There’s a story told about a government official who wanted to get to the heart of the meaning of capitalism.
So, as politicians naturally do, he formed an exploratory committee to investigate and come up with an explanation.
A couple weeks passed and the committee returned to him a 20 page report. The official told the committee the explanation was much too long and difficult for him to understand and so he requested that it be shortened.
The committee reconvened. Another two weeks passed before they reported back with a much shorter version of the original. This time the report was only two pages. Once again the official told them it was still a bit too long and confusing, so back to the drawing board they went.
Finally, after an extended period of time, the committee returned to the official with an explanation they thought he would be able to understand; they boiled the meaning of capitalism down to just one sentence: “There’s no such thing as a free lunch.”
The meter is always running
I’ve always enjoyed this story. Some of you may recognize it as an illustration of Violand’s Second Law of Business: “Somebody always pays.”
It highlights the concept that when you own a business, the meter is always running and somebody has to pay the fare. Either the customer pays by agreeing to compensate you for the goods or services purchased, or the business owner pays by taking the money out of the company’s profit margin or out of his own pocket (frequently one and the same).
When you understand this concept, you understand how vital it is to know what your costs are and what you must charge to make a profit. You also understand there is no such thing as a “free offer.” Either the customer or the business is actually paying for the freebee. But who among us, this author included, hasn’t fallen into the “free” mindset with our business from time to time?
How many times do we offer our customers something for “free” and actually delude ourselves into forgetting the associated costs? It’s almost as if we convince ourselves there’s some kind of business “Sugar Daddy” picking up the tab.
Beware the ‘free creep’
An even more alarming aspect of “free offers” doesn’t have to do with the hidden costs, but with the “free creep” that often accompanies them. I’m sure you know to what I’m referring.
Free offers usually start out innocently enough — small and seemingly harmless. But, as with many other things in life, we seem to gradually build immunity to their effects. The original free offer no longer captures our customers’ attention. Before long, we have to up the ante, increasing our free offers just to stay in the game.
What may have started out innocently can grow so large it becomes downright vulgar and impossible to sustain. Worse yet, free offers can undermine the reasons our customers actually buy from us: Value, service, etc., or they redefine the relationship itself, giving it a name few of us are inclined to use in polite company.
When it comes to “introductory” offers that many companies use to attract new customers, doesn’t it make you wonder who’s picking up the tab? My bet is it’s all the loyal, uncomplaining customers who’ve been supporting us for years.
There can be a steep price to pay for the practice of freebies, which author Fred Reichheld addresses in his book The Ultimate Question. Fred writes, “Buying growth is expensive. It tends to create a profit squeeze, which in turn usually deepens a company’s addiction to bad profits. This addiction to bad profits demotivates employees, diminishes the chances for true growth, and accelerates a destructive spiral.” I agree with Fred’s thinking!
What if loyal, long-term customers requested their bills to be reduced by the amount being charged to offset the “free” offers made to new customers? How quickly things might change.
Free offers frequently start small. But innocent, complimentary offers often accelerate into awarding outrageous commissions, “finder’s fees,” travel junkets, fishing trips or outright kick-backs to people who refer work to us.
Setting aside the ethical questions involved and simply looking at this from a practical, financial perspective — who is paying for all the “free” stuff?
A freebee mentality doesn’t involve only introductory offers to potential customers. It involves the people who work for our company, too. Are “free” health benefits and other “perks” really free? What about the automatic pay increases expected year after year. Who pays for that? Once again, the cost is actually covered either by increased productivity on the part of our workers or by customers willing to pay more for the additional value they receive. None of this is really free.
Business owners aren’t exempt from this freebie mentality, either. How often is the company check book used as a piggy bank for the owner’s personal purchases (some of which can be pretty grand) that bring no value to either the company or its customers?
Too often, these “perks” are viewed as entitlements of business ownership, rationalized by all the hard work and financial risk the owner takes in building his business. Somehow the concept of “someone always pays” gets overlooked.
I’m always intrigued when someone comments about a business owner’s ability to “write off” legitimate business trips, charitable donations or other business purchases. The underlying message is that these things are free.
While we’re very fortunate to enjoy a system that in many ways is favorable to business, it’s important to keep in mind these deductions are not free. There must be real expenses involved.
One of my favorite local newspaper journalists is Charita Goshay, a lady who brings refreshing wisdom to global — as well as local — events. Recently she wrote that anything we think is free “teaches us once again that ‘free’ just means that someone else is paying the price.”
Although initially it might be our loyal customers, ultimately it is us.
Chuck Violand understands the unique challenges of small businesses, having owned a commercial cleaning and water damage mitigation company for 26 years. He founded Violand Management Associates (VMA) in 1988 as a consulting, teaching and training resource for owners of small businesses. To learn more about VMA's services and programs, visit www.Violand.com or call (330) 966-0700.