The Jewelry Store Caper
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9 August 2013 - 23:32, by , in Activity-Based Cost Management, No comments

One night, a group of thieves broke into a jewelry store. Instead of stealing anything, they simply switched all the price tags. The next day no one could tell what was valuable and what was cheap. When the thieves returned the following day posing as customers, the expensive jewels had suddenly become cheap, and the costume jewelry was suddenly of great value. In our personal and professional world, someone has come in and switched all the price tags. It’s become hard to tell what is of value and what is not.

  • A distributor of industrial products was experiencing shrinking profits. Traditionally, they had priced product using cost plus a mark-up to cover overhead and profit. When the distributor implemented Activity Based Management (ABM), he realized that customers “valued” the engineering staff’s activities more than they valued the product. Unbeknownst to the business owner, the customer had switched the “price tag” from products to the distributor’s activities.
  • Manufacturers have almost always given away their services to enhance sales of their goods, e.g. IBM in the 1960’s and 1970’s. Many now realize that customers value the services so highly that the companies can charge separately for them. In their book “The Experience Economy”, authors Joe Pine and Jim Gilmore note, “General Electric’s highest-profit contributor is GE Capital, and the Big Three automakers actually make more money from their financial arms than they do from manufacturing the cars.”
  • Software vendors have traditionally promoted the features and functions of their products. Today’s software customers, including our own, place greater value on competent customer service, reliable tech support, training and the experience resulting from the software’s use.
  • The value of training has traditionally been determined by the quality of the speaker’s resume, his/her handouts and relevance of the material taught. Value today is determined by the participant’s experience. In the best training classes, roles have switched … participants have become the performers. For example, in ICMS’ ABM Boot Camp, participants experience the principles of ABM/ABC by applying them in actual departments, not case study.
  • Companies that provide “special” services have typically billed customers for that experience. Take Hertz Corporation’s #1 Club Gold Program as a case in point. While Gold customers valued the ability to bypass the line at the counter and proceed directly to their rental car, they often balked at the $50 annual fee. But Hertz no longer charges the fee because they found out it actually costs less to provide Gold service than standard service!
  • For decades, great value has been given to the accumulation of material wealth and the power that goes with it. But according to a 1998 Yankelovich survey, one in three adults said they would accept a smaller paycheck in exchange for a simpler lifestyle. Values have changed. Referring to Matthew 6:19-20 in a recent sermon, my pastor remarked, “I’ve never seen a U-Haul hitched to a hearse.”

My wife and I go to Starbuck’s every Saturday morning for an “experience” … not the product or service. Goods and services are no longer enough to create economic value for customers. Customers, like my wife and I, have switched the price tag on what we value. Recognizing experiences as a distinct economic offering will be a key to your organization’s future economic growth. What product and process “experiences” are you providing your customers? What do they cost? What is the customer willing to pay? Reviewing your ABM activity cost and ABC Bill of Activity will provide financial “facts” to measure your customer’s value-based “feelings”.

Please e-mail comments about this article to: TomPryor@icms.net.

If this article has inspired you and your organization to cut costs this year, call us at 817-475-2945, or e-mail your needs to tompryor@icms.net.

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Tom Pryor
TomPryor@ICMS.net
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