You Get What You Pay For—Or Do You?

You get what you pay for, right?

It's a lesson all of us learn at some point in our lives. We cut corners and suffer the consequences. Or we splurge and discover that a bit of luxury is often the more frugal choice.

'You get what you pay for' is also a lesson many of us learn to question. The bargain option turns out to last longer than the expensive option. Or the expensive option turns out to be smoke and mirrors.

Recently, the New York Times ran the eye-popping headline "They Spent Their Life Savings on Life Coaching." It was a new article with an old story (see also: Rachel Monroe's piece in The Guardian or Season 3 of The Dream). People pay outrageous sums of money for life-changing results or a lucrative new career helping others, only to discover later that they'll need to "invest" even more money in their "success."

I've written before about how prices—especially in the "online business" world—become wildly inflated due to epistemically hostile environments. But the Times article, combined with some of my recent teaching, got me thinking about another aspect of sky-high prices: how price, value, and operational integrity become utterly disconnected.

So you spent your life savings on coaching…

For instance, this detail in the Times story stood out to me. One of the subjects of the piece had withdrawn $18,000 from her 401(k) to invest in a life coach training program but found the experience to be "a confusing and low-quality program of online lessons—one hour per week for six months—in which aspiring coaches discussed chapters they had read outside of class and practiced coaching one another." While many would scoff at the $18,000 price tag, I take much more issue with the person's "confusing and low-quality" experience in the program.

How can such an expensive program lead to a "confusing" experience and unmet expectations?

One answer might be that the person or company offering the program is greedy and corrupt. That's often the reaction that participants in these programs have, and that's the reaction that articles like the one in The New York Times are meant to provoke: what a scam!

However, I don't think greed or corruption is often the real issue.1 Instead, I think people with good intentions get caught up in a swirl of economic forces—the harmful effects of which are people spending too much money on products or services that can't deliver what they promise. These economic forces are the 'delusion of profit,' the cultural embrace of unsustainable business models, and the devaluation of labor.

If we're to run more ethical and humane ventures, we must resist these economic forces and work to understand the true costs of doing business.

The Profit Delusion

It is not the business that earns a profit adequate to its genuine costs of capital, to the risks of tomorrow and to the needs of tomorrow's worker and pensioner, that "rips off" society. It is the business that fails to do so.

— Peter Drucker

In 1975, Peter Drucker wrote an op-ed for The Wall Street Journal called “The Delusion of Profits." In it, he charged business leaders with a fundamental misunderstanding of profit—namely, that “there is no such thing. There are only costs."

Drucker argued that most companies fall short of truly covering their costs. They earn a "profit," yes, but only because they short-change investment in the future. Profit becomes what's squeezed out of a company's operations rather than what's generated to support the company—including its workers—over time:

Therefore, the proper question for any management is not "What is the maximum profit this business can yield?" It is "What is the minimum profitability needed to cover the future risks of this business?"

This prevailing delusion about profit, in turn, confuses the rest of us. Our profit delusion obscures the ways in which companies fail at their most basic responsibilities. We neglect to ask why wages aren't higher, why workers aren't better protected from harassment or exploitation, and why companies can make such socially or ecologically disastrous decisions and still see their stock prices go up. We fail to ask these questions because we let "profit" and its servants run the show.

As business owners or independent workers, we often fail to ask any questions at all about the costs of doing business. There's a lot more talk about how much a business generates in revenue than about how much a business spends on customer support or offer development. I've seen plenty of celebrations for six- or seven-figure revenue milestones but never a celebration for a six- or seven-figure payroll milestone.

Can you really get what you pay for if a business is focused on "profit" instead of costs?

A “leading life coach school" like the one mentioned in the Times article has the revenue to invest in curriculum design, learning management systems, full-time employees to help deliver the program and support participants, etc. However, instead of these customer-oriented costs, a “leading" brand will funnel its budget into things that maintain and reproduce what made it "leading" in the first place: advertising, photo and video shoots, social media strategy, etc.

Whether or not the business is wildly profitable, it creates an illusion of profit. That illusion helps generate more revenue, which can be used to create even more grand illusions of profit. What happens to customers after they pay is less important than keeping people paying.

