THE BUSINESS WE MEANT TO BUILD

How good businesses lose their way

Chapter 14 – The Price of Being the Cheapest

From 2 February 2027, Jetstar passengers travelling on its standard fare will generally be permitted to carry one bag capable of fitting beneath the seat in front of them. Those wanting to place a larger bag in the overhead locker will usually need to purchase a Priority Carry-on option or select a fare or bundle in which that privilege is included. Jetstar presents the change as a way of removing the frustration of weighing carry-on baggage, reducing competition for overhead locker space, making boarding more efficient and preserving the lowest possible basic fare. There is a certain commercial neatness to the proposition. Those who use more space pay more, while those prepared to travel lightly retain access to the lowest advertised price.

I am not suggesting that Jetstar is doing anything improper. A low-cost airline is entitled to construct a low-cost model, and there will undoubtedly be passengers who are perfectly content to travel with little more than a small bag and a seat. For them, paying only for what they use may represent genuine value. The question is not whether an airline should be allowed to charge for an optional service. The quieter and more important question is whether the passenger believes the service really is optional. Is the customer merely purchasing a seat, or are they buying the reasonable ability to undertake a journey with the ordinary belongings that journey requires?

That question reaches well beyond aviation. Every business must decide what is included in its price, what is genuinely optional and what should attract an additional charge. There is nothing inherently wrong with offering customers different levels of service. The danger begins when the headline price becomes the principal weapon of competition and the margin required to deliver the ordinary customer experience must then be recovered through exclusions, upgrades, restrictions and additions. The business may win the initial comparison, yet lose something far more difficult to measure. The customer may complete the transaction, but remember the irritation longer than the saving that first attracted them.

Price is seductive because it is so easy to see. It fits neatly into an advertisement, a website search or a comparison table. Service, trust, reliability, convenience, employee attitude and reputation are far more difficult to reduce to a single number. When businesses are told that customers always choose the cheapest option, reducing the visible price can appear to be the most direct route to increased sales. Yet once a business teaches its customers to choose it only because it is cheapest, it should not be surprised when those customers leave as soon as someone else becomes cheaper. A customer gained solely through price can usually be lost through price just as easily.

This does not mean that price is irrelevant. Customers have budgets, value for money matters and lower prices can make products and services available to people who might otherwise be excluded. Price competition can also force inefficient businesses to examine themselves rather than relying upon habit, location or customer inertia. The weakness arises when the business has no answer beyond price. Unless it possesses a genuine and sustainable cost advantage, the cheapest price is rarely a permanent position. A competitor can reduce its price tomorrow, and the original business must then reduce its price again, accept the loss of price-sensitive customers or finally explain why it deserves to be chosen for some other reason.

There is an important difference between being inexpensive and being cheap. An inexpensive business may operate efficiently, control waste, simplify its systems and provide honest value. It knows what its service costs and has deliberately designed an offer that can be delivered profitably at a lower price. A cheap business is something different. It removes the things customers can see and feel, then attempts to recover the missing margin whenever the customer asks for something resembling the service they believed they were buying. The distinction is not determined by the amount charged. It is revealed by the experience surrounding the charge and by whether the customer feels informed, respected and fairly treated.

One of the original pillars of Banks Consultancy was that we would speak in the client’s language. In pricing, that means understanding that the advertised price is not necessarily the price the customer considers important. The customer wants to know what it will cost to receive the outcome they reasonably believed they were purchasing. For an airline passenger, that may be the total cost of travelling with an ordinary bag, selecting a seat, changing a booking and reaching the destination with a reasonable level of comfort. For a building client, it may be the completed cost of the renovation rather than the quotation stripped of predictable variations. For an accounting client, it may be the cost of receiving the advice and assistance they actually need rather than an attractive starting fee that excludes every useful conversation.

Speaking in the customer’s language does not require every service to be bundled into one price. It requires the business to make the complete proposition understandable. What is included? What is genuinely optional? What will most customers probably need? What is the likely total cost of obtaining the result being advertised? Clear pricing is not merely an administrative courtesy. It is part of service. When the customer understands the offer and the final outcome agrees with the expectation created at the beginning, trust has an opportunity to grow. When the opening number appears to have been constructed mainly to secure commitment before the real cost becomes visible, the relationship begins under strain.

A genuine silent partner in the business would look beyond whether the lower price produced more sales. They would ask whether those sales were profitable, whether the customers attracted were likely to return and whether staff were being placed in continual conflict with people surprised by the pricing model. They would consider the costs that do not immediately appear in the sales report: complaints, abandoned transactions, poor reviews, reduced recommendations and the time required for employees to explain charges they did not design and may not believe in. None of those consequences is inevitable, but neither should they be ignored simply because the additional fee produced an attractive line in the monthly accounts.

This is where What the Accountant Saw becomes relevant. Increased transactions, passenger numbers or revenue may look impressive while revealing very little about the strength of the business being created. The accountant should ask what behaviour produced the revenue and what longer-term cost may accompany it. Did the pricing model create a satisfied customer, or did it merely extract a little more from a customer who had already committed to the transaction? Did the additional charge improve profitability after complaints, administration and service recovery were considered? Did it build a reason to return, or another reason to look elsewhere next time?

