I recently switched cellphone carriers from Bell (one of 3.5 carriers we have in Ontario) to Rogers. There is a 30 day cancellation notice required, which I happily gave a couple weeks ago and was told that my next bill would lower the plan pricing so that I would only be paying for cancellation date + 30 days. Sounded fair to me. I get my bill and of course there is no discount so puzzled I call up the customer service. It turns out that my credit will come on my final (Nov 1) bill* Fine, so will Bell refund me money when my Nov bill has Bell owing me? Oh of course… in 6 to 8 weeks.

* if you haven’t had the pleasure of spending exorbitant amounts of money on phone service in Canada an explanation of the billing process is in order. Each bill received contains the charge for the next month of service plan as well as any extra usage charges for the previous month. Therefore the Oct 1 bill was charging me for October’s service and any long distance I used in September. My phone service ends partway through October.

Bell has effectively scored a 3 month interest free loan from me and every single other person in the ranks of those leaving their service. Is this final move to squeeze every dime from their (former) customer base really going to affect me? Of course not, but this kind of treatment is exactly the sort that leaves a bitter taste. Although I wasn’t satisfied with Bell as a carrier perhaps I would have subscribed to their DSL service or their satellite TV. Clearly this will no longer happen since I’ve experienced their customer service first-hand. This little rant leads nicely into the point of this blog article…

Companies Are Losing Easy Profits By Devoting Exceptional Resources to Alienating Hard-Won Customers

It is well-established that it is far more expensive to acquire a new customer than to sell to an existing one. If acquiring new customers is so difficult it should make sense to do everything possible to keep your customers, and certainly a business should not be actively devoting resources towards the opposite effect. There’s no doubt in my mind that at least the executives in major companies acknowledge that this is true, but this truth becomes lost the further down you dive into the structure of a corporation. Each department has its own responsibilities which in turn spawn its own priorities, objectives, and metrics of success. If these metrics are left to be devised strictly on the basis of the department’s role, then a billing department may be concerned mostly with maintaining a healthy cash flow by collecting money due as quickly as possible. Sounds reasonable enough, but if that’s your only metric of success, where is the motive to maintain high customer satisfaction (something that the entire company presumably cares about) and not take actions that will hurt satisfaction?

This is the perfect breeding ground for policies like taking money from a customer that you aren’t owed and returning it three months later (whilst not extending payment terms anywhere as generous to customers). It certainly provides a rosier cash flow and opportunity for a nice interest return on money that isn’t yours. The costs of these policies are charged to the company in the form of reduced sales and lost customers, but the department responsible for these costs does not directly bare them (and may in fact be rewarded for its high performance against the metrics set out for it).

On the outside the company appears to be growing miniature heads moving in different directions and causing the corporation to sabotage itself needlessly. This inconsistency is noticed by both employees and customers, creating resentment in both groups towards the corporation and its suicidal tendencies.

But I’m a small business owner and don’t have a large bureaucratic organization. How does any of this help me?

As a small business it’s tempting to blindly copy what the big boys do since they are making money hand over fist. I’ve fallen into this trap many times myself, happily creating my own virtual bureaucratic procedures with no thought as to their real effect. It’s unlikely that a single corporation will change its ways as a result of this post, but if you are a small business owner you have the agility advantage to quickly re-assess how each aspect of your business operates and realign it with the overall company strategy and beliefs.

Should you really require 60 days notice to cancel a service just because Mega Lawyer Driven Corp Inc. does? What kind of refund policy will avoid needless resentment towards your business? Does your existing customer support focus on making life easy for the customer or easy for you? Are you nickel and diming people (*cough* activation fee *cough*), which could be costing you return business, referrals, and larger contracts? What sort of policies have you enforced on customers that are a nuisance or are based on using punishment to coax desired behavior?

Don’t bother spending money on advertising that extols virtues which only parts of your company follow. It’s a basic fact that people hate feeling lied to, cheated, disrespected, deceived, or otherwise treated unfairly, no matter what section 10 paragraph 4 of your “service” agreement might state.

I’ve been busy answering this question since Tilted Pixel Inc. was founded last year. In my previous ventures spending on growth was sparodic and rarely well planned resulting in seriously suboptimal results. With hindsight being 20/20 I’ve been approaching spending in a much more careful way.

Every business is in danger of the same problem, and many business owners have drowned the seed of their idea by spending like large companies despite having 1% of the budget. Some may cry “this was a necessary marketing expense” even as the repo trucks drive away! I’d like to propose that you avoid this mess by stealing an economics theory and choosing to behave in the manner that it predicts.

