocity launched their travel websites with a unique value proposition to the traveling public. Their websites created an efficient market for what had historically been an inefficient one. What I mean is they gave power to the hotel customer by providing travelers an efficient and transparent way of comparing hotel prices and products. This supermarket strategy of plentiful supply at the best prices was being mirrored on the Internet across other industries, but in no other industry was the shift of power from producer to consumer more pronounced than in the travel industry.

The power of Expedia and Travelocity soon multiplied overnight due to the 9/11 tragedy and the ensuing downturn in travel. The traveling public began flocking to the Internet to find the best-priced airfares and hotel rooms. All of a sudden, travel was seen by most as virtually a commodity, and websites like Hotels.com became a traveler's best friend. From Joie de Vivre's perspective, this was a disaster, not just financially but also in terms of our relationship with our customers because we had long enjoyed a direct, personal relationship with our loyal following. Financially, this new commoditized approach to booking hotel rooms meant that our average room rate was plummeting by 20 percent or more as the power now rested in the hands of the consumer. Furthermore, these travel websites charged us up to a 25 percent commission on every room they booked with us. So our $200 hotel room had to drop to a $160 hotel room because of the newly efficient market. And then, if that room was booked by a company like Expedia, we would receive only $120 net of that $160 rate. Our profit margin was wiped out overnight.

Adding insult to injury, the nature of our guests also started to change. Previously, the guests who discovered our hotels had usually done their homework (or had heard about us through friends) and knew why they wanted to book one of our personality-driven hotels. But with this new influx of travel-website guests, who were choosing hotels primarily for price, we found that our customer satisfaction scores started to plummet. It was the worst of all worlds: we were making less money, and our guests were less happy. In analyzing this situation, we found that the guests who had the lowest satisfaction were those who'd booked on the third-party travel websites. Their dissatisfaction seemed to come from the fact that their expectations didn't match the product. Whereas before the Internet our product differentiation was one of our strengths, the fact that we weren't predictable like the Sheratons or Hilton Gardens of the world was coming back to haunt us.

We needed to solve two problems quickly: (1) improve our margins and (2) make sure the right guest was matched with the right hotel so we could improve customer satisfaction. We needed to figure this out fast because the percentage of our business that was coming from the Internet was doubling each year. Unfortunately, at that point in 2002, only 20 percent of our Web-based reservations was coming from our own website, with the balance coming from the high-commission third-party sites.

Thankfully, I'm surrounded by very talented and resourceful people. In 2003, we came up with a clever yet inexpensive solution that leveraged our company's core values of creativity and quirkiness. This solution has translated into millions of dollars of margin improvement and a big uptick in customer satisfaction. Our marketing team introduced a cartoon character named Yvette, the Hotel Matchmaker, on our home page. Yvette asks you to take a one-minute personality test that helps us understand your psychographic persona. Once you take the test, Yvette immediately delivers back to you five of our hotels that best fit your personality. Yvette also provides some matchmaking with respect to what you should do when you visit the Bay Area. She offers up two local people (out of a few dozen who are profiled on our website) who are most similar to your personality and shares their lists of favorite hidden treasures you shouldn't miss during your stay. Finally, Yvette also gives you six specific recommendations of things to do (from a list of a couple hundred local favorites) that seem perfectly suited to your psychographic. (Joie de Vivre recently retired Yvette's image from our website because her cartoon character didn't fit with the company's new design.)

This creative matchmaking tool became an overnight hit, got lots of press, and ultimately won Joie de Vivre the “E- Marketer of the Year” award worldwide in the hospitality industry two years in a row. Not only did this hotel matchmaking approach drive more guests to our website—so that we didn't have to pay that 25 percent commission to travel websites—it also produced a less commodity-driven customer who had much higher satisfaction because we matched him or her with the hotel that best fit their personality. In essence, we did a better job of managing the expectations of our guests. Guest satisfaction grew, and the percentage of our total revenues coming from the Joie de Vivre website escalated at nearly twice the annual growth rate compared with America's big hotel chains. We were able to dodge the bullet that still plagues many other independent hoteliers who have become reliant on the high-commission third-party websites.

In many ways, Yvette was a lightweight means for us to be way ahead of the game in the world of customer customization for which Netflix, Amazon, and Spotify have become famous. And, the thinking that led Joie de Vivre to create Yvette is alive and well at Airbnb, as we use the wide variety of data signals we get from our customers to deliver personalized suggestions of where to stay and what to do for our guests.

Expectations are what drive customer satisfaction or disappointment. The Customer Pyramid can help you better understand the motivations and expectations of your customers. This pyramid will remind your executives that customers are actually collections of people with collective psychological needs and desires. Covering the basics of these customer needs creates baseline customer satisfaction. You can't move up the pyramid without it. But as we've learned, today's customer is rather promiscuous at this base level of the pyramid. Now let's explore what it takes to create a more committed relationship between you and your customer.