Home > Articles > Business & Management > Finance & Investing

This chapter is from the book

Cost Orientation

Unfortunately, all too often managers become preoccupied with costs to the detriment of value to customers. With a cost orientation, managers pay minimal attention to customer value (Exhibit 1.8). According to Boyd Beasley, the senior director of customer support at Electronic Arts, the successful producer of video games, “In years past, we [EA] were very much a cost center operation and our vision was to come in on budget...We are turning the ship to be significantly more customer centric” by providing more services to customers and bringing them into the product development process earlier.22

Exhibit 1.8

Exhibit 1.8 Orientations

Reprinted with permission from “How Marketing Affects Shareholder Value,” The Arrow Group, Ltd.®, New York, NY, 2008.

There are at least two problems with a single-minded cost orientation:

  1. Cost reduction programs may lower value to the customer more than they lower costs.
  2. Cost preoccupation is often, but not necessarily, associated with low pricing strategies.


If lowering costs leads to an even greater lowering of perceived value, CVA® is being decreased, and the organization is contributing less to society and will, therefore, have a lower level of financial performance. Decreasing CVA® when lowering costs represents the hollowing out of a brand.23

During a hollowing-out process, because CVA® depends on the perceptions of customers, there may be a time lag between the lowering of costs and the lowering of perceived value. There is inertia in perceptions—customers may be forgiving at the first signs of lowered product or service value.

An example of how easy it is for managers to begin the hollowing out of a brand: Typically the author travels to China two or three times a year with a major US airline. In the past, they provided sandwiches in the middle of the trip—the time in the air is 14 to 15 hours so the sandwiches were welcome. Recently, the airline decided to eliminate the sandwiches, cutting back on their value to customers. Notice the price of a round-trip business class ticket is in the vicinity of $10,000; the cost of providing a sandwich perhaps a dollar or two. By cutting back on costs, they risk losing the entire fare because there are other carriers flying the same route that are not cutting back on the small comforts that make a trip bearable. Truly, the airline is following a policy of “penny wise, pound foolish.”

When the author mentioned the loss of sandwiches to a flight attendant, she said, “Yes, they are just getting very chintzy—and I am tired of reporting the negative passenger reactions. The managers don’t understand.” Perhaps it would be helpful if the cost-cutters were asked to experience a 15-hour flight sometime and learn how the world looks from a passenger’s point of view.

Incidentally, whenever the author sees one of this airline’s expensive print ads, he immediately thinks, “How many sandwiches is that ad worth?” Glossy advertising does not offset perceived product or service deficiencies—as eventually the top managers of this airline might learn. In fact, glossy advertising makes customers more sensitive to perceived value deficiencies.

One can see hollowing out actions all the time and everywhere. When a local bank promises wonderful service and a customer does not receive that level of service, perceived value falls even faster than any cost savings. When a chemical produces lags in their delivery, perceived value may decrease more than any shipping costs saved.

The time lag between when a cost is cut and when customer value falls can tempt a senior manager to cut costs because they can appear to be successful with a cost-cutting program as long as customers have not yet noticed the decline in customer value. Their successor will discover later that the cost decreases have eroded the customer value and brand reputation of the organization, compromising the brand’s power to generate revenue, profits, and cash flow, sometimes irretrievably.24

All cost reduction programs should be calibrated against the impact on customer value as perceived by the customer—value engineering from the customer’s point of view. Unfortunately, many organizations are cost-oriented because they do not know the perceived value associated with their product or service and, therefore, are unable to discover the impact of cost changes on value as perceived by their customers.

An infamous example of failing to consider CVA® is the Schlitz beer story. In the 1970’s, Schlitz was the number two brewer in the US. Concerned with their stock price, top management cut costs by using less expensive hops and reducing the time to age the beer. In the short run, profits increased and so did the stock price, but then customers started to realize that the Schlitz taste had deteriorated and they stopped buying the beer. Schlitz was never able to climb back to their number two position. It was a classic case of deliberately decreasing CVA® for short-term gain and consequently hollowing out a once strong brand.25


Organizations focused on costs often seem to focus on price-cutting strategies. As a result, they risk training their customers to be concerned about price to the exclusion of value and often incite price wars. The airline, telecommunications, and automotive industries include competitors that seem to have adopted this approach.26

There is usually only one winner of a price war: the customer. Of the companies involved in the price war, the lowest-cost producer may do the best; but their financial results may or may not be attractive. As demonstrated in Chapter 5, as prices are lowered, unit volume must increase substantially simply to maintain contribution.

Meanwhile, in such an industry, many customers become price-shoppers instead of value-shoppers. That simply intensifies the pressure to lower prices and accelerates the vicious spiral of price cuts. Price wars not only erode profits, but also train customers to expect the same prices and to assume that all products and services perform the same—even if that is not true.

Appropriate Costs

A preoccupation chiefly with costs can keep one from achieving an optimal strategy for all the reasons above. But the situation is even worse. As discussed in Chapter 5, many organizations do not even know their appropriate costs and, instead, use some form of average full-costing, which compounds the errors associated with a cost orientation.

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information

To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.


Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.


If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information

Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.


This site is not directed to children under the age of 13.


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information

If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information

Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents

California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure

Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact

Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice

We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020