The last post ended with the teaser: “It turns out that transaction costs are one of the factors that can have a huge impact on entrepreneurial projects, marketing, sales channels, and major strategic decisions.” One of the reasons eBay has become so successful is because it is one of the biggest and most effective environments for reducing something called “transaction costs.” In macroeconomics, these are the financial and emotional costs associated with the time and work needed to find, negotiate, and close a sale on both sides of the transaction. The person who bought my microphone out of the hundreds who looked at it associated the most value with my offering and had the most desire to take a little risk to save a few dollars. He saw my great feedback rating, the clear photos of a pristine used microphone, the complete set of accessories, and a fair shipping price so he kept bidding to $81 to win it. On the other side of the transaction, I found the eBay bidding audience the largest, the selling prices reasonable, the effort to create the microphone auction low, and the payment logistics fast and secure.
Many entrepreneurial startups have created thriving businesses based on even slightly reducing transaction costs. For example, Square (http://squareup.com) created a way for anybody with a smartphone and a bank account to accept credit / debit cards for a minimal fee and no monthly recurring costs. They even provide a free credit card reader. The transaction cost for a “merchant account” (as it is official called) was reduced dramatically for both the sellers and the buyers who could now use their cards at tiny merchants such as street vendors, farmers’ markets, etc.
For the rest of us, transaction costs are a way of thinking that can lead to better sales and marketing techniques. How hard is it for a customer to find you (online or otherwise), ask a question, buy an item, process a return, or get service? There are some companies that have such “annoying” salespeople that I never want to call them, the transaction cost of interacting with these people is too high. Car dealerships are a perfect example of this. There are other companies that I rarely call, like Southwest Airlines. I book, change, cancel reservations online, manage my mileage plan, check-in for flights, get flight status, but once in a while I call and amazingly, I look forward to it. They have great running jokes as their “music on hold” and every person that I talk to can solve my problem immediately. Remember, I only call them for the really messy problems, so this is a great compliment.
Take a moment and think about your entire customer relationship in terms of transactions costs. Next post will discuss more specific techniques to improve and provide a better experience based on this framework, both externally and internally.