Develop the Minimum Core Offering to Reduce Costs Per Unit by 96 Percent

We consider an older concept in this article, one that has often been applied to cost-reduction thinking: zero-based analysis. You may know this concept as "zero-based costing."

Zero-based analysis reverses the usual way of thinking in which many people start by looking at how to remove costs from what is already being spent. Zero-based analysis starts, instead, by assuming that no costs need to be spent and grudgingly adds costs only after being convinced that they cannot be avoided.

Imagine that most cost-reduction analysis begins with a full pail of water (representing all costs) and uses a doll's spoon to ladle out some water. Zero-based analysis starts with an empty pail and adds water (costs) one drop at a time after microscopic examination.

There's a weakness in the way the zero-based mental discipline has often been applied: Some people haven't erased enough preconceptions from their minds about how business should be conducted before starting to add costs. For instance, those who have always worked in nice offices are likely to add the cost of nice offices as essential. Yet we know that most businesses today can be conducted virtually and through outsourcers so that no nice offices are required; in fact, no offices at all may be needed.

Start by considering the ideal best practice for having low costs and high effectiveness as the zero-cost level. Making that consideration requires you to think about many different ways that offerings can be provided.

Let me give you a few examples of what I mean to start you off:

1. Assume that you now offer a product. Can you offer information instead of a product?

Products are typically acquired by customers to obtain some desired result. Let's say that you are in the business of providing hair shampoo. It might seem strange to suggest information as an alternative to hair shampoo. Nevertheless, several potential applications come to my mind:

a. Shampoo isn't hard to make. You could provide custom recipes for making shampoos that are more highly individualized than what can be bought in a store. Your directions might include how to test hair to identify the most beneficial ingredients and how much of each one is required. The result can be cleaner, more attractive hair than a person would accomplish by using standard shampoos.

b. Some people might not want to make their own shampoos, but they would like to gain the benefits of using a more customized shampoo. Your information could explain how to test hair and to mix combinations of existing shampoos to gain a near-perfect individual result.

c. Shampoos will do less damage to hair if used in conjunction with better hair-care practices. You could also describe how to test hair and scalp to identify how an individual's hair should be optimally dried, arranged, and styled to gain an optimal appearance and to have healthier hair and scalp.

Developing such information is going to be costly, but the cost to deliver the information will be minimal. If you provide the information in such a way that each interaction requires another visit to your database, you can establish quite a good ongoing revenue stream.

2. Assume that you now offer a service. Can you offer information instead of the service?

I remember when personal computer software first became available for analyzing the technical aspects of finding stocks for investment. The programs were slow and awkward, but the insights were impressive. Since then, such software has become very elaborate and is still time-consuming to use. Unless you find all the details fascinating, the effort can feel excessive. The purpose of having the software is to make profitable investments. How could information be a substitute for such analytical software? Here are some possible alternatives:

a. Using technical-analysis software presumes that the analysis such software provides helps you to make better investment decisions. It could take weeks of effort to determine which technical methods have worked best for an individual security. Large institutional investors can afford to do that, but you can't. The software company could provide fast, inexpensive ways to check which technical tools have been best at predicting the prices of each security. With that information in hand, most investors could probably employ bits and pieces of free technical software from various stock brokers and never need to buy any technical software. Your information would help level the playing field for finding good opportunities between individuals and large institutions. The cost of developing the information would be similar from security to security so such an information-based business could start with the largest, most widely held securities that would attract the most customers and add on selectively from there. Serving each additional customer with the existing information for a security would add virtually no costs.

b. Another approach would be to provide data that no one else offers for making technical evaluations of securities. For instance, such data might include the percentage of institutionally owned shares that have been held continually for over five years. Such information in this case could help indicate how much increased buying and selling would affect the price of a security.

c. A third method of providing new information would be to supplement what companies report with data that can be obtained in other public sources so that the context for stock-price shifts could be easier to understand.

3. You now provide information, but you want to reduce the cost of developing that information to near zero.

This opportunity could be grasped by creating low-cost incentives to information providers for gaining status and recognition. For instance, providers might be ranked relative to one another based on visitor votes about how helpful their information has been. If costs are low enough, you could provide the information for free and make your profit from selling advertising on pages that visitors view.

