Today, it seems every business is looking for little ways to improve its bottom line. Customer amenities that were suspended during the pandemic never return. Grocery products are hit by “shrinkflation,” going down in size but not in price. Cruise lines, long known for their all-inclusive approach, charge for things like room service, previously free.
Newly retired Costco CFO doesn't believe in chasing every last penny of profit.
While companies have every right to charge what they want for their products and services, sometimes it makes sense to pass up an opportunity to charge the highest price the market will allow.
Take Costco’s iconic $1.50 hot dog and soda combo that hasn’t changed price since 1985. Bumping the price to, say, $2.50, would likely add a little to the bottom line even if fewer combos were sold. But that change would likely annoy those customers who buy a combo every time they visit. It might change how they feel about the brand in some small way.
Newly retired Costco CFO Richard Galanti thinks the hot dog combo price is safe for a while. In an interview with Bloomberg, Galanti comments, “I’m not trying to look for the last penny.”
Galanti’s “last penny” comment related to the firm’s avoiding the profitable but potentially risky move of selling off its real estate holdings, but it seems to also embody the firm’s overall approach to business.
‘More Money Than We Need’
Galanti says, “we generate more money than we need every year,” which means risky moves aren’t necessary. The statement says something deeper, though, about Costco’s philosophy. As long as the company is sufficiently profitable to satisfy its stakeholders, trying to squeeze every cent of profit out of the business isn’t necessary or desirable.
Indeed, for much of the 20th century many businesses operated that way. They paid their employees, supported their communities, and afforded their shareholders adequate returns.
Satisficing vs. Optimizing
In 1956, Nobel Prize winner Herb Simon coined the term “satisficing” to describe humans making choices that produced results that were good enough. This contrasted with economic theory at the time that assumed businesses and individuals acted to maximize or optimize results. Simon suggested that businesses would not always seek to keep maximizing profits if a satisfactory result could be achieved.
Today, in a world where private equity seems to be taking over every industry and even huge firms contend with activist investors, the idea that any level of profit is “enough” seems quaint. Costs must be minimized and prices raised to whatever level will maximize profits. Services should be unbundled and offered as a la carte options to maximize revenue.
Customers Are Paying Attention
Shareholders may like the short-term results from profit maximization efforts, but customers notice when they feel nickel-and-dimed or when prices increase more than they think is reasonable. Travel forums light up with complaints from aggrieved guests when some prized amenity disappears or becomes an extra-charge option.
Costco’s approach of not looking for that last penny of profit seems to resonate with its customers. Once again, the firm leads its big-box peers in customer satisfaction. Other firms should emulate Costco and focus on building long-term customer loyalty instead of optimization at all cost.
