Defining the Zone

Rands in Repose has an excellent article on context switches, or tooling changes and the cost associated with these changes. This issue is well known in production, less in services. Very relevant article.

In the introduction the author hits on a very to the point definition of the Zone: ” This is that magical place where you’ve managed to fit the entire context of your current project in your head. With all this content in there, you can perform superhuman acts of productivity and creativity because you have the complete problem space at your mental disposal.”

Awesome!

The impact of transaction costs on buying behaviour

How customers buy

Incoming cash flow is the life blood of your organization. And that incoming cash flow depends on both the number and size of successfully completed transactions with your customers. But customers don’t engage blindly with just any supplier. They will often do background research or talk to current and past customers. The potential customer will also look at the costs he will incur in doing business with you.
Based on this analysis, which is not always executed consciously, one of three situations will occur:

1. The customer decides not to buy from you;
2. The customer decides to buy from you, but abandons for some reason before completing the transaction;
3. The customer decides to buy from you and completes the transaction.

The more completed transactions, the higher your incoming cash flow. So the basic idea is to make sure as many customers as possible decide to buy from you.

Making as many customers as possible buy from you
Assuming your products are, in terms of quality, identical to the competition. How can you make sure as many customers as possible buy from you?

1. You could invest heavily in commercial presence, which a lot of companies do.
2. You can hire good marketing people, and optimize the presentation of your solution.
3. You can the transaction as easy and as low in cost to your customer as possible.

What is the cost of a transaction?

The transaction cost to the customer

In order to acquire something from you, your customer goes through a process. This costs time and time costs money, because your customer needs to pay its employees to go through the process. What are possible elements of this process?

1. Identifying you as a provider: this can be an internet search, reading a brochure … both finding this information and digesting it takes time. You need to make this information as accessible and understandable as possible;
2. Comparing solutions: your customer spends time comparing your solution to those of the competition. Have you provided all relevant information to make this comparison as easy as possible? Is the information clear, or are there hidden elements which will come and bite you in the back?
3. Ordering: this is a process of contacting your organization and asking you to produce or provide something to him. This can be as easy as a fill-in form on the internet, or as complex as a detailed contract with legal complexity which require legal assistance. All of this costs money.
4. Receiving the goods or services: have you made this as easy as possible for him? Are you providing the product or service at the right location, at the right time, or is the customer obliged to wait an indetermined amount of time before you show up?

All of these elements are important for the customer, because his personnel will need to perform tasks which they are being paid for. Lowering the transaction cost will therefore lower to total cost of the service or product for the customer.

The transaction cost to your organization

Your organization needs to be capable of processing the transaction in an accurate, complete and timely manner. You need personnel to register the order and to make sure it gets properly processed and executed. This is often automated, so you need to pay for systems to allow you the processing. And in order to optimize the processing, you need internal processes. Creating and maintaining these will cost you money, both in wages and in consulting fees.

Each transaction bears multiple transaction costs

Each transaction does not only increases incoming cash flow, it also increases costs. And these costs are not limited to what you spend producing your solution, but include the cost of your administrative organization managing the transactions and the administrative cost of the transaction to your customers. In order to optimize your results, you need to find the balance between the costs to your customers and these to your organization.