The deeper inward question for the owner is therefore not, “How low can we make the advertised price?” It is, “Are we building a business customers choose because it is cheapest today, or one they choose because they trust what they will receive tomorrow?” That question cannot be answered by a competitor’s price list. It requires the owner to decide what customers should say after the transaction has ended. Would they describe the business as fair, reliable and easy to deal with? Would they still choose it if a competitor reduced its price? Is there any part of the experience sufficiently valuable, human or dependable that the customer would be reluctant to surrender it for a small saving?

Peter Merrett’s Wonderlicious offers a more constructive starting point than another round of discounting. Its underlying philosophy asks how care, humanity, curiosity and a sense of wonder can be brought into the experience of customers and employees. This does not necessarily require expensive gifts, elaborate surroundings or a vast service department. It may begin with noticing the customer, listening properly, communicating clearly, keeping promises and giving frontline employees enough authority to solve ordinary problems. Many small details can combine to produce a substantial emotional effect. What costs relatively little may create significant value when it causes someone to feel genuinely considered.

That raises an uncomfortable but useful question. What might happen if the time spent designing another fee were instead spent designing a better experience? This is not an argument against cost control or commercial discipline. Service must be funded, margins must be protected and a business that continually gives away more than it can afford will eventually be unable to serve anyone. Margin is not greed. It is what allows the business to employ good people, maintain systems, correct mistakes and continue honouring its promises. The challenge is to set a sustainable price openly, rather than reducing the visible number and hoping that additions will repair a margin that was inadequate from the beginning.

CANEI – Constant and Never-Ending Improvement – belongs in this discussion, but not as an invitation to find another item that can be removed from the base price. It should direct attention to the complete customer experience. Can the offer be clearer? Can the process be easier? Can the service become more reliable? Can employees respond more effectively? Can a frustration be removed? Can something memorable be added without imposing unnecessary cost? A pricing change may still be justified, but continual improvement requires management to consider whether that change strengthens the customer relationship as well as the short-term revenue calculation.

Before any of that, however, comes the Discipline of Boring. The business must understand what it genuinely costs to provide the service, the margin required to remain viable, the customers it can serve profitably and the promises being made by its marketing. It must know why customers leave, why they return, what complaints recur and how much it costs to replace a customer who has quietly gone elsewhere. These matters are not exciting. They do not produce dramatic social-media announcements or allow management to claim it has reinvented the industry. They are nevertheless more useful than copying a competitor’s price and hoping increased volume will compensate for the absence of thought.

Perhaps this is another example of asking, “How did we get here?” How did we arrive at a point where reducing what is included can be presented automatically as providing more choice? How did businesses become convinced that the lowest visible number is the clearest expression of value while the customer is expected to assemble the real price from a collection of additions? The answer is not that customers are unintelligent. Businesses, advertising systems and comparison websites have trained attention towards the number that is easiest to display. The danger is that management begins improving what is easiest to compare rather than what matters most to the person receiving the service.

This is also where the thinking behind Dumbing It Down becomes relevant. Price is simple. Reputation is complicated. Service culture, trust, employee behaviour, convenience and reliability cannot be fitted comfortably into a small box on a comparison screen. Yet difficulty in measuring them does not make them less important. The business owner should ask whether price is truly the strongest expression of the value being offered, or merely the easiest part of the offer to explain. If price were removed from the discussion tomorrow, what reason would remain for the customer to choose the business?

A quiet review may provide a better answer than another promotion. Why do customers currently choose us? What do they praise when recommending us? Which complaints keep appearing? Is the advertised price a fair indication of the likely final price? Which additions are truly optional, and which are practically necessary for many customers? Are our margins sufficient to deliver what we promise? Do our employees feel trusted enough to solve problems? What thoughtful, low-cost act could improve the experience? Most importantly, if we stopped being the cheapest tomorrow, would our customers have any reason to remain?

Jetstar may determine that its revised carry-on model is appropriate for the market it intends to serve. Some passengers may welcome the choice and others may decide that the complete cost no longer represents value for them. That is the nature of competition. The broader lesson is that every exclusion, addition and service decision contributes to the reputation being built. The business may have the ability to charge, but it should still consider the wisdom of charging, the clarity with which the fee is explained and the feeling left with the customer after it has been paid.

A business does not need to charge the highest price or provide the most elaborate service to build loyalty. It needs to set a price capable of sustaining what it promises, communicate that price honestly and then keep looking for ways to make the customer feel the decision was worthwhile. Peter Merrett’s approach offers a more useful question than simply asking how little can be included before the customer refuses to buy. What thoughtful detail, reliable action or human response might make that customer want to return?

The lowest advertised price may win the fare comparison, the quotation or the first transaction. It does not necessarily win the customer. The cheapest price can always be beaten. A reputation for fairness, service and genuine care is far more difficult to copy, and it gives the business something worth protecting when the next competitor inevitably arrives with a lower number.