The upper bounds to quality

The digital age changes our notions of quality, and in particular, our notions of the limits to quality. Generally, there are two limits to quality: The first limit is your imagination. If you are innovative, you can increase quality in many creative ways. The second limit to quality is what the customer will pay for. If your product is priced too high, even if it is of super high quality, you won’t be able to sell many.

These two limits to quality have existed since a caveman traded away a stone knife for the first time. The more it costs to make a product, the higher price you must charge for it. Economists call the tension between cost and price, “Elasticity.”

The elasticity concept has been around since that caveman, but in the digital age, its power is draining away. That’s because the notion that price is dependent on cost is an assumption based on the character of industrial manufacturing.

Actually, there are two distinct components to cost, “Fixed” and “Variable.” Variable costs are those tied to each individual product you make. This includes the raw materials, labor, and transportation of each object. Fixed costs are all the other costs that cannot be tied directly to a unique object. Typically, these include design, engineering, marketing, and administrative costs.

In the industrial age, just as in the days of the caveman, the variable costs were a much larger portion of the total cost than were the fixed costs. That’s because design and administration is cheap compared to purchasing, transporting, and transforming steel, aluminum, glass, plastic, and energy. A washing machine, for example, might have taken a dozen engineers six months to design, but it took tons of steel, hundreds of people, railroads, mines, and factories to build those washing machines.

For the washing machine company, elasticity was strong because the variable costs were far, far greater than the fixed costs. The clever business person always paid more attention to driving costs down than to raising quality, simply because cost reduction had such powerful, direct downward leverage on price. Certainly higher quality exerted an upward pressure on sales, but it was offset by the need to raise prices to pay for it. Most customers choose a value compromise, where quality is adequate and price is low. This strong elasticity cemented into business thinking the industrial age idea that quality is expensive. But that relationship has now changed, and quality is no longer so expensive.

The digital age has inverted the relationship between fixed and variable costs. Fixed costs are now usually greater than variable costs, and this dramatically changes the role of price elasticity. When a product is made out of bits, there is no cost to purchase, transport, or transform anything! There are little or no variable costs that can be tied to each individual object for sale. Yes, the cost of transforming bits into coherent software is expensive, but it isn’t a variable cost. The expense of design and programming is the same regardless of how many copies you sell.

When price elasticity weakens, the upper boundaries to quality relax and take on a different character than in industrial times. When variable costs drop to insignificance compared to fixed costs, it means that price can drop to insignificance, too. This can be seen clearly in today’s market where the most successful companies, such as Google, Facebook, and Twitter, provide their products for free.

When price doesn’t dominate the purchase decision, quality does. When every company’s offering is free or nearly so, the customer is free to choose based solely on the quality of his or her experience in using the product.

The two limits to quality are still there, but in the industrial age, cost held your imagination in check. In the digital age, your imagination is free to expand without limit. It really doesn’t matter how much time, money, effort, or imagination you invest in your digital product, as long as what you make delights your customers. They will certainly be able to afford it, so you just have to make them want it.

In the digital age the upper bounds to quality are only the upper bounds of your imagination. If you and your colleagues can think more creatively and innovate more effectively than your competition, you will succeed. The more desirable your product is, the less each day of invention will have cost you. In other words, your costs shrink to insignificance when you drive your desirability way up. Really clever post-industrial managers don’t pay much attention to costs. Instead they exhort their people to better and more desirable creativity. That is the path to post-industrial success.

2 Comments

Tor Løvskogen Bollingmo
Are innovative and creative products automatically of high quality?
Devdas Bhagat
Google, Facebook and Twitter don't provide products for free. Their real product is the attention of humans to advertising, and that is very definitely not free. The cost of quality attention is to keep a large userbase around for a long time, which needs a sufficiently useful service which isn't trivially accessed elsewhere. Your example would be better served by systems like Apache, or Linux which are high quality and cheap.

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