First we need to remember that in business there is no such thing as perfect. You never have enough time or money to do what you should, and a major part of consistent success hinges on you being able to create something great inspite of the imperfections that abound. It’s particularly tough to do when starting out as you begin to try to reconcile the vision in your mind with the reality you live in. You can’t have it all so what do you choose?

My economics-based answer is spend the next sum of money that you can afford on the purchase that provides to you the greatest marginal utility.

This is my fancy way of stating two simple ideas:

1. Devote your cash to the items that will bring you the greatest return (highest marginal utility per $ spent).
2. Don’t make an expense that you can’t afford.

In economics marginal utility (the value that you receive from the next of that item) can be used to predict how resources are allocated between multiple expenditures, with the theory that the optimal mix is the one that gives you the “most utility for your buck”. In other words the sum of the utility you have received from your chosen amount of spending on each expenditure is at a maximum.

Economics isn’t business advice however, it’s a set of theories on how the economy and its participants tend to behave and is thus based on interpretation of real world behavior. The above tells us that rational profit seeking businesses tend to allocate their money in a manner that attempts to maximize the desired return. With the idea of marginal utility it also provides a neat model of measuring this numerically. This leads me to suggest that we consciously attempt to use this model to behave in the manner that economics theory suggests we will behave. How’s that for making you dizzy?

Putting It Into Practice

We have a simple model now to help keep spending wise and on track. We will only focus on new spending and assume that any existing expenses of your business are already optimal. In reality you will want to re-evaluate your expenses to fit that assumption, which you can do by applying this model to each expense and lowering those that do not fit your conclusions. You will likely save a hefty chunk when you analyse your expenses in this way even if your original spending decisions were made carefully.

In addition to making a point about marginal utility I made a separate point about only spending what you can afford. This is technically redundant since academically I could argue that a marginal utility calculation truly mirroring real life could award a negative result to purchases that will harm your business. This is unnecessarily anal and tedious so I will instead say that your spending on the growth of your business must not be done at the expense of your ability to pay your bills right now. This means carefully mapping out your cash flow and achieving a current ratio that lets you sleep at night.

You will now make all your purchases according to the calculation of marginal utility that we will apply. For the most part you will rarely ever sit down and attempt to compute an absolute number for this. Marginal utility is only useful in this spending model when compared to other marginal utility amounts, and in general we are going to care about significant differences such as “an order of magnitude greater” or at least “double that of”. It would be quite futile to attempt to perform such a subjective calculation to any greater accuracy.

When looking at the marginal utility I define it roughly as “the purchase’s ability to make my business succeed in the long run”. Very simple definition, but measuring it is very tricky. I want to use the limited resources of my business in a way that will get me the furthest ahead of the game in the long run, meaning that it is best suited for my business to grow. Beware that timing is implicitely factored into this! A key mistake that businesses make is trying to grow too fast, straining resources to the point of financial collapse. Perhaps buying a fancy 3D sign for your new store will attract more customers in the long run and build strong brand recognition, but if it costs you 85% of your available marketing budget I guarantee you that is not your fastest path to growth (and will likely ruin you). When considering the long run effect of a purchase you also have to consider the short run effect to adequately calculate where this purchase will really lead your business in the future.

This model is effective and worth using because it helps highlight the tremendous difference in your return per dollar on various expenses - the very same problem that I highlighted at the start of this article. I mentioned overlooking critical expenses, those that would have provided me a tremendously high return on my money. Rather than seizing the opportunity of those expenses I made decisions that simply would provide a return, failing to always recognize the tremendous marginal utility differences involved. Since money is finite, choosing to spend it in one place necessarily forgoes spending it elsewhere at the same time (opportunity cost).

I recently upgraded my PDA to a BlackBerry to improve my ability to access the internet from anywhere. Despite the rather high monthly service cost, the device easily pays for itself multiple times thanks to the time I save not hunting for a WiFi access point when I need to reply to an e-mail urgently. It also allows me to compose e-mails in situations where my PocketPC did not thanks to the fully QWERTY keyboard. The marginal utility on this device is very high, but only because I am actually able to take financial advantage of the benefits that it provides. Had I bought this device when my business had first started I would have received very little time savings since the company was far less busy, but I would be paying the same high monthly fee. To add insult to injury that monthly fee would have been draining valuable resources that would be far more beneficial if devoted to printing business cards and attending client-gaining networking events. At that point in time the BlackBerry’s marginal utility to me would have been very low.

