Costs and benefits are mutual

Costs are benefits

My costs are your costs

My benefits are your benefits

Reducing my costs will reduce yours

My benefits will produce yours

Costs are benefits

Costs are unrealized benefits. Service providers have to incur certain costs to be able to produce outcomes that fulfill customer needs. These costs are the bulk of prices service providers are willing to commit. Customers may balk at the pricing but will not question them since the only way they are exposed to these costs is in the form of benefits. These costs are considered reasonable under the wisdom of “no pain, no gain”. An increase in these direct costs on one side leads to an increase in the benefits for the other side, until they reach a tipping point after which costs take away from the benefits, increase the risk of a loss, and reduce the overall net value of the service. Improving the quality of outcomes yields greater benefits. Improving quality of experience reduces total costs, by making it less painful for capacity and demand to engage.

My costs are your costs

Each side needs to make a certain level of commitment in terms of enrollment and engagement. Enrollment for service providers means signing up for a unit of demand at a certain price point. Is it worth it? For customers it means signing up to supply that unit of demand at that price point. Is it worth it? Uncertainty and risk can make both sides hold back or hesitate, leading to surpluses and shortages in capacity and demand. Capacity and demand feel less assured. That results in loss in the potential of customer and service provider assets when they have the opportunity to be more useful and valuable. In that sense, each sides imposes on the other opportunity costs. The equilibrium they may reach leaves a lot on the table. There is loss in the net value of the service, which when added up across the entire economy reduces GDP.

My benefits are your benefits

When service providers put in an effort to deliver performance and affordance the result is benefits for the customer from the fulfillment of needs. Customers may be willing to pay for even better fulfillment and even greater benefits. That explains why services typically have options for higher service levels at additional costs which compensate for the additional costs and risks the provider assumes. Therefore an increase in benefits on one side can contribute to an increase on the other. After the tipping point, a further improvement in the quality of outcomes does not result in further benefits. Once goods have been delivered, delivering them anymore is of marginal utility to the customer and of diminishing returns to the provider in terms any additional revenue. But there is another way.

Reducing my costs will reduce your costs

There are actual benefits and perceived benefits. Each side has a cost/benefit analysis that determines perceptions of risk. Loss aversion sets in if the benefits come at too high a cost, or if for a given cost the benefits are not high enough. But after a point, service providers cannot reduce the price any further without cutting corners, which may lead to a drop in the quality of service, which in turn imposes additional costs on the service provider. Similarly, customers may not be able to pay more for a certain quality of outcome. This is when quality of experience and transaction costs matters. Customers can reduce transaction costs for service providers by providing them a better quality of demand and effectively a quality of experience. In the absence of adequate levels of good will and trust, demand shaping policies and the fine print force such behavior on customers by placing conditions and restrictions. But that has the effect of increasing the policing and enforcing costs.

Producing my benefits will produce your benefits

The payoff for customers aligns with payments for service providers and vice versa. One is because of the other, and eventually becomes the other, within windows of opportunity. There is a positive reinforcing loop that forms between the two sets of benefits (benefit-commitment-benefit) and as long as the commitment is high it makes net value exponentially grow until the tipping point at which it stabilizes.

There is happiness when benefits flow on both sides. That’s the whole point of any product and services are no different. What’s different is, unlike the trade in manufactured goods, the benefits flow during the window of opportunity. The fluid dynamics introduce uncertainty and risk on both sides, which have the effect of dampening the commitment and cause the net value curve to flatten out. This is quite normal. It simply should not reach an inflection point at which a vicious cycle sets it. Assurance is a backstop with each side making sure the level of commitments does not fall to the threshold below which the service is not viable.