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The high cost of do-it-yourself cost-cutting
Lower prices mask a bitter truth: The customer still pays, but with time and frustration. A company that can cut prices without alienating its public could be a great buy.
By Jim Jubak
I was thinking about Adam Smith as I waited on hold to schedule what would turn out to be the sixth unsuccessful attempt to fix my high-speed Internet service.
More than two centuries ago, Smith wrote in "The Wealth of Nations:" The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.
Smith was trying to explain why the same thing sells for such different prices in different places. But Smiths emphasis on the toil and trouble of acquiring a thing also explains why our current statistical measures of price inflation right now fail to capture the full cost of a thing or service. If you look at the full toil-and-trouble cost, instead of just the price tag in dollars, you can see not only why inflation feels higher than the official measure, but also why it is in fact higher.
Smiths 18th century point of view also reveals the growing do-it-yourself nature of todays corporate cost-cutting. And that, in turn, points the way toward an expanded strategy for picking stocks in the current inflation environment. If youll remember, I began this inflation discussion in my July 16 column, 3 ways we already feel inflations sting. Ill complete this series in my Aug. 13 column with some stock picks, both conventional and unconventional, for the sort of inflation that characterizes this economy.
Dollar costs arent the whole story
The measures of inflation that Alan Greenspan and the Federal Reserve use to set interest rates and monetary policy, which are the instruments of the moment for directing the course of the economy, are based on price calculated in dollars.
That captures the amount of money that we pay for things. But it doesnt capture another, increasingly important, feature of cost in the current economy: the nonmonetary toil and trouble it takes to acquire that thing.
As an increasingly important part of their cost-cutting efforts, companies are making consumers work harder and harder to buy goods and services from them. That often results in cost savings to the company, some of which they pass on to consumers. Measured just in dollars, that makes prices lower. But measured by Smiths full toil-and-trouble accounting, those lower cash prices actually disguise a jump in total cost to the consumer.
Troubling lesson
Let me show you what I mean using the example of the difference in price between buying an airline ticket now and 10 years ago, measured solely in price and measured by Smiths total toil and trouble, price and consumer effort, standard.
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Say that 10 years ago you bought a ticket to fly, one-way, from San Francisco to New York for $300. Today, its easy to find a one-way flight on one of the low-cost carriers for around $140.
So the cost of a ticket from San Francisco to New York is $160 less than it was a decade ago. That 53% decrease in cost sure helps keep the official inflation numbers down.
But the picture isnt as favorable if you look at the full toil-and-trouble cost. Ten years ago, my flight on a full-fare carrier would have departed from San Francisco International. Today, theres a good chance Id be flying from the Oakland airport. That shift is likely to add a good 20 minutes to my travel time and, if I take a cab, $15 to $20 to my taxi fare.
Because the low-cost carriers at Oakland are so popular, the airport is operating way beyond its designed capacity and lines for checking in can be as long as the Golden Gate Bridge. The wait, even if you factor out delays for new security measures, is certainly longer than it was a decade ago at San Francisco International. Remember travel agents? They once booked flights for you after consulting their computerized data bases. Today, we do it ourselves. The cost of paying that travel agent was paid by the airline (and passed along to the consumer in the ticket price). Today, the airline doesnt pay that cost (or pass it along to the consumer). Instead, we save the money by doing the work ourselves.
Even when you add the full toil-and-trouble costs, todays airline ticket represents a considerable bargain compared to the full cost of a ticket a decade ago. But the difference isnt as big as it seems to be when you simply compare dollar prices.
Whats your toil worth?
You can find examples just about anywhere you look in the economy and in your daily life -- and most of them dont work out to be as much in the consumers favor as my airline example. Its at work at the rental-car counter when the company decides to hire one less person to process reservations. The company cuts costs and you wind up waiting in line a little longer. Or how about the company, perhaps a cable TV company, that decides to staff its help desk with just enough people to make most customers wait four to six minutes, on average, and then wait again to talk to a real technician. Or how about the high-speed Internet service provider that advertises a free months service and then just $29.95 a month ever after, as long as you install the service yourself.
This kind of do-it-yourself cost-cutting isnt limited to the consumer world. Look around you at work. Many of the vendors that your company buys from used to employ salespeople to explain new products, take orders and to resolve problems and complaints. Now, many of those sales have been shifted to the Internet, which sure saves the vendor time and money, but adds some work for the customer. And woe to you if youve got a problem.
