Lowering Buyers Costs

Tactical and short-term advantage can be achieved by lowering production cost through greater operational effectiveness. In a competitive environment, all firms are encouraged to maximize operational effectiveness. As a result, operational effectiveness is a necessary but insufficient condition for achieving strategic and long-term advantage.

It is, however, also possible to lower costs in ways that transcend operational effectiveness. Such methods can significantly differentiate the enterprise. If this differentiation is sustainable, it will produce a strategic advantage.

In business – and perhaps in much of life – we usually define cost as the value we must give up in order to generate a product or service. This cost informs our pricing. But Porter encourages us to also consider the cost customers experience that goes beyond our price. What is the customer’s cost to access and use your product or service? If you can reduce the overall cost to the customer, you should be able to achieve a strategic advantage.

Hertz has lowered my cost of accessing their services. Through their Hertz Gold program I save a great deal of time and time is a cost to which I am very sensitive. Unfortunately for Hertz this service is highly replicable. Most other rental agencies have an identical service. Hertz has been attentive to my indirect costs of accessing their service, but their response is not differentiated, and does not create a strategic advantage.

My wife purchased her car – that she loves – from a dealership that seems unable to conveniently schedule regular service. She has observed that the dealership from which we purchased my car is friendly, flexible, and accessible. I always deal with the same service manager. I am regularly advised of upcoming service needs and costs. The service-oriented dealership has created for itself a significant strategic advantage in terms of our next car purchase. We will pay a premium price to enjoy a lower overall cost, where cost is determined by price, hassle-factor, and time expended. The buyers’ cost is more than your price.

My wife and I do most of our banking with the nation’s largest financial institution: Bank of America. But really we bank with Doris. Our bank has changed hands several times. Doris has provided continuity and personalized service. When the huge institutional system breaks-down – as it often does – we call Doris to fix it. If Doris would move, we would try to move our banking with her, despite all of the direct costs of doing so, because working with Doris saves us so many indirect costs. I worry about what will happen when Doris retires. But as long as Bank of America has Doris – or can develop new generations of Doris-like professionals – they have a significant strategic advantage in capturing our business.

Michael Porter explains, “In seeking opportunities to lower buyer costs, a firm must chart in detail how its product moves through or affects the buyer’s value chain, including the buyer’s inventory, handling, technology development, and administrative activities. It must also be familiar with all other products or inputs its product is used with, and understand how its product interfaces with them. The firm must also identify every other value activity in its value chain that affects the buyer’s chain.” (Porter, Michael E.; Competitive Advantage, Free Press, 1985)

Throughout the Exodus story Moses – or God working through Moses – is constantly providing products and services for which the “customers” do not directly return value. Manna from heaven, water from a rock, and military victory can be seen as loss-leading investments to create and preserve a market. In part this demonstrates a problem in making an analogy between the product that God offers and that offered in a commercial setting. God’s bottom-line has a different definition of profit and loss than our own.

But God is certainly promoting a product – a way of living – and Moses is a kind of Chief Operating Officer, product manager, and salesman rolled into one. Again and again, Moses positions the product as responding to real needs, improves access to the product, and even suggests variety in some aspects of the product that customers otherwise would not recognize. Given the promised – and demonstrated – benefits, Moses keeps the buyers costs very low.

Despite the innate value of the product – and the skill of Moses in positioning the product – it is still misunderstood and undervalued by many customers. The product is simply rejected by a significant proportion of the market. Fantastic service is quickly taken for granted. The experience of Moses is worth remembering the next time you grow frustrated in opening a new market.

On more than one occasion God is ready to give up on the chosen target market and start-over from scratch (Exodus 32: 9-14), but Moses successfully argues it is still possible to achieve the goals set out at Mt. Horeb. From time to time God does, in fact, eliminate a portion of the market that has proven itself absolutely insensitive to the value being offered. (Exodus 32: 35) But, all-in-all, the story of Exodus can be seen as a very successful effort to cultivate a long-term supplier-customer relationship. The shared value chains now extend over 3000 years.