Exchange is the key to staying in business

People still don’t get it. If we constantly look upon the customer as just a source of revenue, there will always be a time of reckoning.

Quite a few of my clients have been pressing me in recent times to develop an education program for their lower level workers, focusing on the elements of management so that everyone in their organisations can understand how they fit into the overall rationale of the business.

So, it sent me back to my library and I came across an idea that is so simple and yet profound that it escapes most of us, but is central to the existence of a business.

Businesses stay in existence and grow for one reason and one reason only. What a business exchanges for a customer’s money has to be worth more to the customer than the money paid. On the other side of the coin, the money the business receives has to represent a profit on the cost of providing whatever it does provide to the customer.

In other words, the benefit conferred on the customer has to be greater, in the perception of the customer, than the price paid for that benefit. Every time the cash register rings, an exchange has taken place, and if the money that the customer puts in the till exceeds, in her or his mind, the benefit that he or she receives, the business goes backwards.

Regrettably, we so often think in terms of the tangible “thing” we are selling. It doesn’t matter whether it is a can of soup, a computer or a legal service; it is not the can of soup, or the computer or the legal service (the number of billable hours) that is important to the customer which enables the customer to evaluate the benefit – it is what the can of soup, the computer or the legal service does for her or him.

If the soup is terrible, the computer can’t access the internet or the legal service is nothing more than hours charged, then, predictably, the customer will decide that the benefit wasn’t worth the money. The business suffers.

And yet, this idea that it is the tangible “product” that is the thing that keeps us in business is endemic. Just this week the ANZ, in announcing a $3 billion profit, indicated that its costs would increase because of some bad investment and loan decisions it had made, and these costs would be passed on to, guess who; the customer.

For goodness sake! When things were great, the shareholders got the dividend, but when the banks make a mistake, the poor old customer takes a hiding.

Now, the ANZ is not alone in its glory. It is making the mistake that it believes that the “loan” it makes to the customer is the product. It isn’t. The product is always the benefit that the business confers on the customer.

The “benefit” in the case of the ANZ bank, is to pass on to the customer a cost that he or she did not expect and one for which he or she is getting no benefit, and in relation to a mistake in which the customer had no part. Theoretically, the only people to benefit from passing on of this extra cost to the customer are the shareholders.

According to the theory of exchange, the shareholder will ultimately suffer because the business in which it is investing is conferring less of a benefit on the customer than that for which the customer is paying money. The business has to suffer and if one looks at the graph of bank shares in recent times, it is not surprising to see what has happened.

People still don’t get it. If we constantly look upon the customer as a source of revenue rather than an entity upon which to confer a benefit, there will always be a time of reckoning. In tough times, people’s memories are incredibly reliable. Competition comes knocking on the door and customers tend to remember their bad experiences or those that have been passed on to them anecdotally by others.

The suffering business asks “why won’t people buy my product?” The answer is that if you think you are in the business of selling products, you won’t be in business for much longer. You are in the business of exchange. If the perception in the market is that the benefit you confer is not worth the price you charge (or might charge in the future) then don’t come talking to me about your product.

The story has been told a million times, and has been ignored as many times as it has been told. The railways companies in the United States had a field day when the American enterprise was in its wonderful pioneering days. For a few brief years, the railway companies that laid tracks and built carriages and rolling stock were having a field day.

Then came along new and more sophisticated forms of transport such as the modern motor vehicle, the transport truck and the aeroplane. Railways didn’t get into any of these businesses because they thought they were in the business of railways.

They weren’t. They were in the business of transport, and didn’t understand what was happening to them.

If the railways had just stopped for a minute and asked themselves “why do people pay us money?” they would have received the answer; because the benefit we got from using trains was worth the money. Now, it is cheaper and quicker to use road and air; and by the way, the truck companies and airlines seem to appreciate our business.

Exchange was, in the days of barter, what drove business. Today, in the world of instant gratification and whatever the future holds for us (and hopefully, we can have some influence on that) it is still exchange, in another form, that still drives business.

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

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