No one knows the cost of a defective product. Don’t tell me you do. You know the cost of replacing it, but not the cost of a dissatisfied customer. — Edwards Deming

In my last post I asserted that a customer is a person who receives something of value in exchange for something of value. Many with a mass production mentality will find this definition troubling because it doesn’t require that what is exchanged be tangible.

The reason this definition works, though, is that a thing can be valuable while remaining intangible. Intangibles — things like gratitude — can have great value and, in a few cases, can actually be measured.

An important difference between a mass producer and a Lean organization is that people in the Lean organization consciously and constantly seek to add value that is real, but may be intangible, while mass producers don’t bother.

Let me give two examples of how and why intangibles like gratitude must enter into our decision making.

The first is a simple example.

Imagine that a parent loses a child, and seeks help from a grief counselor. What the grieving parent seeks is well-being, which is intangible. Presumably the grief counselor can help the grieving parent achieve greater well-being, for which the parent will also be grateful (gratitude also being intangible), and for which service the grief counselor will be paid in money, which is tangible.

In this case something of value is exchanged for something of value. It doesn’t matter whether what is exchanged is tangible or not. It matters whether these things are freely exchanged because both supplier and customer believe they will be better off after the exchange.

A second example can let us look at the concept in more detail.

A friend of mine runs a mostly-carryout restaurant where customers can order a popular item either as a side dish or as part of a complete meal. Ordered as a side dish, it comes with a dipping sauce. Ordered as part of a meal, is doesn’t. It’s goofy, but it’s corporate policy. And, since customers rarely read the fine print when they order online, it’s also a prescription for disappointment.

Customers rarely discover until they get home that the dipping sauce is missing. Some call and complain, only to be told “It’s corporate policy.”

Well, No, not at my friend’s restaurant. The dipping sauce is included with the meal, corporate policy be damned.

Some of my friend’s assistant managers have a mass production mentality. They resist giving away the dipping sauce, saying “It costs us fifty cents (the regular menu price of the sauce) every time we give one away.”

As my friend explains, “No, you’re confusing cost and price. The dipping sauce costs us maybe a dime per serving. Maybe we give away a thousand of them a year. So what? Are we going to risk disappointing a thousand customers just to save a hundred bucks?”

But it doesn’t end there. My friend is a very good restaurant manager. He instructed his staff to say to the customers when they arrive to pick up their orders, “You know, that meal doesn’t come with dipping sauce, which seems strange. I thought you might like to have some, so I put some dipping sauce in there for you.”

Most customers are grateful to have it.

I tell this story to suggest that there are three possible outcomes in a situation like this.

1) Customers could be disappointed. They paid their money, expected dipping sauce, but received none.

2) Customers could be indifferent. They paid their money, expected dipping sauce, and received dipping sauce.

3) Customers could be grateful. They paid their money, expecting dipping sauce. However, they were informed, without asking, that it normally wasn’t included, but that it had been included for them at no charge.

Gratitude is better than indifference or disappointment. My friend has provided to the customer something of very nominal value — dipping sauce — for something of inestimable value — gratitude. Both the customers and my friend are pleased with the exchange. There is a reason his restaurant is one of the top rated ones in a very large chain.

Going back to Demings comment, it’s true that we don’t know the cost of a disappointed customer. But what about the value of indifferent or grateful customers?

We can surmise that one measure of having many indifferent customers may be indifferent financial results for the company.

What about the grateful customer? What do we know about the value of him or her?

Individually, we know relatively little. In the aggregate, however, we can sometimes know quite a lot. Or perhaps I should say that our accountants can know quite a lot.

In the practice of accounting, there may be on the balance sheet of a company an entry for an intangible asset labeled “goodwill.” Technically, goodwill arises when one company buys another and pays more for the company than the net of assets and liabilities, which is probably scaring a lot of readers right now.

Fear not.

As a practical matter, goodwill can be thought of as the market value of (or the price of buying, if you will) the reputation of the company.

A company with a great reputation — Nordstrom, for example — will sell for more than the same company — the same stores and the same inventory — but with an average or poor reputation. The difference is called “goodwill.” Goodwill is simply gratitude aggregated.

What the Lean practitioner must know is that gratitude and goodwill are normally intangible, but can be worth a great deal of money in the long run. The wise manager, the Lean manager, seeks to always, every day, and constantly improve the value provided to the customer, even if only in exchange for the gratitude of the customer. It is an exchange of inestimable value.

 

Copyright 2015 by Paul G. Spring. All rights reserved.