What happens with a “leading life coach school" or, for that matter, lots of high-profile “online businesses" is oddly similar to what happens with many publicly traded companies. The illusion of profit or growth influences the stock price. As long as a company can keep reproducing the illusion of profit or growth, its stock price can continue to rise. Even when a company isn't doing well (by stock market standards), it can do a round of layoffs or announce an exciting new campaign to remake the illusion.

Stock price has little to do with the operational integrity of a company and much more to do with the ability of the CEO to create a profitable impression for shareholders. Similarly, the value of a "leading life coach school" isn't about the quality of its programs or the number of successful program participants it graduates. Its value is based on the perception of potential students. A charismatic founder with a picture-perfect social media strategy seems to go a long way to creating the illusion of quality rather than working to ensure the success of their customers.

The Other Profit Delusion

Drucker's point that profit is a myth is critical to understanding a business's financial (and social) sustainability (or lack thereof). But small business owners and independent workers have another delusion about profit: We confuse profit with personal income.

This isn't merely a semantic difference. It leads to real (bad) choices about how we run our businesses or pursue our work—the same choices that Drucker warned about in his essay. Instead of investing in mitigating future risk (e.g., a few of your students talk to The New York Times about your confusing program), confusing profit with personal income creates an environment in which every cost is accounted for against the money you use to pay your bills, buy your groceries, or go on vacation.

When the profit of our businesses becomes confused with our personal income, any choice to invest in the future has to be weighed against our own personal financial needs. What software we purchase, what wage we offer to a new hire, what policies we set around refunds—every decision has the potential to impact how much money we have in our pockets.

Just like an overpaid CEO trying to please stockholders, we are tempted to squeeze “profit" out of our operations. Sure, it looks like taking care of ourselves. It looks like getting "paid what we're worth." But what we're really doing is robbing ourselves of a more sustainable future.

To solve this, we can borrow Drucker's analysis and see our personal income (or owner's compensation) as a cost—one of many. Our businesses must generate enough revenue to cover our costs—including the money we need to make ourselves—before any surplus can be declared "profit." Revenue must also cover the costs of future needs. That includes costs such as ongoing product improvement, additional staff to increase capacity, and improvements to customer experience. Again, these are real costs that need to be accounted for.

To return to that $18,000 coach training investment, I want to believe that a price tag like that is a sign that a business takes these costs seriously. Unfortunately, as the example in the Times article illustrates, this is often not the case. People charge $18,000 because other people will pay $18,000—not because they value the integrity or sustainability of their operations, let alone the customer experience. I think it's perfectly reasonable to expect that an $18,000 coaching program will have well-organized materials, clear pathways for support, a straightforward schedule, discernible criteria for certification, etc.

These are costs. They're costs that mitigate future risks and provide for the company's operational integrity into the future. I'd go so far as to say they're non-negotiable. Either you pay these costs with money, or you pay them with your time. Respecting these costs is a matter of care. Ignoring these costs to squeeze out more "profit" (because profit is confused with personal income) is unsustainable long term.

A Truly Sustainable Business Model

Now that we've considered why what we know as "profit" is better understood as the costs of future operational integrity and why we must stop confusing personal income with profit to properly invest in those costs, we must turn to what's required for a truly sustainable business model.

The first thing to know is that a well-compensated owner and an under-compensated owner can both run equally unsustainable businesses. The well-compensated owner may forego key investments to keep their compensation sky-high. The under-compensated owner may make key investments without considering their own needs. Either way, the gears of both businesses will eventually grind to a halt.

Kate Tyson recently wrote about owner's compensation through a humane and expansive lens. So, for more on that, check out her piece.

Rooting around in compensation is an easy way to figure out any gap between what you say you value and what you actually value.

— Kate Tyson, “Getting Paid"

What is a sustainable business model?

A business model is (1) a system for creating, delivering, and exchanging value and (2) a system for meeting needs. A sustainable business model is one that meets present-day needs while creating safeguards against future risks and pathways for future opportunities. Just because a business generates a lot of revenue doesn't mean it has a sustainable business model.

An underpaid owner tends to use their own surplus effort to get a company off the ground or keep it afloat. A highly compensated owner with an unsustainable business model extracts surplus effort from their staff (e.g., treating a virtual assistant like a director of marketing) and/or their customers (e.g., denying refunds to an underdeveloped coaching program). Both of these models of unsustainability are normalized in our economy.

