How should businesses be designed theoretically?
I'll be answering this question using a combination of theory and practice. For the sake of non--business audience, let me first define a metric called NPS (Net Promoter Score). After using a product/service, the business owner sends a survey to the customer asking to rate from 1 to 10 on how likely is the customer to refer the service to a friend. People who give 9 or 10 are called Promoters | 7 and 8 rating are given by Passives | 1 to 6 rating is given by detractors. The NPS score is the % of people who give a rating of 9 or 10 minus %of people giving 1 to 6. It's a measure of customer service/satisfaction. Higher the NPS, the better it is for the business.
Ever since businesses have started, the objective of businesses has been to maximize profits. That is the starting point in B-schools across the world. That is the primary objective. Businesses state that customer satisfaction is also equally or more important. Profit maximization requires reducing costs at every point of the customer journey. Increasing customer experience/satisfaction involves increasing costs at every point of the customer journey. Today's businesses largely operate trying to balance out between these 2.
If there is conflict between the 2 goals, typically business prioritize maximizing profits. And this conflict exists in every business out there. This is a direct conflict and usually what ends up happening is businesses prioritize profits at the cost of customer happiness. This leads to a substandard product being sold to the customers.
Imagine a world where businesses operated where the metrics were reversed - Maximize customer satisfaction at whatever cost would be the objective. Revenue would naturally follow. If that sounds impractical to you and a costly affair, let me give you an example.
'Assume that you want to start a business and you don't have capital. You have identified a large gap in the market which you can fill. And you want to get capital for this project. Assume for the sake of this theoretical discussion that you get access to an investor with infinite capital and he asks you to come up with a business plan for the project. Will you now design your business to maximize profit or maximize customer satisfaction at whatever cost.
In the Maximize profits model, at every customer touch point, you'll try to save on costs which affects NPS at that touch point. This would lead to a lower budget for the project and you might come up with some plan but can you guarantee that customer satisfaction will be maximized? No. It'll be a low budget project with profit projections based on market demand. Now, let's look at NPS maximization based business models. At every customer touch point, we'll try to maximise the quality of the service. We'll try to solve the problems using the best possible approach not limiting ourselves on cost.
What is the result? At every point when we measure the NPS, it would be highest and in reality we would be building the best possible solution for the customer with no budget constraint. As part of product development, we can define a large enough test customer base with whom you can co-create the product. What i mean by that since in this theoretical discussion, capital is not a constraint anymore, you can pay the test customer base incentives, measure NPS, improve the product, run this logic in a loop until NPS is really high and then go for marketing your product. Hence, before sending it out into market, you have close to product market fit.
Then you can do marketing for your service which is already largely customer ready and setup systems to capture the customer feebdack on a loop to improve the product and maximise NPS.
What is the result? NPS is maximised because of which customers gives tesimonials, refers other customers, who get into this loop again and they refer other customers and this goes on in an infinite loop to create a theoretical infinite revenue generating business.
In simple words, we're investing heavily in product development and co-creating the product along with the customers by investing heavily in incentivising them to be part of it for filling NPS surveys, giving all sort of qualitative feedback which goes into the product development loop. This will lead to more initial product development time and high cost of development. But we're saving on marketing cost because we'll have customer referrals that help build the brand. The initial cost of the project will be so many multiples higher than the profit centric based design. But return would be guaranteed for the business owner/investor and the value of the return is infinity considering a large enough market.
I realized that conventional business models based on profit maximization is based on an illogical societal notion and most businesses from the beginning of time have been following this.
So, one aspect is Customer NPS. the other metric for the business owner to closely track is Employee NPS/Employee Satisfaction. Businesses today largely operate with an objective of getting good quality resources at the cheapest price. My theory states that you need to put in more investment in hiring good quality resources at way above market price because you'll be saving on attrition cost which otherwise you would have incurred. That will have long term business implications.
Hence, to summarize, as a business owner, I would track just 2 metrics and maximize my investment on that - Customer NPS and Employee NPS. The investment in this case will be much higher than profit centric business models but the return can be guaranteed (theoretically Infinity). NPS/Customer Satisfaction cannot be some secondary metric that is measured by leaving it to the mercy of the customers. If you need to incentivise customers to fill up detailed NPS surveys, that needs to be done. If you feel that customers will randomly fill up long NPS surveys just for incentives, you're completely forgetting about tbe time cost for the customer. IF we incentivise customer with say an Amazon voucher to fill up an NPS survey, there is a time cost for the customer to do it.
I have a feeling it might not have been that insightful because the discussion is theoretical. So, let me show the power of this thought in practice.
I'm currently working in a bank. Parallely, I've been wanting to launch a startup in the careers and job preparation space. I found a co-founder through an online platform. After discussion, we decided to use his expertise in the field of AI and my prior expertise in the field of resume making and bring it together.
We called our service JoPrep. In the long run, we want to be everything job preparation related. To start off, we decided to create an AI resume making service where our AI bot Jo will interact over a web-audio with customers who want their resume made and make the resume instantly for them. We hired a good quality low cost team and built the first version of the product in 2 months. Since i had worked prior in the field as a manual resume writer, my insights drove the product development. After launching the product, we've been trying to do marketing. But there have hardly been any conversions. I wasn't sure whether this is the right approach to follow.
I've been working on a theory for the last decade and part of that solves for how businesses should ideally be run. That theory work got over 2 weeks and as part of that I was posting a few relevant content on linkedin. I hadn't told my co-founder about my theory as anyone would think i'm crazy for coming up with such theory. The theory was around how to create a utopian society.
Anyway, lately my co-founder found that I was very distracted and not committed to JoPrep. So, he said that we fundamentally want different things and wanted to part ways. He's an amazing partner and i did not want to leave him. So I wrote a letter to him. The letter will show you how NPS maximization based business models trump profit maximisation based models.
I believe it's an interesting read. Click on Letter to Co-Founder
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