Its easy to understand the attraction of this kind of do-it-yourself cost-cutting to companies that have made all the easy cost reductions and still face pressure to reduce costs. The company saves an easily calculated amount of hard currency and the customer faces a fuzzy and difficult-to-calculate increase in the toil-and-trouble cost. How much, for example, is an extra 20 minutes spent waiting in line worth to a customer? Because of their subjectivity, their fuzziness, and their invisibility none of these toil-and-trouble costs are included in the official inflation numbers.
The consumer benefit
But consumers arent passive patsies in any economic system. This do-it-yourself cost-cutting can be a pain in the neck for consumers, so if it didnt offer them something in return theyd protest enough, with their purchasing decisions, to stop the strategy dead in its tracks.
So what do consumers get out of it? A chance to turn free time into cash. Thats a very attractive deal in an economy where income is growing relatively slowly. According to Mercer Human Resource Consulting, companies expect to increase pay by 3.3% in 2004. That will match the 3.3% raise in 2003. Next year, 2005, is expected to be slightly better, with pay increases projected at 3.5%. But the average annual pay increase has been below 4% since 2002. In the 1990s, pay increases outpaced inflation by about 2 percentage points a year. Recently, pay increases have only outpaced inflation by 1 percentage point or so. Subtract higher co-payments and premiums for company health insurance and that pay increase just about vanishes.
Which explains the popularity of part-time work, either in the form of an official part-time job -- according to the Bureau of Labor Statistics, the number of persons working part-time increased by 495,000 from March through June 2004 -- or in the form of a do-it-yourself job, such as waiting in line, installing your own modem, or assembling your own furniture. When cash pay is stagnant or worse, consumers are willing to substitute their free time for paying higher cash prices. Its a good trade-off, in this economy, to spend six hours assembling a piece of furniture from Ikea rather than spending more for a more expensive factory-assembled table or desk, for example. Think of those assembly hours or that time waiting in line or on hold as a second job that pays in discounted prices.
Converting free time into lower cash prices isnt without its cost to consumers. I dont know about you, but I dont have a lot of free time as it is. Taking away some so I can wait on a help line or install my own replacement gasket on my washing machine may save me dollars, but it eats up another commodity thats in short demand in my life. I have a suspicion, but no way to put it into numbers, that patience is in increasing short supply in the United States and that were all crankier than we once were. Do-it-yourself cost-cutting strategies play a role in this.
Stock winners: efficiency and lower prices
Smiths perspective does suggest a way to pick stock winners and losers in an environment of do-it-yourself cost-cutting. The winners are those companies that, when all the dollar savings and free-time consumption and potential aggravation are netted out, offer customers real value in the trade-off of free time for lower prices. If the cash price is lower but the customer has to spend too much time on the transaction, by the customers own subjective calculation, or the price of frustration outweighs the cash savings, then the customer is likely to conclude that the full toil-and-trouble cost is too high. The company may have successfully cut costs only to discover that it has also cut customers.
And the biggest winners are those companies that have combined lower prices and efficient transactions. They havent just found a successful cost-cutting strategy but a positive competitive weapon in this economy.
You know of examples of winners and losers from your own experience. Remember that Im still looking for inflation winners for my Aug. 13 column. Send me the names of any companies that you think have combined lower prices with transaction efficiencies and Ill add them to the idea hopper for that column.
And for fun, send me the names of any companies that you think have so raised the full toil-and-trouble cost of their products, even if theyve cut the cash price, that theyve lost you as a customer. Ill report on those suggestions, too.
New developments on past columns
Now, only cheap stocks will make you money
On July 23, Schlumberger (SLB, news, msgs) reported operating earnings of 48 cents a share, matching Wall Street forecasts. Revenue, which after recent sales of non-oil service business is almost all from oil-field services, was $2.8 billion. Operating profit in the oil field businesses, taking out seismic service division WesternGeco, climbed 7.4%. WesternGeco showed $15 million in operating earnings, up from a loss in the same quarter of 2003, but down from the first quarter of 2004. In the conference call, the company said that the need for increased oil and gas production should keep demand and prices for its services high, while the difficulty of much new exploration and drilling would result in increased demand for Schlumbergers high-technology services. As of July 27, Im setting a new target price of $70 by December 2004, up from the prior target of $68 by June 2004. (Full disclosure: I own shares of Schlumberger.)
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned shares in the following equities mentioned in this column: Schlumberger. He does not own short positions in any stock mentioned in this column.
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