You Get What You Pay For—Or Do You?
Thoughts on price, sustainability, and our due diligence as business owners in response to NYT's "They Spent Their Life Savings on Life Coaching"
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.
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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 One of the subjects of the piece had withdrawn $18,000 from her 401(k) to invest in a life coach training program but found the experience to be "a confusing and low-quality program of online lessons—one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.
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.