4. You now provide free information, but you want to gain more profit from such information without spending any more money.

You might work with a partner to make related offerings available to your information site's visitors in exchange for a share of the partner's revenues, payments that would exceed the usual advertising rates. In order to increase profits, the cost of developing the site to add these new revenues would, of course, be borne by your partner.

Now, let's take the analysis a step further to appreciate what the "minimum core offering" is that delivers just the right value that customers, end users, and other stakeholders want and can best use. Why is that an important subject? Whenever you provide more than the minimum that people need and desire, you add costs that often harm them and you.

Let's look at an example. Many Americans drive a large pickup truck or sport utility vehicle that will take her or him to rugged off-road sites, carry a half ton of cargo plus six people, tow a large trailer, and drive safely at high speeds on good roads. A new vehicle of either type typically costs about $27,000 and burns gasoline as if it were free. Who needs all that? If you cut timber in remote locations, this vehicle might be a good choice. If you are part of a typical suburban family of four, the vehicle's appeal is primarily to your ego... it simply makes you look and feel more powerful. If appearance is all that counts for you, spend a lot less money by just buying a cowboy hat, great boots, and a fancy belt buckle.

A clever vehicle-leasing company might offer a program to use a variety of vehicles after just a little advance notice. You could have a truck or SUV when tasks required it, a nice sports car for high-speed jaunts on winding roads in good weather, an easy-to-park small car for shopping in places where it's hard to find a spot, and an impressive luxury car for taking your in-laws out to dinner. If the leasing company picked up and delivered the vehicle of your choice, such a lease package could leave you with somewhat similar convenience and much less cost than owning or leasing multiple vehicles. That's pretty nice!

Let's consider a more extreme example of overproviding. Many restaurants would like to earn more money per diner. Realizing that it's hard to improve food quality and service past a certain level, many restaurants instead raise prices and justify what they've done by providing you with enough food for more than one meal. But in making such offerings, they don't limit themselves to dishes that reheat well. As a result, you can't eat most of what they serve and often don't want the rest for the next day at home. All that's happened is that you've been sold a lot more food than you wanted or needed.

Food can often be only part of the reason why you choose a restaurant. You may be looking for a place to relax, a nice environment to lighten your mood, or the chance to spend time with people you care about. It would be possible to establish restaurants that only serve, but do not prepare, food. Such establishments could instead rely on sourcing food from neighboring restaurants and beautifully placing that food on attractive, properly heated or chilled dishes. With so little to do in the kitchen, the restaurant could be a lot smaller, more could be invested in appearance, and management could focus more on providing superior service. As a result, the cost of the meal might be smaller, yet the experience could be much nicer.

Let's look next at restaurants that use superior ingredients and apply great preparation methods. The cost of such meals can be astronomical. How could you provide such fine meals, but at a much lower cost? A restaurant could offer catering packages of partially prepared ingredients that could be finished in a person's home kitchen in half hour or less by following "foolproof" directions.

Before you get too excited about this idea, let's further deconstruct it. You don't really need a restaurant to accomplish that result. Instead, a gourmet grocery store could offer high-quality ingredients that are partially prepared for finishing at home. Such an approach could take about 90 percent more costs out of providing the offering.

Well, that's not the end either, is it? You could focus on making great dishes so easy to prepare that even I could create them from scratch. Then, you are simply selling someone the ingredients and the directions. By taking out any preparation cost, you could reduce costs by another 40 percent.

But that's not the ultimate. You could simply provide the information on a Web site that explains where to purchase the ingredients in your area and how to assemble the ingredients for a great meal. While the cost to deliver the information wouldn't be zero, it could be pretty close.

Here are questions to apply concerning your own offerings that will help you to duplicate the mental processes I've been describing:

1.Who can't use all of what you offer?

2 What aspects can't which people use?

3. How could such aspects be eliminated?

4. Of the aspects that remain, how can an offering's costs be reduced for a stakeholder?

5. How can the remaining costs be reduced even more?

6. How can offerings be tailored to be even lower cost and for providing just the most important parts of customers' and stakeholders' needs?

7. How can complementary offerings provide for more of customers' and stakeholders' needs while further reducing overall costs per unit?