The self-exploiting, underpaid owner is familiar to us as the proprietor of the Main Street bookstore or taco joint. They work constantly—always at the store when the "open" sign is up, then working from home on bookkeeping, purchasing, and other administrative tasks. In the US, we revere this person and applaud them for their persistence.

The highly compensated owner who exploits their staff and customers is, well, like just about every CEO of a publicly traded company. These CEOs don't make 344 times the wage of their average employee because they make those businesses run better. As I mentioned earlier, they make that much money because they successfully create the illusion that shareholders want to see. Sometimes, that might mean the business runs better. But often, it means that the company becomes one with a toxic work environment that makes a not-so-good product.

In its simplest form, a sustainable business model must generate enough revenue to cover all costs—current and future. To do that, it must balance the associated costs of its capacity and volume (e.g., the number of goods sold) with the price it charges. And that's where we run into the next issue.

If you live in a country with a consumer-driven economy, you're used to purchasing a wide range of goods for very low prices. The companies that sell these goods are often very "profitable." But are their business models sustainable? No. Of course not.

Our consumer expectations impact how we run our businesses.

No matter how conscious your consumption is, you buy wildly underpriced crap nearly every day. When I say "underpriced" what I mean is that many of the goods we buy don't reflect the costs of producing, selling, and delivering them sustainability. By outsourcing production to countries with fewer labor protections, shipping goods in resource-intensive ways, and underpaying workers at the point of sale, companies offer us their goods for a bargain.

Cheap clothing is as good as any example. So let's take a closer look at t-shirts before we get back to what this has to do with the kind of prices we find in "leading life coach schools" and other "online businesses."

T-shirts are wildly underpriced in most places they're sold in the US today. Every component of the average T-shirt is produced under miserable conditions, and every aspect of its distribution and sale is also miserable. The price we get used to paying is the price made possible by this unsustainable system of production, distribution, and sale.

Since we’re accustomed to paying these low prices, we can experience sticker shock when we arrive at the website of a company that sells more sustainably made t-shirts. A simple t-shirt at American Giant, which produces clothing made from American-grown cotton and sewn in US factories, retails for $50. In contrast, as of this writing, you can purchase a "similar" organic cotton t-shirt for $12 from The Gap.

Now, there are all sorts of reasons that buying a t-shirt from The Gap makes sense—not the least of which is the price of health insurance or your rent. We all make the best decisions we can with what we've got to work with. There is no ethical consumption under capitalism, after all. So, no shame from me if you buy your t-shirts from stores like The Gap.

There are more t-shirts in the United States that cost $10-20 than t-shirts that cost $50 or more. For many of us, that means we associate the average t-shirt with a “value” of $10-20. When we see a $50 t-shirt, we might think, “Oof, is that really worth it?”

The value we associate with the t-shirt is about the product itself and what we want from it.2 We don’t think about the human and non-human systems that produce, distribute, and sell the t-shirt. We could see value as originating with the labor required to get the t-shirt into the store or website for us to purchase. We could include in that value the resources used to create and ship the t-shirt. We could even factor in the impact that process makes on the environment and community.

But we don’t. Not really.

We think about value—and, with it, price—as what a product is going to do for us.

Is the t-shirt going to make me look good? Feel good? Will the graphic on the front represent my identity? Will it help me fit in or stand out?

Of course, the companies that produce, distribute, and sell the t-shirts have to cover their costs. But they also price the final product based on consumer expectations rather than production value. Some brands can (and do) influence consumer expectations of price through their brand positioning or item descriptions. However, many other brands manipulate the cost of production so that they can meet consumer expectations of price while maintaining a healthy "profit" margin.

So yes, we get what we pay for. We pay what we expect, and companies suppress wages, overuse natural resources, and degrade the quality of goods to make that possible. We learn to value a good because of what it can do for us rather than the time, energy, and care that went into creating a product (i.e., we fetishize the commodity).

It might seem like a stretch to compare an underpriced t-shirt to an $18,000 coaching certification, but hear me out. It's tempting to scoff at the outrageous price of coach training. But when compared to other career change solutions (e.g., a new college degree, skill certificate, or graduate degree), its price is pretty standard—if not on the low side. Coaching schools offer a new career, even a lucrative one. They promise to equip you with valuable skills and get you started on the path of business ownership.

