Don't Sacrifice Quality for Short-term Profit Goals

Books on productivity would tell you that management's decision to pursue short-term profit goals by curbing quality would result is various kinds of losses, including, rework, defects, loss of customer goodwill, etc.

Well i tasted this thing on the first day of a small start-up - namely a juice cafe - in college. I brought a labor guy with me, trusting his experience working in homes as chef, etc. He after seeing how costly our drink was, as it used 4-6 different kinds of fruits and/or fruit juices (packaged/unpackaged) concluded on day # 1 that this business won't make a nickel. Hence, he started to use some water in it to dilute it, to reduce costs. This juice was never meant to use water. Nonetheless, i made a big mistake and let him do that, thinking what difference can this little amount of water can make.

During the day & afterward, the most crucial negative customer feedback we got was that there was too much water in it - perhaps he mistook water for fruits & juices! Some asking to add something else apart from water.

How disastrous! From next day onwards we didn't add single droplet of water apart from what was coming through fruit juice; except in 1 juice which has to have water in it.

I forgot a fundamental business lesson: all investments are not covered on day 1! Moreover, you saw how low commitment to quality resulted in loss of goodwill & defects. Its important to note that the excess of water is "critical-to-quality" (CTQ) in juices for customers. It wasn't something customer didn't care about.

Models that Measure Customer Demand

I ran with my friends a small juice cafe in university. Unlike many Pakistani businesses which think about customer demand and all of it after spending millions, we searched for ways to determine, in fact, accurately measure consumer demand, elasticity of demand (i.e., effect of price change on customer demand of our products), quantity consumers would like to consume, product choice, prices, etc. We did that by giving samples to our faculty who we were not our customers actually (sounds funny isn't it!). Our customers were (poor) BSc/BA students only, for whom cost is a major factor, for they come to this university (confirmed from university surveys).

So we used widely used survey thing, without carrying out any reliability and confidence test. What our survey proved was that people on campus are addicted to cheap (& nasty) food. Not many care about the quality which has caused yours truly food poisoning for couple of time. And, that not many would love to pay more than Rs. 50 as regular customers. Because juices were different and each juice had 4-6 fruit or fruit juice(s) as inputs, it justified high prices of Rs. 70-80 per 450 ml glass. I visited Dunkin Donuts in Lahore, and they sell smoothie at Rs. 150. What can you do about ingratitude ! :P (Nah, I'm joking.)

The survey prediction came true. Sales fell as we moved forward. We ran out of friends. Repeatedly, our customers told us, often instructing us, to cut down prices. Unfortunately, we couldn't continue with low prices due to excessive end-semester workload, and had to close the beloved cafe. It has disappointed many, and if i get permission next semester, I'd definitely do it, primarily for my own self, I'm sick of low quality items sold. This experience is shared by many, hence I believe I can create value. Again, I need to research again, and that's were Marketing Models of Consumer Demand, a research paper Chicago & Stanford professor kicks in. It does just the thing.

Here's the abstract of the paper, and you can download its pdf from here.

"Abstract:
Marketing researchers have used models of consumer demand to forecast future sales; to describe and test theories of consumer behavior; and to measure the response to marketing interventions. The basic framework typically starts from microfoundations of expected utility theory to obtain a statistical system that describes consumers’ choices over available options, and to thus characterize product demand. The basic model has been augmented significantly to account for quantity choice decisions; to accommodate purchases of several products on a single purchase occasion (multiple discreteness and multi-category purchases); and to allow for asymmetric switching between brands across different price tiers. These extensions have enabled researchers to bring the analysis to bear on several related marketing phenomena of interest.

This paper has three main objectives. The first objective is to articulate the main goals of demand analysis - forecasting, measurement and testing - and to highlight the desiderata associated with these goals. Our second objective is describe the main building blocks of individual-level demand models. We discuss approaches built on direct and indirect utility specifications of demand systems, and review extensions that have appeared in the marketing literature. The third objective is to explore interesting emerging directions in demand analysis including considering demand-side dynamics; combining purchase data with primary information; and using semiparametric and nonparametric approaches. We hope researchers new to this literature will take away a broader perspective on these models and see potential for new directions in future research."

Pradeep K. Chintagunta
University of Chicago

Harikesh Nair
Stanford University - Graduate School of Business

Point of working in groups

Professors tell us that in real world team players are demanded. Working alone and in a team is hugely different for psychological and social reasons. The fact that you can face criticisms on your thoughts can be disturbing especially if the members are not glued together already. The point really is to get us debate about grey areas, and come to agreement using some objective criteria.

Working in teams suppose in a business should be have clear "rules of engagement". What i mean is that although we're not enemies, but since we're often excited about the venture, we forget to deal with each other like strangers. Hence, when i and my 3 friends launched a small venture of juice cafe in our school, we made it very clear what our values were, although there used to disagreements, because not everything could be foreseen, especially when making critical decisions about business, like pricing, budget spending, etc. i want to emphasize on corporate structures of even a small firm. What happens in over family business is that things are not worked out, nobody decides how time would one person work, and what would be his job description. That can leave space for lots of commissions and conflicts for future...

Helping students get into top universities

My father has given this task to create an academy in my home city for intermediate/high school students preparing for undergrad med and engineering and other schools. i'm thinking of creating an opprotunity for those students who're in those schools teach remotely through Skype or something during evening. Many students want to devote time freely for this... Nonetheless, i've to talk to them and see if its feasible for them... Couple with this computerized tests which students can practice online, for this i'll have to see technology penetration... A place where students can collaborate real time, and take lectures at home...

My Entrepreneurial Venture: Long way to go

We've planted a seed of a start-up. We wish it goes a long way. i wanna talk about elements of success and appreciate how "smarter our parents" - in fact smartest!

Its all about perseverance some say. Our professor talked about Pakistani businesses. He said that they are not doing any thing brilliant - making fans, constructing houses, etc. Yet making a fortune. They do things consistently over a number of years. Now a days we've this trend where people do one thing, then leave it and move on. When you meet them after 20-30 years, they're still saying, "Ah, i'm going to do something great soon." It never happens, because perseverance is not a part of such entrepreneurs.

As i reflect on our juice cafe. i've been exposed to things related to this business - customer perceptions about food brands, having just-in-time production system, food hygiene & other bio-tech problems, accounting systems for such a business, etc. I've opportunities to grow. I'd better grow in this sector than haphazardly starting another. i can diversify and move to other food and drink items; its essence remains the same. What i can leverage over the number of years by having a staying power, i'm more likely to do innovations and remain more competitive than a start-up.

But that does not mean i cannot or should not start other businesses if i can. The example that i'd give also explains how smarts our parents are, who're doing businesses or remained part of markets over decades. My father today discussed with me the idea of exporting straws produced as by-products from crops such as wheat. He made an accurate calculation of investment and found that one can make 200% profit by collecting this waste which many people here burn (hence increasing its price), making its batches and storing to wait for the time of export. He is mashaAllah already into many diverse markets. One of my friend's father also has done so many things which are herculean. He made that point.