Remember that game, Snakes and Ladders? So maddening – you’re going along just fine and then a random roll of the dice sends you sliding back 20 or 30 squares. Grrr…
It sometimes feels like that when you’re running your business, right?
But what if it wasn’t just the occasional random event? What if the whole board was rigged against you? That would REALLY suck – and you wouldn’t want to play.
I hate be the first to tell you, but that’s what running a business is really like. There’s actually a fundamental problem at the heart of EVERY business. And it hurts small businesses most of all.
The problem is the “transaction box”. Here’s how it works:
A. It starts when we focus on what our customer wants. (Yes, I know you’ve been told that’s what you’re supposed to do. But it’s wrong. Stay with me.)
B. If our customer is a business, then it naturally focuses on its customer. If our customer is a person, then he or she is focused on her own thoughts and aspirations.
Regardless, neither one of these customer types thinks very hard about us. And when they do…
C. …they think of us as a supplier. Suppliers which cost money. Sure, suppliers are necessary. But. They. Cost. Money.
D. See, we want to charge our customers more money, right? Because that’s how we increase our profit.
But our customer wants to increase her profit. And a good way to do this is to reduce her expenses and spend less money. Huge conflict.
E. Worse: our customer has control of the cash and the purchasing process. So she creates a competitive environment either explicitly (a bidding process is a great example) or implicitly (she simply keeps in mind that there are lots of our kind of business out there).
And, hey-presto! We’re now in the transaction box along with our customer, playing tug-of-war with a twenty dollar bill.
Check it out – see if these 10 attributes of the transaction box feel familiar to you:
Customers explicitly or implicitly consider multiple options to increase their choice. To make the comparison easier, customers treat these options as if they were identical. This is called commoditization.
- Price pressure.
When options are perceived as identical, the only differentiating feature becomes the price. When price is the only differentiating feature, the lowest price wins.Because commoditization makes a lower price more important to our customer, we start comparing our price to our competitors’ prices. Our price is likely to drop as a result.
- Impacted offering.
Any drop in our price puts pressure on what we’re willing or able to offer. We find we want to offer as little as possible: just enough to meet the customer’s request and just enough to match or ever-so-slightly beat our competitors’ offerings.
- No cherry on top.
With commoditization leading to price pressure leading to minimalist offerings, it becomes very difficult for us to put a cherry on top. Our customer either hasn’t asked for a cherry or has specifically asked for it to be excluded from our offering. Either way, she’s not going to pay for it.This is a lost opportunity for both our customer and us. She may miss out on something beneficial without realizing it. And we lose the opportunity to add additional value and differentiate ourselves.
- Short-term thinking.
When we’re in the transaction box we think in the short-term: we simply want to win the deal.Over time, the price pressure (and resulting profit pressure and cash flow pressure) created by the transaction box can exacerbate our need to win each deal which further increases the price pressure we feel. We get locked into short-term thinking.
- Forgotten customer.
Because commoditization increases the importance of price to win a deal, we become increasingly aware of our competitors’ offerings and prices.In order to win, we take our eye off our customer and look laterally at our competitors. We focus on beating them, rather than winning the customer.
- Innovation deterrence.
Innovation is an investment in the future. But how is this possible in the transaction box? We’re now thinking short-term, not long-term. And investing is much more difficult when our profitability is under pressure.Further, innovation, by definition, means creating something fresh and new. This rarely comes from staring at competitors; it comes instead from thinking more widely and long-term about customer aspirations, the larger landscape, and our own capabilities and dreams. Innovation needs time and space and money to think creatively, none of which the transaction box is good at providing.
- Lost customer focus.
Ironically, by looking back up the supply chain to control her suppliers, our customer’s focus moves away from her customers and her aspirations. She can lose sight of where she really wants to go.Over time this can become an institutionalized way of thinking.
- Cultural norm.
With repetition, transaction box thinking gets reinforced and becomes standard practice for all participants, customers and suppliers alike.From a wider perspective, constant pressure on profits, long-term thinking and innovation may well have broader implications for an industry, a community, and a society.
- Increased vulnerability.
Finally, transaction box thinking increases our vulnerability. With less margin, we become more vulnerable to financial fluctuations; with commoditization, we become more vulnerable to creative alternatives; with less innovation, we beggar our future.
So. The transaction box promotes short-term, transaction-focused thinking that squeezes out creativity and innovation, encourages cost-based – rather than value-based – pricing, and makes suppliers (us!) more vulnerable.
Do you run a small business? Does any of this sound familiar? If so, please leave a comment below.