As long as we stick with the potential value a prospective coach feels they'll gain from the program, the price makes a lot of sense. And that's exactly what many companies marketing these programs bank on. They sell the promise with compelling copy and hand-picked testimonials—then drop the ball on delivering that value because their effort was in bolstering the illusion of value rather than the infrastructure required to realize it. The program is a $12 t-shirt that looks like what you want to buy but fails to satisfy after just a few times through the wash.

To get what we pay for—or, to ensure that what we offer is “worth” the price—the question we need to ask is whether the price covers the costs associated with meeting all stakeholders’ needs. Does that price cover curriculum design? A proper learning management system? The necessary support for someone embarking on this kind of skill-building and career change? The compensation the owner/leader needs to support the program?

If you think, 'Woah, baby! That sounds expensive!' You're right. It is expensive. Those costs really add up. And that's exactly my point. It costs a lot of money to provide appropriate (at least in my opinion) infrastructure for programs like this. That $18,000 should afford the participant exactly that kind of infrastructure, but if we're to believe the Times article, as well as countless other exposés and anecdotes, this is often not the case.

As I mentioned at the top, my issue is not with this price. It's with what this price doesn't seem to buy. It buys the possibility of a new career but not the care or concern of the company marketing it. It buys the credentials of a "leading life coach school" but not the training to back it up. It buys the momentary boost of excitement that comes from investing in yourself but not the long-term confidence that you're moving toward a sustainable future.

To be clear, I'm not suggesting that a life coach school (or any other high-ticket program) has to promise results. It doesn't have to guarantee success. But it should have done the due diligence to ensure that its participants have the best chance of achieving what's been marketed to them.

Due Diligence

So, how do you figure out what you need to make your business model sustainable and appropriately provide for the customers or clients you work with?

Start with your owner's compensation.

Again, read Kate Tyson's piece for some critical points to consider. But I always start with owner's compensation because it's a variable we can use to determine other components of the business model, including volume and price.

If you need to generate $90,000 per year in owner's compensation but the business model you've designed can't readily get you to that number, you're on the fast track to exploiting yourself and others. If you're going to take care of your customers or clients, you need to take care of yourself.

Make operational integrity part of the offer development process.

Whether you've got an offer you're ready to refine or you're developing something new, ask yourself:

• What would it look like to deliver this value with full integrity?

• What needs to be included in the package to feel like you've given your customers the best shot of getting what they paid for?

• What support do you need to fully support your customers?

Then, consider your operating budget. What will it cost to offer this product or service? Where will that money come from?

Start small.

There's nothing wrong with not knowing what a program or service requires when you start to conceive it. As long as you're giving it care and thought, you're going to come up with a good working working hypothesis.

But a working hypothesis isn't something you offer to thousands of people. Until you have direct experience with what it takes to deliver value with integrity, stay small. That can mean you chop your idea into pieces and refine them one at a time. It can mean you keep the volume of customers you serve to a minimum so you can personally manage their experience. It probably won't mean keeping the price low because you'll need to cover the costs of starting small and delivering an exceptional experience.

You can always work up to a higher capacity or volume. But once you’ve earned a reputation for providing a lot less than what you promised, you’re sunk. Trust me.

Learn and adjust.

You'll misjudge costs. You'll run into problems or needs you didn't expect. You'll figure out you need to hire someone you've never hired before. That's great. Learn those lessons. And adjust your operating budget. Make sure that the price you're charging and the volume you can accommodate match up with the true costs of operating.

It's also possible that part of what you learn is that people don't want to pay what's required to deliver your product or service in a way that fully covers costs. That can be a hard lesson to learn. It might mean throwing in the towel on that offer. But smaller adjustments to the offer, the price, and the business model behind it all might make it work. Just know that the equation doesn't always work out the way we'd like it to.

The Bottom Line

Doing things right, doing things well, often costs a lot. As consumers, we've learned that we get what we pay for—for good or for ill—except when we don't. We can and should try to discern whether a high price is justified by the operational integrity of the company that’s charging it.

But as business owners or independent workers, we have a greater responsibility. We have a responsibility to ourselves, our teams, and our customers. And that responsibility often means charging a price that’s higher than we’d like so that we can cover the true costs of doing business—and doing it well.

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