Last month, while on vacation, I read Bhu Srinivasan’s excellent book, Americana: A 400-year History of American Capitalism.
Srinivasan’s epic work paints a panoramic picture of U.S. capitalism and entrepreneurship. And for small businesses, two big insights jump out at you. One, I discuss in this blog post—the problem of customer-ization which Henry Ford solved.
The other insight, about the intersection of technology and entrepreneurship, I discuss next week.
Henry Ford’s Giant Insight
Rather than paraphrase, let me just quote Srinivasan’s description of Ford’s gigantic insight:
… Ford didn’t believe that the customer is always right. Indeed, he attributed the difficulties of his early competitors to their slavish need to listen to customers. To Ford this was a trap. The customers willing to pay the absolute most for a car were the ones who wanted customization. But an auto maker willing to customize, to cater to individual requests, lost the opportunity to scale his operation… To reduce the cost of production, a manufacturer needed to standardize components and processes…
Ford’s insight, as richly detailed by Srinivasan, led him down a path a century ago that ultimately ended with giant business success.
But here’s the thing… A century later, we small business people still need to follow Ford’s game plan where we can.
In other words, we need to avoid custom-tailoring products and services. Instead, we need to design and deliver high-quality, high-value items which we can produce in volume.
If we don’t, bad problems appear.
First Problem of Customer-ization: Lower-Quality Product Design
A first problem? Customers and clients typically lack the technical skills and lack the inside understanding of your firm and industry necessary to design quality products and services.
Gosh, no surprise there, right? Product design takes hard work, advanced skills, knowledge in the relevant subject matter, and creativity.
Customers and clients of course know what they want. But they simply don’t know enough to design good, high-quality products.
And this low-quality thing undermines you, undermines me, from the very beginning.
Second Problem of Customer-ization: No Scalability
A second problem flows from the first problem: No scalability.
You and I can’t profitably deliver products and services except at decent volumes. One can’t amortize fixed costs over one or two (or four) customers usually.
Yet customization, or what I’m calling customer-ization, pushes the small business owner to deliver new, usually untested creations. And to create and deliver these one-off creations again and again.
Surely, no scalability counts as another serious problem stemming from customer-ization.
Third Problem of Customer-ization: Low Profit Margins
A third problem flows from the first and second problems as naturally as water runs downhill.
With customers designing products that often suffer from lower quality, and products which usually can’t be delivered in volume at high efficiency, the customized product or service probably doesn’t generate adequate profit margins.
A portfolio of customized products and services, in fact, probably won’t generate enough profit to fairly compensate employees, pay for the cost of the capital used in the firm, and reasonably reward the business owner for her or his efforts.
Marcus Lemonis, in a wonderful recent episode of his popular TV show, The Profit, highlights this. He observes about a tiny home manufacturer that a firm can’t be profitable by selling customization and price. Rather, Lemonis says you and I want to sell value and experience.
I think he’s right… don’t you?
Two Wrap-up Comments
If any of this rings familiar, can I throw out a couple of suggestions?
Second, if you’re running a small business confronted with the problem of customer-ization, watch the Tumbleweeds Tiny Homes episode of The Profit. No joke, I had everybody in my CPA firm watch the episode at work… and then we had a group discussion of how and where customer-ization hurts our product quality and profit margins.