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.

It's easy for business people to forget about the great difference between the inside view and the outside view. That is, the experience customers have with software systems is enormously different from the experience business people have deploying those systems. This means that making an otherwise good business decision about software systems can have terrible, unforeseen consequences.

The Netflix company just learned this lesson the hard way. It doesn't take a rocket scientist to see the progression from VHS tapes to DVDs to streaming video. Netflix built its business by renting DVDs when the competition was still renting clunky VHS tapes. Just a few months ago, the company decided it was time to get a similar head start on the next new technology, but they failed to look at the outside view when they crafted their solution.

They split off the portion of the company that provides streaming video from the older, DVD-supplying part. From the inside of the company, this looked like a really good idea and, from that perspective, it was. It allowed Netflix to offer their streaming video service to customers unencumbered by the older technology. The problem is that this doesn't reflect the point of view of their customers, the outside view.

My wife and I have been happy Netflix customers since they started. We rent DVDs and also stream video from them. As my wife so succinctly said, "I want to go to Netflix to get movies, not to one company for DVDs and another for streaming video." Her sentiments neatly encapsulate the outside view: subscribers think about Netflix as a provider of motion picture entertainment, not as a provider of some particular media.

Netflix learned a hard lesson in the importance of looking at things from the user's perspective, rather than just from their own internal one. This little hiccup has cost them 810,000 subscribers and their market cap has dropped by over a quarter just in the last three months.

In the old days when the variable costs of manufacturing dominated income statements, what was good for the company was usually good for the customer. Today, when the experience of people is far more important than the cost of raw materials, business managers need to focus on their users, their employees, and their stakeholders, and not on their internal business processes. The way to success is by making customers happy, even if it means more work inside the company's walls. The only way to please people is by carefully studying their outside point of view.

As a business person, you may consider your software to be an operational tool, part of the sales or operations of your organization. But to your customers, it is a pipeline to your corporate soul. The behavior of your software indicates what is really valuable, what is truly important to your company, and there is really no way to hide.

Websites let your customers access your products and services, but as a side effect, they also access your corporate values. If your website is clumsy or slick, easy or confusing, it tells them a story.

Most clients hire Cooper to solve superficial problems. When they first approach us, they ask us to help make their websites “be more friendly” or their software “easier to use.” Sometimes they just want us to “make it pretty.” In every case, we find that hard to use, unfriendly, or even just ugly software is a symptom of deeper problems within the organization.

The old saying, "History repeats itself" seems to be true in the recent history of book selling.

When the big chain stores of Borders and Barnes & Noble moved into town, the local independent bookstores all quaked in fear or squawked in high dudgeon about how the soulless giant franchises were ruining the business.

Borders failed to compete with Amazon and has since filed for bankruptcy

But the chains taught the independents a valuable lesson: that some books were a commodity. The price and availability of New York Times bestsellers was more important than was the sales clerk's expertise.

The weaker independents closed their doors while the big chains grew fat and happy. The surviving independents continued to disparage the big chains, but the chains delivered a better experience. They added cafes, benches where you could read for hours, and offered a much larger selection of books.

Then the World Wide Web came along, and after some initial jockeying for position, Amazon emerged as the Internet bookseller to beat. Now the shoe was on the other foot. The big chains squawked in righteous rectitude about how they couldn't compete with a company that didn't need to invest in bricks and mortar.

But Amazon taught the chains a valuable lesson: That all books were commodities if you already knew what book you wanted, and it was easier to purchase online, and the online vendors could stock far more titles. What's more, the supporting information on the Web was far more valuable than anything a harried, youthful sales clerk could offer.

Both Borders and Barnes & Noble took huge body blows as the new business model assaulted them, but the Web delivered a better experience. Barnes & Noble created their own online presence and has managed to stay in the game. Borders, however, not only failed to grasp their role in their brick-and-mortar world, but they foolishly gave their online business to Amazon, and so filed for bankruptcy last month.

What's wrong, you might argue, with keeping costs down? Quite a bit, it turns out. If your objective is to design a product people want to use, or to invent something brand new, you must embark on a journey of creativity and innovation. That might seem like normal, every day business, but don't make the mistake of trying to run your creative organization like a conventional one.

