Outcomes are goods, experience is the packaging. Improving the quality of outcomes increases the benefits. Improving the quality of experiences reduces unnecessary costs.

The design of a service should make it possible to deliver superior sets of outcomes and experiences at the lowest possible cost, so both customers and service providers are better off, without have to force upon each other false choices or compromises. To understand the design problem, and the non-linear relationship between price (P), outcome (O) and experience (E), let’s create our own playful equation. It’s based on the idea good design delivers the highest possible quality at lowest possible price, subject to the constraint of non-zero costs.

net value = benefits – costs

Net value is the algebraic sum of benefits from using a service minus all the possible costs, including the price, penalties, or surcharges, and price adjustments such as discounts, subsidies, rebates, or rewards. Benefits as we know are in terms of gains or avoided loss. Costs are facts. Pricing is policy. Therefore, no matter how low the price, there will be costs to recover, at least those that cannot pass off on others, wittingly or unwittingly.

TCU = price / quality of experience

price = TCU x quality of experience

quality of experience, E

E = pleasure/pain

1/E = pain/pleasure

pain = difficulty/tolerance

pleasure = ease/intolerance

There is positive co-relation between price and quality. From the payer’s perspective, lowering of price should not mean lower the quality of experience.

When E > 1.0, then it feels like a discount or rebate

When E < 1.0, then it feels like a penalty or surcharge

From a customer’s perspective, the quality of outcomes can be expressed as number that indicates the value of avoided losses and gains. For example, if filing an income tax return results in a refund of $2500, then a customer could be willing to pay $100 for a service that files the taxes digitally, gets confirmation, and automatically deposits the money in the filer’s bank. It would be painless and worth it. That outcome could be worth up to $2500 though very few people would pay that much. Similarly, paying $100 in service fees to avoid a penalty or fine of $2500 may be appealing to a customer. Not everything can be measured in financial terms, yet individuals and enterprises are able to find some reasonable way to rationalize the impact of outcomes and experience.

net value = gain – pain

net value = (gain + avoided loss) – price x (pain/pleasure)

net value = quality of outcomes – price / quality of experience

N = O – P/E

O – P/E = N

In the above example, the O = $2500, P = $100, and let’s say E=1.20 because the software and its service were easy to use, secure, and reliable.

N = $2500 – $100/1.2

N = $2416.67

Suppose, instead of using a tax filing software, the taxpayer drove into town, paid for parking, waited at the office of an accountant, and then went through a series of questions for the accountant to obtain the necessary information. If the accountant charges the same fee of $100 as TurboTax, then he or she would have to score better than E=1.2 to produce the same net value. Why? Because of the cost of driving, parking and waiting outside, and any other inconveniences are not imposed by TurboTax.

This of course is an empirical equation for the simple purpose of understanding how the factors relate to each other in a nonlinear fashion. When net value is lower than some reference value associated with a “do nothing” or DIY option, then customers effectively give a “thumbs down”. Or picks a competing service or alternative. When the net value is high enough, then they are open to enrollment.

Posted by:Majid Iqbal

TL;DR I bring clarity to the concept of a service.