During a Pandemic Cost Benefit Analysis Becomes Your Best Guide
Cost benefit analysis is a powerful indicator during a crisis. It explains why Zoom and many other online services have seen a surge in paying customers and explosive growth during the COVID-19 pandemic.
Cost benefit analysis highlights the reason for this surge. The benefit of using zoom, which includes working while avoiding the virus, is now massive compared to the cost or pain of using it.
COVID-19 changed the game for both new and existing products by elevating the benefit side of the equation…making the cost side less noticeable. Avoidance of catastrophic illness tends to be an exceptionally large benefit, so by comparison cost is almost irrelevant.
Pandemics and disasters (both natural and man-made) have always skewed a cost benefit analysis. Take for example, the great horse manure crisis of 1894. By the late 1800s, large cities all around the world were “drowning in horse manure.” In order for these cities to function, they were dependent on thousands of horses for the transport of both people and goods. New York City for example had a population of 100,000 horses producing around 2.5 million pounds of manure every day.
Horse manure and the remains of dead horses littered the streets and provided a breeding ground for billions of flies. These in turn spread diseases, elevating the problem from a nuisance to a public health crisis. The adoption of the automobile was dramatically accelerated (in large cities only!!) by the enormous benefits called “breathable air and walkable streets.” By 1912, cars outnumbered horses on the streets of NYC and by 1917 the last horsecar was put out of commission.
COVID, and crises of all kinds, have a multiplier effect on the benefit side of cost-benefit equation, which you can use to your advantage.
Cost Benefit Imbalance
In normal times, the success of a new or emerging product is often determined by the cost or pain the product imposes on the user. If customers are forced to substantially change their behavior to adopt a new product, then the perceived cost is higher. And when the cost is high, the associated benefits must also be high.
Examples of unbalanced cost-benefit ratios are everywhere. A new survey found that 64% of small businesses that use email marketing, do not employ CRMs like HubSpot or Salesforce or other automation tools. Which means they handle email manually.
Why this refusal to adopt CRM? The primary reason cited by respondents is: integrating a CRM system — and getting the staff acclimated to it — takes up “too many resources,” which means the cost is too high relative to the benefits received. The conclusion of the survey author was that small businesses are “making a mistake” by avoiding CRMs.
This is a classic example of ignoring the cost-benefit ratio of an entire product category. Rather than reduce the cost and/or pain of adoption, companies are focusing on marketing and promotion to try to boost the perception of benefits received. The best course of action would be to make CRM easier to adopt and use.
Another example of imbalance: when you see an article that says “the market for AI technologies appears to be struggling, with a recent global survey finding no increase in AI adoption in the enterprise,”  you can be fairly certain that slowing adoption is the result of the cost being too high or the benefit being too low…or both.
Cost comes in many forms and goes by many names — friction, pain, learning curve, resource-demand, etc. Because startups are not very good at reducing cost, the focus has traditionally been on increasing benefits…typically through the addition of advanced features. But when you find a way to let a pandemic amplify your benefits for you, you’ll be in great shape.
Accelerate Adoption by Lowering Cost
Making an innovation easier to adopt is the most effective way to reduce cost. Typically, that means fitting your innovation into systems that are already in place, and avoiding disruption whenever possible.
Most of us think of Thomas Edison as the disruptive inventor of electric power. But if you look closely, you’ll see Edison had an expert understanding of both technology adoption and cost-benefit alignment.
Edison’s first public demonstration of his incandescent light bulb was on December 31, 1879. And in 1882 Edison dramatically accelerated the adoption of electric power and light by using specific techniques designed to reduce both cost and disruption.
Most people don’t realize that Edison’s strategy for accelerating the adoption of electric light was initially based on minimizing cost and disruption. Since gas lamps were the dominant method of indoor lighting, Edison designed his electric lights to look and operate almost identically. His initial electric lights provided 13 watts of light, almost the same as the 12-watt gas lamps he wanted to replace. The new electric lamps looked almost exactly the same as the gas lamps he was replacing.
Recognizing that many commercial and residential landowners in New York had invested considerable capital in gas infrastructure to light their buildings, Edison also chose to run his first electrical wires through existing gas lines, fitting directly into the system people already understood for the delivery of light.
Edison’s technology was new, but the form and function were decades old. In fact, Edison’s strategy of adapting his technology to systems people were familiar with, and minimizing disruption of the customer’s habits, led to accelerated acceptance and adoption.
Cost Benefit Analysis Revisited
Even though it makes life easier for startups, my hope is the pandemic won’t last forever. So, it’s also important to know how to navigate the cost-benefit landscape during normal times. And fortunately, strategy tools are available to help with this task.
Your product’s value to the customer is established by its cost-benefit ratio. And the cost-benefit ratio your customers demand is a moving target. Most startups are aware of how to increase the benefit their product provides, but few consider the cost component of their value equation.
Brand new products often provide customers with very high gains or benefits, but come at a very high cost. This explains why early adopters are the only buyers of new innovations and technologies. Early adopters accept high cost and high risk in order to get exceptional benefits.
Herein lies the challenge for your new product or innovation. The cost-benefit ratio that is acceptable to your customer changes over time. And you must always be in alignment with the changing value expectations of your customers.
[please refer to the lower right-hand corner of this interactive infographic]
After early adopters, update your product so it can deliver a very high gain while requiring only modest discomfort or cost. Follow that with a new release that is a higher performing product (not necessarily very high) that has a comparatively painless or low cost of adoption. And finally, continue to serve maturing markets with increasingly modest gains going forward, while minimizing the pain associated with adopting them.
Many startups and emerging high-tech companies are trying to pivot, or look for growth, or find ways to get through to scale. And currently there is an opportunity for founders to leverage the COVID crisis and amplify the benefit side of their product’s value.
The pandemic is helping people appreciate the outsize benefits made possible by 21st-century technologies — blockchain, the internet of things, digital learning platforms, augmented reality, drones, 3D printing and much more — to keep us healthy and to allow us to conduct business. This amplification of the benefit side of makes a cost benefit analysis much more of an advantage for the founder. Cost-benefit ratio is currently your friend.