Business sage Peter Drucker asserted creative employees "are not labor, they are capital." This has profound implications on the way you should manage and account for your business. As Drucker also asserted, "What is decisive in the performance of capital is not its costs, but its productivity."

In other words, if there is something you can do to enhance the creative abilities of your people, it doesn’t really matter how much it costs, or how long it takes. If it results in a successful invention, or a compelling design, that’s what really counts.

Business people trained in industrial age thinking cut costs from force of habit. After all, expense reduction was an excellent strategy when manufacturing costs were dominant; they are easy to measure and provide instant benefits. In the post industrial age, manufacturing costs are neither dominant nor elastic, so reducing them reduces your quality without improving your desirability. Today, trying to make your product cheaper just makes it frustrating to use and unlovable without making it any cheaper to buy. It’s no longer a valid competitive strategy.

“The way to have good ideas is to have lots of ideas.” That’s one of my favorite axioms and, in my experience, it is universally true. I have many ideas, every day, and some of them are very good. Mostly, though, they are bad.

A small fraction of my good ideas made it to market, but time spent on good ideas is never wasted. There’s always abundant insight to be gleaned from working on a promising thought, and sometimes working on an auspicious idea can lead to other, even better ones.

I’ve wasted plenty of time, though, pursuing my bad ideas. The time and attention I’ve invested in bad ideas in the quixotic hope that they will somehow morph into good ones has been, by far, my biggest waste. Not only did it cost me time and effort, but I could have been working on something much better instead.

Pursuing bad ideas instead of good ideas is a significant and largely hidden problem of innovation. Economists call the waste “opportunity cost.” It's the cost of what you didn’t do while you were busy doing something else. That is, what good idea did you ignore while you were busy working on a bad idea. I would argue that opportunity cost is the most expensive in all of business.

The obvious solution is to only invest time on good ideas, but that isn’t a realistic solution because of the conundrum of innovation:

Bad ideas often look really good in the beginning, and that’s when good ideas almost always look bad.

For example, the people who worked hard on the Microsoft Zune really thought at the time it was the best music player ever, and many observers of Google a decade ago thought it was just another silly Web startup with an equally silly name.

Frankly, it’s really difficult to find good examples of this phenomenon because of some very powerful cognitive illusions. In hindsight, all good ideas look good and all bad ideas look bad, even though this is not at all the case in the heat of the moment.

Ford Motor Company has just convincingly demonstrated that being an excellent industrial manufacturer doesn’t automatically mean that you are an excellent maker of digital technology. Despite Ford’s improvements in manufacturing quality, their overall ratings fell precipitously this year due solely to the poor software interaction on their dashboards. A recent article in the New York Times discusses Ford’s plummeting fall in user rankings this year, focusing the blame on their new touch screen interface.

MyFord Touch on new Ford Edge—heavily criticized in J.D. Power's research and "frustrating" according to Consumer Reports.

According to the article, J.D.Power, the auto industry arbiter, dropped Ford’s ranking from 5th to 23rd, and subsidiary Lincoln’s ranking from 8th to 17th place. J.D.Power acknowledges that both Ford and Lincoln’s fit and finish are excellent. It was the “annoying” behavior of their driver-facing interactive systems that caused their ratings to plummet. Other reviewers concur, as Consumer Reports yanked their “Recommended” rating from Ford’s new 2011 Edge model.

What’s been your proudest achievement in life? Think about this for a minute or two. The accomplishments that I hold most dear are those that have occurred mostly outside of my professional career. But are we missing opportunities as designers and developers to contribute directly to furthering social causes? Social psychologist Jennifer Aaker and social media innovator Robert Chatwani say that we are. Cooper is proud to host these two Bay Area thought leaders at an open studio event on Wednesday, November 17th, from 6 - 9 pm at our offices on 100 1st Street on the 26th floor.

Jennifer Aaker and marketing technologist, Andy Smith’s new book The Dragonfly Effect is a must-read for designers and developers. The book details how people using Twitter, Facebook and YouTube beat the odds, made a difference, and literally saved lives. It tells how a former nightclub owner made a way for some of the world’s poorest people to have clean water, how a girl’s lemonade stand inspired fundraising for breast cancer, and how Barack Obama connected with a younger generation to become the first African American president of the United States. It underscores the importance of connecting meaning with social media when trying to create infectious action.

