If two people meet and shake hands with each other, how many handshakes are there? Easy question, the answer is one.
If three people meet, how many handshakes are there? Three, are you with me?
If four people meet the answer is six, now you need to think about it.
As the number of people goes up the number of handshakes, (or interactions) also climbs. A meeting of 20 people needs 190 handshakes. A lot of sweaty palms. The number of interactions increases much, much faster than the number of people. Interactions increase exponentially. The graph below shows how it pans out.
Why is this important to your business?
As the number of things you sell (or service or produce) increases, the number of interactions also increases. Those interactions show up as:
- The number of customer segments
- The number of management decisions
- The number of call scripts
- The number of telephone routing options
- The number of system interfaces.
- The number of rework loops
- And, and, and…
All of those interactions cost money. So as the range of things you try to service increases the cost of servicing also increases.
Exponentially.
Now for a couple of assumptions and a bit of accounting (mostly painless):
- If every extra product you service makes you extra revenue
- And every extra product cause more interactions
- Then your interaction / complexity costs increase exponentially (like the handshakes)
Before long your profits won’t look that rosy
Of course, it is easy to drive a coach and horses through this argument.
- Not all costs are interaction costs
- Some costs are fixed
- Some costs are variable
- Some costs are semi variable
- Not all products generate the same revenue
Here are three things you could do to see if the arguement holds true in your organisation.
- Do some operations analysis and see if you can find a real world example
- Put some sensible cost assesments together
- Challenge the profitability of that extra line extension
Image by freakapotimus
Read another opinion
The arguement would hold true if all of the costs were “interaction costs”. I suspect that this is quite unlikely. Whilst these costs may be exponential and therefore in theory catch up in the end causing negative profits it is a question of how long it would take.
Many internet businesses specialise in managing the long tail of complexity. Take Amazon for example. They are making plenty of money by all accounts
But Amazon are the masters of process improvement aren’t they? If anybody can manage a long product tail they can. They make everything the same.
Try this link http://techcrunch.com/2011/02/13/bye-bye-long-tail/
Hi Mike, thanks for the comment. I think Amazon is a great example, but I see it slightly differently. They do have a massively complex line / range, but seam to do everything else they can to simplify things. I always use the same user name on the same web site, they always send me items in the same box…
I think the real point is to make sure you know what is important to your customers then simplify everything else.
Nice post, the handshake explanation is a nice way of showing how interactions work
Pat
Actually the Amazon’s 2011 results proof the point of the handshakes. Both 2011 operating margin and profit are dismal at Amazon and continue to decline YoY, as they have expanded their product lines endlessly.
.Alfonso
Very interesting Alfonso, thanks for pointing that out. I guess if they can’t manage it there is very little hope for the rest of us.
JL
I think Steve Jobs understood your second point — more products does not necessarily equal more profit