““Small leaks sink the big ships.”” – American proverb

One of the ideas I’m going to come back to over and over again is what I call the theory of incremental degradation – 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 business letters. Or reduce the number of screws you use per stud from six to five..

These 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 theory goes, the accumulation of these incremental degradations results in something that is noticed. Suddenly (and inexplicably), sales slump and profits tumble.

I believe this theory, but I have always had a difficult time making a case for it. If a cost-cutting measure is proposed and I can’t link it to a measurably negative effect, it seems foolish not to support it. After all, savings result in a healthier bottom line. And the bottom line is the bottom line, right?

No. And no.

No, because eventually the habit of focusing on what’s in it for you (saving money/higher profits) has a noticeable impact on your customer. One day he is using your product and says to himself, “It just doesn’t work like it used to.” Or he tries another product and says, “Wow, this is better.”

Focusing on short-term profits usually results in long-term problems. And the irony is that when the problems arise, you won’t be able to understand them because all of your bad decisions will seem, in retrospect, to have been good ones.

Put differently, you can make money by cheating your customers, but you won’t hold onto them. Instead, you’ll spend all your time and energy finding new customers . . . and thus you’ll spend the last day of your working life hustling just as hard as you did on your first day. That’s no way to live.

And I haven’t even mentioned the negative feelings you’ll have about yourself.

Downgrading your business is like putting on weight. If you do it slowly enough, you will not even notice how unattractive you have become.

But this is a tough argument to make in a conference room when your partner or your colleague has just presented an idea that will “save a fortune” and “won’t even be noticed by the customer.”

Back To The Tipping Point . . .

An idea I talked about on Friday in Message #139 – Malcolm Gladwell’s “tipping point” – may be helpful here. To refresh your memory, Malcolm Gladwell is the columnist (New Yorker magazine) who just published a book that explains how and why little things can have big consequences. The tipping point theory is named after an experiment in which a glass of water is filled to the brim and then – one by one – drops of water are placed on the water’s surface, raising the level above the rim until one single drop tips the balance and all the excess water spills over.

Gladwell’s theory was inspired by an article he read in The American Journal of Sociology in which it was shown that the quality of life in a neighborhood can deteriorate gradually without effect until a certain point is reached. Then, suddenly, there’s a big reaction. Crime statistics and teen pregnancy, for example, skyrocket.

If this doesn’t explain incremental degradation, it corroborates it. And that may help me make the case next time I need to.

Big Outcomes Out Of Small Changes

But the incremental degradation theory begs another question: If small degradations can damage a business, can incremental improvements result in an eventual boost upwards?

I think so. In fact I’m almost positive. But again, I can’t prove it.

Let’s look at a major historical example. In the 1950s, Japan entered the U.S. consumer market by offering inexpensive toys and household goods. (Back then “made in Japan” meant poor quality.) But the Japanese were smart. As their share of the U.S. market grew, they gradually upgraded their product quality. Meanwhile, their customer base (the baby boomers), grew up, entered the workforce and became more affluent. Eventually (I can’t tell you exactly when it was – sometime in the 1980s, I think), Japanese products had become state-of-the-art. And dominant in the marketplace. Because of their many little improvements, the Japanese had bypassed their behemoth American competitors. The tipping scale had tipped.

As a compulsive builder of new businesses, I have spent too much time devising ways to knock off trends with cheaper variations. (This is, as I have observed, the way to go only when you are starting out.) I have also had some experience in making incremental improvements – which has been, for the most part, very rewarding.

One case in particular – an investment service I started twenty years ago – is doing better than ever today, with a great staff and a great line of products, attentive customer service, and a very happy customer base. This was a start-up company that should have lasted seven years at best. It’s still here. And it’s still making millions, because (I firmly believe) its management is completely committed to making it better in every possible way.

Incremental upgrading is smart business. You won’t be able to prove its value. However, if you have faith in the process and make the changes gradually, your business will gradually improve as your customers grow older and richer (and develop more trust in you).

Plus, as time goes on, sales will come easier, you’ll enjoy word-of-mouth referrals, you’ll spend less money on legal and regulatory issues, you’ll have happier, more committed employees, and you’ll feel better about yourself.

Maybe, when all is said and done, it’s just a matter of the kind of person you want to be. Remember Message #102? I walked you through the process of determining what you wanted in life. I told you to limit your goals to four, and I suggested you think about what you’d like people to say about you after you’re gone.

Well, now ask yourself that same question as it relates to your effect as a businessperson. Would you prefer to be known as someone who knew how to squeeze an extra dollar out of every deal? Or as someone who made the world better, even if in the smallest increments?

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