The book begins with a very personal story: In 2007, a friend, Sameer Bhatia, was diagnosed with Acute Myelogenous Leukemia (AML). His one chance of survival was to find a bone marrow donor but his odds were slim: 1 in 25,000. Sameer’s friends, led by Robert Chatwani, used social technology to find a match for Sameer. And that’s just the beginning of the story!

Please join us at Cooper’s studio to meet Robert and Jennifer and to find out more about The Dragonfly Effect and the excellent design principles that were invaluable for affecting change. RSVP to rsvp@cooper.com.

Jennifer Aaker

A social psychologist and marketer, Jennifer Aaker is the General Atlantic Professor of Marketing at Stanford University’s Graduate School of Business. Her research spans time, money and happiness. She focuses on questions such as: “What actually makes people happy, as opposed to what they think makes them happy?” “How can small acts create infectious action, and how can such effects be fueled by social media?” She is widely published in the leading scholarly journals in psychology and marketing, and her work has been featured in a variety of media including The Economist, The New York Times, Wall Street Journal, Washington Post, BusinessWeek, Forbes, CBS Money Watch, NPR, Science, Inc, and Cosmopolitan.

A sought-after teacher in the field of marketing, Professor Aaker teaches in many of Stanford’s Executive Education programs as well as MBA electives including Designing Happiness, How to Tell a Story, Building Innovative Brands and The Power of Social Technology. She has also taught at UC Berkeley, UCLA, and Columbia and is a recipient of the Distinguished Teaching Award, Citibank Best Teacher Award, George Robbins Best Teacher Award and both the Spence and Fletcher Jones Faculty Scholar Awards.

Robert Chatwani

Robert Chatwani leads Global Citizenship for eBay Inc., which covers a range of technology-driven social innovation across eBay and PayPal. Reporting to eBay’s CEO, he oversees the company’s global social impact and business goals across three areas: entrepreneurship, sustainable commerce, and communities. eBay’s platforms have enabled 25 million sellers around the world, powered the sale of over $100 billion in pre-owned goods, and raised more than $200 million for nonprofit organizations. Robert previously co-founded WorldofGood.com by eBay, the world’s largest marketplace for socially responsible shopping. Prior to eBay, Chatwani was the co-founder of MonkeyBin, an online consumer marketplace for trade and barter. Robert began his career with McKinsey & Company in Chicago and Washington DC, where he served a range of Fortune 500 clients and launched McKinsey’s Globalization practice. Chatwani received a bachelor’s degree in economics from DePaul University and an MBA from the Haas School of Business at the University of California, Berkeley. He was named to Time Magazine’s Top 100 Green Pioneers of 2009.

I was recently involved in a project that involved the creation of a "status economy" on the web, i.e. a system in which businesses reward loyal users with stuff — a representation of increased status, better service, cash, etc. The parallel in the real world is the loyalty program, but the word "loyalty" seemed to imply a sort of exclusivity that is inconsistent with fluid and flexible world of web commerce and relationships. The web already has a variety of ways of displaying status, and the word "economy" more appropriately spoke to the web's transactional nature.

Enterprise resource planning systems must, by their very nature, serve the needs of a wide variety of people, and the implementation of these systems can result in the needs of one person being sacrificed in order to meet the needs of another. In an article on Forbes.com, Dan Woods does a nice job of laying out the pitfalls and frustrations attending ERP and other monolithic business software.

We particularly like the article because he mentions Alan and credits him for formalizing the use of personas, but it's also a sophisticated look at how system design is begging for effective tools to understand the network of human needs that must be balanced in order to create effective solutions:

...[S]ome users get more value from software applications than others. This is because software is written from a certain user perspective. In many cases, the problems and challenges faced in making software work can be explained by the tension created when the design of software is dominated by one perspective over another. In CRM systems, for example, the sales reps who must do the work of entering data about contacts and meetings often must be bludgeoned or bribed to do so. They get little benefit from such tracking, as opposed to the VP of sales, for whom the data is a vital way to understand what is happening.

Check it out "One Software Doesn't Fit All" on Forbes.com.