The Secret of Incremental Degradation

“Quality, quality, quality: never waver from it, even when you don’t see how you can afford to keep it up. When you compromise, you become a commodity and then you die.” – Gary Hirshberg

If you are involved in a growing business, there are two complementary concepts you should be aware of.

One explains why a business or product, after a long string of success, suddenly fails. This concept is called incremental degradation. The theory goes that you can eventually ruin your business by making many very small downgrades in the quality of the product or service you offer. These downgrades are usually implemented to cut costs. You might, for example, switch to a cheaper grade of paper stock for your sales letters. Or reduce the number of screws you use per stud from six to five.

A good example of what I’m taking about was a soda that originally had 32 flavoring ingredients. But then a cost-conscious executive noticed that they could remove one of those ingredients – at considerable savings in production costs – without affecting the taste. Removing a second ingredient some time later also saved the company a lot of money… again without noticeably affecting the taste.

They repeated this cost-cutting strategy a dozen times over two years with no problems. But then, people suddenly stopped buying it. Why? Because the taste had finally deteriorated to the point where the decrease in quality was obvious.

The moral is that small reductions may go unnoticed by your customers and have no measurable impact on sales. And since they result in savings, they will produce short-term benefits to your bottom line. But in the long run, the accumulation of these incremental degradations results in something noticeable. Suddenly, sales slump and profits tumble.

Understanding this concept will dissuade you from trying to eke out more profits by reducing the cost (and thus the quality) of your products – a common, yet fundamentally destructive, business practice.

As the soda-company example above illustrates, the effect of small reductions in the quality of your product may not be immediately apparent – but if it continues, your customers will eventually stop buying it. And when that happens, it will be too late for you to do anything about it because your relationship with them will have been irreparably damaged.

Quality matters. You either believe it or you don’t.

I once worked for a business that sold knock-offs of name-brand perfume. It was, as I recall, about a $10 million business at the time. I had the idea of sending out all our products in beautiful boxes and establishing a Tiffany-like standard of customer service. I thought that would distinguish us from our competitors, who were continually cutting the quality of their packaging and reducing customer service to save money.

I presented my idea to the company’s CEO, arguing that although it would reduce profits in the short run it would increase them over time as the marketplace became more aware of the increased quality we were providing. He listened, but wasn’t persuaded. He argued that our customers didn’t know the difference between good and bad packaging and didn’t care. “We are giving them a good value for what they are paying us, aren’t we?” he asked.

I agreed.

“And we are making only a 12 percent profit, right?”

I agreed again.

“Okay then,” he said. “Don’t be bringing me any more ideas about spending more money. Tell me how we can spend less.”

So we cut costs to keep up with our competitors, but the entire knock-off perfume industry continued to degrade. And despite all the cost cutting, our profits never increased because the market became even more competitive. After a few years, it “died.”

Well, it didn’t die entirely. One company, which was (and still is) run by a friend of mine, implemented my strategy of gradually increasing the quality of their packaging and service. And today, that company is in the $50 million to $100 million range, thriving primarily because of the goodwill they have established with millions of customers over the years.

Many businesspeople brag about cutting costs. And that’s not surprising, since the image of the penny-pinching, multimillionaire industrialist is such a fundamental part of business folklore. (Think John D. Rockefeller.)

For a business to grow, it must be profitable. And if you want your business to be profitable, you have to spend less than you make. But that doesn’t mean you should cheapen your product or customer service. Yes, it is less expensive to deliver a bottle of faux perfume in a manila envelope than in a box with ribbon tied around it, but what is the psychological impact on the customer of the one versus the other?

When you sell something, you are starting a commercial relationship with your customer. The customer will expect something from you based on the promises and claims you made in your advertising. If you deliver less than he expects, he will be disappointed in you – and that, my friend, is not a good way to begin this relationship.

If you begin the relationship by meeting or even exceeding his expectations, he will think well of you – and he will be more inclined to buy another product from you. But when you deliver that second product, he will still scrutinize it with some degree of skepticism. He’s been fooled before by other commercial relationships. It will take more than one or two very good transactions before he fully trusts you and puts you in his mental A category.

We all have those mental categories, don’t we – ranging from, at the lowest end, the D category for people and companies that have cheated us to the A category for people and companies we trust completely?

When you begin a commercial relationship with a customer, you should assume that you are in the C category. So doesn’t it make sense to work hard to move on up to B and A rather than stay at C or – worse – fall back to D?

Businesspeople who like cost cutting too much – who are willing to reduce the quality of the customer’s experience to increase profits – are setting themselves and their businesses up for disintegration. Truth, as the old bard said, will out. And in today’s world of Internet communications, the truth about your company’s product quality and customer service will be made public – whether you like it or not.

I am not entirely opposed to cutting costs, though, so long as you do it this way:

1. Cut costs when you can do so without degrading – in any way and to any degree – the quality of the product. If, for example, you find a supplier who can provide you with the same service or product component for less (and you aren’t sacrificing a good business relationship with another supplier to get it), go for it.

2. Pass those cost reductions to your customers. From Thomas Edison making electricity more affordable to Henry Ford making automobiles cheaper to Bill Gates and Steve Jobs making personal computing accessible to the masses, the greatest business fortunes have been the result of reducing product costs and, thus, increasing the value of the commercial relationship with the customer.

This is very different from cutting costs for the purpose of increasing profits. You have to be very careful not to cut costs simply because you can. I know some businesspeople with that mentality who actually get a perverse pleasure out of putting the financial squeeze on vendors, suppliers, and employees. I remember one colleague of mine gloating over the fact that his printer was “losing money” on a job he had contracted him to do.

The concept of incremental degradation reminds us of the danger inherent in that kind of thinking. As a businessperson interested in growing a profitable, entrepreneurial business in the Internet age, you should make it your job to increase – not decrease – the value you give to your customers.

Which brings us to the second key concept I want to talk about – one that I have been advocating to my clients for about 15 years. This concept is closely related to incremental degradation, but it is more positive and actually more powerful. If you can teach it to your employees and make it an integral part of your business culture, your business growth will be almost guaranteed. I’ll tell you all about it in Friday’s ETR.

[Ed. Note: Michael Masterson is one of the core contributors behind ETR’s new Internet business-building program, which gives you an all-inclusive, A-to-Z blueprint for starting your own powerhouse Internet business – from learning how to pick a product and set up a website to discovering copywriting secrets from the masters, techniques to help you create an e-mail list, the best ways to market your product, and more. Our hotlist has first access to the 250 spots we’ve opened up for this breakthrough program, but keep reading ETR to take immediate action when and if we have any spots left.] [Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]