That’s all there is to it. I make the purchases that I would be crazy not to, so as to gain the most value from the money that my business invests in its growth. I don’t buy something because my competitors do or because it will be useful to me eventually (beware the trap of making a major expense on something you can get a good deal on now, but which you won’t need for a long time). Regardless of what the long-term prospects of my business my be, I recognize that at any moment I only have a certain amount of money to invest into it, and that money must be distributed to the expenditures that given my current business situation will have the greatest long run positive effect.

Bear in mind that this is primarily a mental mindset to condition yourself into using so that you do not fall prey to ill-conceived decisions or premature purchases. You can apply it in an Excel chart, but you can also run through it in your head while at the store. It is not something that should be scribbled out in long and dreary calculations on paper, as such time-consuming advice is rarely followed (see the lack of business plans for proof).

We all get the same 24 hours each day, of which almost half is devoted to attending to sleeping, eating, transportation and errands. On a good day this leaves 12 hours with which you are free to do as you please to further the achievement of your goals and desires. How is it that some people manage to get so much more out of that 12 hours than others? Why is the time of some people so valuable that they can command $250/hr for their attention? How do I go about earning that, and perhaps more?

The answer to this lies in the prehistoric days, a vague and poorly documented era that I am free to take artistic liberty with. Og was a particularly smart caveman living in that particular era and like all good cavemen he spent the bulk of his days hunting animals while simultaneously avoiding being hunted by said animals. Og was rather fascinated with the world around him, often getting lost in his primitive caveman thoughts as he spied a particularly interesting leaf. It was perhaps the first case of ADD ever noted, and unfortunately for Og it meant that animals would often creep up on him and catch him off-guard. Many wounds later Og realized that he was very poorly equipped in comparison to the saber-tooth tiger that had just run him up a tree. Something had to be done lest he starved.

Og did some heavy thinking and came to the realization that a wooden stick would help him fend off attackers if wielded in the right way. It was a bold idea with much potential. Up until now everyone simple wrestled smaller prey to the ground or settled on sharing termites with the chimpanzees (history suggests it was them that first invented the stick, but accurate patent records have yet to be dug up). After much testing and determination Og had his first functional hunting stick and the first real meal in weeks. The human race had its first tool and soon Og became the most well-fed caveman around.

Other cavemen began to take note of his bulging waistline and came to Og hooting angrily. They too wanted to hunt more effectively as the cavewomen at home were beginning to notice how much better Og was fairing. Og pondered this situation carefully and gestured wildly that yes he would share the powerful secret of the Hunting Stick. In exchange each caveman using said stick would be required to provide Og with one chunk of mammoth meat per month. It was a fair bargain and so Og was able to provide food for himself and his family nearly effortlessly.

So much is written about how to manage your time effectively, but performing low-output tasks efficiently will still get you far less than performing high-output tasks inefficiently. Og’s key to success was his propensity to find ways of leveraging his resources to achieve exponentially higher gain. His first breakthrough came from the stick, which allowed him to catch bigger prey faster than the other cavemen. Rather than using just himself to perform the work, he had transferred some of it to the stick. With the spare time this provided Og was able to think harder and an even bigger breakthrough came next. Og realized that he could equip others with a marvelous Hunting Stick in exchange for food. Suddenly Og didn’t have to do any hunting at all thanks to properly leveraging his resources (the stick idea). At this point historical records are again rather faint, but we can theorize that Og continued to profit from his invention by creating product upgrades like the Sharpened Hunting Stick, Hunting Stick Classic, and the Armored Tank.

You don’t need to be an inventor or a caveman to have this model work for you. What you do need is a change of mindset from the rat race of getting as much done as you humanly can within those 12 free hours into figuring out how much you can leverage your resources and abilities to exponentially increase the return you receive on each hour you work. As a work machine a human being is actually quite terrible. We are high maintenance, error-prone, and can only do so much work in a given period of time. The most productive use of that 12 hours is thinking up ways to generate value through available resources, and then putting those resources together to generate that value. You don’t want to get stuck requiring yourself to be able to generate the value, as the opportunity for expansion becomes highly limited. Og could have sold his hunting services rather than the Hunting Stick, but then he would have to be constantly working to receive payment and would have likely been stomped on by a mammoth. Remember that as impressive as a consultant’s $250/hr rate may sound, many millionaires are making much more than that from passive income streams and doing so while they sleep.