I learned another very important lesson about the critical path while working in our family gas station. In the winters, cars parked outside sometimes had trouble starting during extremely cold temperatures. The batteries just did not have enough energy to start cold engines containing sluggish oil. Throughout the winter, our customers would call us to come jump-start their cars. I’d often be out in the early mornings in minus 20-degree cold jumping car batteries to bring life to those cars.
One day, I asked my father if he ever felt bad about charging our neighbors $10—the equivalent of a couple hours pay back then for most of them—for starting their cars. Weren’t we taking advantage of them in their time of need? He replied that our neighbors didn’t see it that way. Instead, if they couldn’t start their car, they couldn’t go to work. If they didn’t go to work, they didn’t get paid for that day which might make the difference in their family having enough food to eat that week. They might even get fired. Because they knew us and were our customers, we got to them quickly, while other gas stations or AAA would make them wait for hours. So, our neighbors wanted us to be there when they needed help, just like they wanted the doctor when they were sick or the grocer when they needed food.
He asked me to notice how many of our customers said they were glad we showed up so quickly vs. those that complained about our service. How many gladly paid vs. flinched? How many seemed genuinely thankful? From that day forward, I started paying attention and learned from our customers’ reactions how right he was.
Those who view profit-making as a distasteful enterprise often seem to think of selling goods or services as a dishonest activity, as if the organization were tricking customers out of their money. These people are shocked or turned off when they are told that the goal of most organizations is to make a profit by selling goods or services to customers.
We will see, over the course of the book, how wrong these views are. How a company earns a profit is its “critical path” and the critical path must begin with the customer.
People rarely give money readily to others when it is not in their self-interest to do so. Yes, some people give to charity because they believe it’s the right thing to do, it helps relieve their conscience, or they really believe in the charity’s goals. (One could argue that these altruists are acting in their self-interest in that it serves their image of being a good person.) But on a daily basis, most of us only part with our money if we’re getting something we want in return. We value what we’re getting, so we’re willing to pay for it. The value may be in the product itself, or it may be that we don’t want to take the time or have the tools to make it ourselves.
Profit, if earned through this mutually satisfying exchange between willing customers and your organization, is not bad. If you invert your thinking and see it from the customers’ perspective, profit is good. It means that customers are pleased. Every time a company creates a sustainable customer base and is able to make a profit, it means that it has created something of value for that customer base. Think of the millions of customers who flock to Airbnb, Disney World, and Beyonce concerts, happily parting with their money.
For every successful business in a competitive market, the critical path starts with the group that consumes its services or products: its “customer.” As stated earlier, this is where economists get it wrong. They teach supply and demand, which implies that the company—the supplier—comes first. When companies put themselves first, and don’t explicitly include customers in the equations, they are setting themselves up for failure. Rather, economists should teach “demand and supply” to emphasize the primary role of the customers in driving the exchange.
This illustration emphasizes the “critical path” definition laid out earlier in the Introduction.
The critical path is the connection between what the customers want and what the company provides to them. The goal is to create the shortest, fastest, smartest, most effective, most profitable, best path to pleasing a large enough group of highly satisfied, highly profitable repeat customers who then help you bring in an increasing number of new profitable customers.
In other words, you want customers who like what you do for them so much that they are willing to pay for it on an ongoing basis and recommend that others do the same. Recall Walmart customers in the 1980s and 1990s, when Walmart was expanding so quickly across rural America, or Microsoft dominating the personal computer business. In the 2000’s and 2010’s, recall Amazon, Google, Facebook, and Netflix customers. Think of American Idol during its first five seasons. In each of these cases, people were excited about the company (or television show) and weren’t shy about sharing that information with friends and family.
The critical path embodies exchanges like this, where both parties feel like they are getting a fair deal. That sense of fairness must be maintained if the exchange is going to be repeated and the exchange is going to last. In essence, both sides must be satisfied. Again, think of my example of charging $10 to start neighbors’ cars and how happy those customers were to see me.
Customers hope that their favorite suppliers make enough profit to be able to stay in business and continue meeting their needs. Most customers don’t want the hassle of having to keep searching for new suppliers. Sure, we all like variety in some areas, like trying new foods or movies. But, do you want to have to search for a new movie theater every time you want to see a movie? Do you want to learn the food selection and aisle arrangements of new grocery stores every month? Probably not.
Note that customer satisfaction by itself is not the goal. You can get very high customer satisfaction by giving your product away for free. But, as many an internet business—from newspapers to sports sites to blogs—has learned, you will find yourself just scraping by or going out of business.
Many new companies use product give-aways for proof-of-concept and to create a customer base. But this can only go on so long. At some point, you have to be able to charge someone for your product or service and produce it at a cost that results in a profit.
Sprig, a food delivery service in San Francisco, is a perfect example. The company followed a common start-up practice: they gave deep discounts to early users of the service in order to get people to try it and thereby build market share. They also gave credits for future deliveries to customers who referred other new customers. In other words, they were using the $56 million raised from venture capital companies to subsidize their customers’ purchases so that they could build a customer base. What they were not able to do was demonstrate that they could provide their service at an unsubsidized price point that enough customers were actually willing to pay—while making a reasonable profit. They never moved from the give-away stage to the get-paid-full-cost stage before they burned through the investment and had to shut down.
Likewise, you can gouge your customers with very high prices or lousy products. But soon you may have no customers—unless you have a protected “seller’s market” monopoly so that no other alternatives exist for your customers.
As customers, we certainly would prefer not to simply be stuck dealing with an organization that has cornered the market on some necessary good. We’d much prefer companies that earn our business by delighting us with the value they provide, and we’d like them to stay in business so that they can continue to meet our customer needs.
When a company is profitable, it becomes another supplier for meeting the world’s customer needs. Thus, it offers another market option, adding to a better, richer, more diverse customer environment for all of us. For most workers, profit means that the company and its employees are doing something right on the critical path. Profit gives them the opportunity to keep doing it right—and hopefully, doing it even better.
Another way of looking at the critical path is that it’s what both sides must do to connect with each other, whether that’s Sprig finding paying customers or a neighbor with a drained car battery getting me to stop by and give their car a jump start. It’s very much in your company’s best interest to make the critical path as easy and beneficial as possible for the customers’ needs.
Every bump or stoplight on that path creates what economists call “friction” or “transaction costs.” These are additional costs that either the company or the customer has to factor in. For example, if a bank has only a downtown location, doesn’t have nearby parking, and is only open from 9 am–4 pm each day, they have probably created too many transaction costs for most customers who do not have a reason to be downtown, as well as for those who cannot get there between 9 am–4 pm.
Reducing these transaction costs makes it easier for the customer to do business with you. Walmart’s original success was due to reducing the need for rural customers to drive hours to a big city to do major shopping. Instead, their customers could get almost everything from a nearby Walmart and for a similar, if not lower, price than the big city options. Walmart saved them time AND money—a good proposition for any business.
Critical Path Action Items
What value does your company add for your customers?
How do customers view the value they receive from your company?