How to Judge a Business

This story is a snippet.

At Harvard Business School, we’re taught this idea of a value stick.

A value stick shows how the money is split up when a consumer buys something from your business.

Imagine someone paid $10 for a cup you created. You paid $2 to buy the materials to create the cup, and decided to sell it for $10. So, you make $8. Simple.

(They call the $8 “firm margin”; “firm” means “business” and “margin” means the difference between two values ($10-$2), because you generally write differences on the edge, or the “margin”, of an accounting sheet.)

However, there are a few other things that are important when trying to figure out how to make and sell cups. You bought your supplies for $2, but your suppliers might have been willing to give you the supplies (“willing to sell” or “WTS”) for less — say, $1. So, the supplier is actually getting $1 “supplier surplus,” because you paid $1 more than you had to in order to get the supplies.

In addition to that, the customer was willing to pay (WTP) $15 for the cup. Thus, you “lost” $5 that you could have made if you had just charged a higher price. That $5 is called “customer delight.” The customer feels happy because they’re getting a ($5) deal. They were willing to pay $15, but you only charged them $10.

Now that you know the basics of the value stick, I want to talk more deeply about customer delight.

I care deeply about making people feel happier, and I feel like that’s what businesses are supposed to do. I consider myself to be a utilitarian, because I think that what’s important in the world is making people feel better.

So, in contrast to how people generally think of businesses, where the goal is to make the most profit or “firm margin,” I think a better way of looking at businesses might be to instead see how much “customer delight” a company gives people.

Why? Because it’s not taking profits that actually makes the world better.

“Willingness to pay” is defined as the amount of money where a person would not pay any higher to purchase the product. This means that they might even be upset, or sad that the price is so high, but they want the product so badly that they’re willing to pay that much anyway. By charging that highly for a product, you’re able to make a lot more money as a business owner. But you’re actually making the world a worse place.

So, from a utilitarian standpoint, I think the best way to look at how well a business is doing is not to look at its profits or “firm margin,” but instead to look at its “customer delight.” How much happiness is it bringing people?

Other related thoughts that occurred to me while writing

Ambivalence

You could argue that, theoretically, the current capitalist system is just making the world an “ambivalent” place, since no one would buy something that didn’t help them enough for it to be worth the cost. That is, even if the customer is upset while making the purchase, the purchase will help the customer not be as upset in some other area of their life.

Either way, the goal is to get businesses to make the world better, not just ambivalent. So, the current system still isn’t good enough.

Assumptions

I’m making some assumptions about work and pay and emotions here that I’d like to make more explicit.

This model I’m putting forth assumes a few things.

1. People don’t like working
2. People need to work in order to make money

I personally currently advocate for a world in which neither of these two things are true, but in our current society, they seem to be, and that is why the extra money the customer does not have to pay is called “customer delight.”

It’s a delight to be able to work less.

Measuring Customer Delight

How do you measure customer delight?

The current capitalist system has an interesting answer: maximize profit. Then, whatever profit you made is what could have been customer delight. That is, under the current system, we measure how much customer delight a business can offer. Instead I want to measure how much customer delight a business does offer.

Another way of putting this is that we don’t actually do good in the world. We instead measure how much good we could have done if we weren’t greedy.

Yes, high profits do show that your business is providing a much-needed service. But, if you’re charging the ideal amount, you’re essentially charging so much that people are ambivalent between using your solution versus just putting up with the problem.

An off-the-cuff response on how to measure customer delight while maximizing customer delight would say to have businesses follow capitalism, but at the end of the year, return the profits back to the consumers. However, this doesn’t quite work because the consumers will likely take that refund into account when buying stuff, meaning they’ll buy more expensive stuff because they assume they’ll be getting money back for it later. So, you can’t accurately measure customer delight with this method.

If anyone has thoughts on how to measure customer delight, I’d love to hear about them in the comments.

Regular Customer Delight

Just to be clear, companies in our capitalist society oftentimes on-purposely have high customer delight. Why? Wouldn’t this make them lose profits?

It doesn’t make them lose profits, because having customer delight leads to brand loyalty. People feel happy about your product because they consistently feel like they’re getting a deal. Thus, they’ll buy more things from your business, rather than other businesses.

So, while businesses may gain less money on each transaction, because customers start liking their business as a whole due to having high customer delight, there are more transactions, leading to more profits (and other benefits) in the long run.

Amazon

Amazon’s mission statement includes “We aim to be Earth’s most customer centric company.” Part of this mindset is that Amazon actively attempts to have a high customer delight.

(Sidenote: there’s an interesting story of how Amazon is evading anti-trust law because in order to use anti-trust laws against a company you have to show that the company is bad for consumers, but Amazon is really good for consumers (just bad for new businesses), so it’s taking years to get the law updated to catch up to Amazon’s business practices. It’s part of why I wrote this.)

There are also many concerns about the working conditions of Amazon’s employees.

Perhaps unsurprisingly, the two (customer delight and bad working conditions) go hand-in-hand. One of the key ways to raise customer delight as a business owner is to lower your cost. And one of the ways you can lower your cost is by paying your workers less and having them do more.

Thus, I think the idea of judging companies purely off of their customer delight is actually a really bad idea from a utilitarian lens, because it pushes companies to treat their workers worse.

I’m not sure how to get around this issue, and I would appreciate suggestions.

Thoughts? Ideas? Questions? Suggestions? Let me know in the comments. I want to hear from you. Also, if you enjoyed these thoughts, please clap for this piece— it helps get the ideas out to more people.

December 17, 2021

Yesterday I was talking with one of my friends, Thor Larson, and he helped me to understand why it is that capitalism may still be a good mechanism for generating customer delight. The thought is that competition will generally make it so that consumer delight is raised, because competition drives companies to lower prices so that more people buy their goods, thus driving up customer delight.

I think that in general, this is a good argument, and helps me to understand how the system is supposed to function. I still have two worries though:

1. Companies are incentivized to not compete, and we have seen over and over again that companies do not compete or make it extremely difficult for other players to compete. Some may argue that this is where the government needs to step in, but I personally believe that the current systems of government may be too slow to do so in a reasonable amount of time. Business moves fast, and governments, by design, move slowly. Thus, I’m still not sure if this is the best humans can do with regards to building a system that supports human flourishing.
2. This still doesn’t solve the issue of treating workers with respect unless there are strong social forces that make it so that people don’t buy products from a place unless their workers are treated with respect. As we can see, this is still (content warning: tragic death) not the case. (Or, at the very least, these forces are not yet strong enough.)