The appendix of The Goal notes how the presence of price competition often indicates that customers feel unable to control most aspects of their cost profiles. This conclusion is intuitive – if customers were able to lower other costs, they might choose goods and services based on factors unrelated to price.
An organization with a superior good or service can sometimes be caught on the other side of this problem if they are unable to lower their price point. What is the best approach if customers cannot cover the cost for producing a good or service? To put it another way, if it costs $10 to produce a pizza but customers never pay more than $8, that’s the end of the pizza industry, right?
A clever organization can survive such a challenge if it can lower the cost profiles of its customers. There are simple ways to do this. If customers are unable to afford to travel to a particular store, for example, an organization can lower this aspect of the cost profile by offering a delivery service for a fee that is lower than the transportation cost for a customer. There are a number of more complex examples that grow from this idea – money back guarantees, rollover minutes, rewards programs, and so on.
What these organizations and their methods all have in common is the way they charge a customer for the right to a lower cost profile. The rise of Internet commerce provides many examples for how organizations find ways to lower a customer’s cost profile. A theory-based way to think of Seattle-based Amazon’s shipping service is that it eliminates the need to buy a plane ticket to the Pacific Northwest anytime a customer wants to buy from Amazon. In this approach, a customer who could not afford to buy a book for $20 plus the round-trip airfare would become able to afford the book for $20 plus the cost of shipping.
A more practical understanding suggests that shipping eliminates the cost of driving to any local bookstore that might sell the same book. The majority of Amazon book customers probably consider the cost of shipping to be less than the cost of going to the bookstore. This thought process applies to everything Amazon offers and manifests in its Prime membership program – for a flat annual fee, Amazon will ship anything to you for free. The program’s success hinges on a simple calculation – any customer who feels the membership cost is less than the cost of all the trips made in a year to brick and mortar stores will sign up for the service. This in turn lowers their overall cost profile, which in turn frees up a customer’s spending money for buying products on Amazon that might cost more than the prices offered on local store shelves.
If the program is executed successfully, the customer who is right on the edge of purchasing a single good or service is enticed into making the purchase (and many similar ones in the future) by signing up for the program, lowering their overall cost, and finding that, all things considered, the more expensive good is better for their overall financial health.
