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The Classic “Purpose of a Business” Might Actually Put You Out of Business
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This article was published on January 23, 2010. So far, 3 people have left their thoughts. Share your own thoughts.
It’s surprising to me how often I see all the classic definitions of a business that don’t define or describe a business well at all. If you follow them, they might even put you out of business.
Most of the better definitions still only define or describe ONE PART of the purpose of a business, but not the whole enchilada. Examples of the most common definitions I’ve heard over the years:
The purpose of a business is:
- to make money.
- to fulfill a human need
- to serve the stakeholders.
- to provide goods and services to the population.
- to maximize shareholder profit.
The Purpose of a Business must create sustainability or it’s not inclusive enough. If you focused solely on any of the above, you would go out of business. Peter Drucker has the most famous definition. But the quote from him I see most often is only 1/3rd of the purpose of a business: Drucker – “There is only one valid definition of business purpose: to create a customer.” Follow this slavishly and you will go out of business.
I’ve also occasionally seen an expanded version of that which is closer and captures 2/3rds of the purpose of a business. I don’t know if this is truly Drucker’s statement or someone has added to it: Drucker – “The purpose of business is to create and keep a customer.” I have also heard this with the words “acquire a customer”, or “retain a customer”. But a focus on these two things will send you out of business, too.
Here’s mine and what I believe to be the most inclusive purpose of a business:
The purpose of a business is to acquire and retain customers profitably.
The reason this is the best definition of a business is that it is inclusive of all the three things that will keep you in business for the long haul. 1) acquire, 2) retain and 3) be profitable. The others all leave at least one of these three out.
Acquire
If you focus only on the Drucker definitiion of creating customers but you don’t work hard to retain them, you create a revolving door. People buy great marketing only once. Acquisition isn’t enough, you must work hard to retain by having a great product/service and the best customer service.
Retain
If you focus only on a great product or service (retaining), but don’t have a great system to acquire, you fit in the category of a lot of businesses who think that because they make a great chair somebody ought to buy it. It’s a high quality way to go out of business.
Be Profitable
But even if you’re great at both acquisition and retention and you don’t set your pricing to be profitable, you’ll be out of business very quickly. And conversely, if you’re simply very profitable at the expense of acquisition or retention, word of mouth will quickly put you out of business.
Focus on all three – acquisitions, retention, and profitability. Check your business against these three and shore up the one or two that is keeping you from creating a great business.
By the way the purpose of OWNING a business is radically different than the purpose of business in general. People get these two things confused and it significantly endangers their ability to grow the business they always dreamed of. Next week will talk about the purpose of OWNING a business.
Add Your Own
Thoughts
Tim Walker
01/23/10
Good thoughts, Chuck. And I absolutely agree that (a) Drucker’s definition leaves substantial gray area, which is certainly damaging if (b) we “follow this slavishly.”
In other words, for anyone who requires a definition that can be followed slavishly, yours is certainly better than Drucker’s, because it’s clearer.
But — at least in my reading of him — by no means was Drucker ignoring the 2/3 of the equation that you aptly illuminate. He spent too much time emphasizing the importance of (1) creating sustained value for customers and (2) creating sustained enterprise value — whether defined as profitability (for profit-seeking enterprises), positive social change (for nonprofits), or some combination of goals.
My point: Drucker’s guideline that you quote here does beg the question of what “create a customer” means. If we take a narrow view of that — a dictionary-definition view that requires all of the terms to be immediately understandable out of context — Drucker could have done better. But if we understand Drucker on his own terms, in context, your definition and his aren’t at odds. Quite the contrary, they go hand in hand.
One more note: I think we could find examples to rebut your thesis that “People buy great marketing only once.” The marketing work of Apple and Nike comes to mind. But — and here we’re in line with a key thought from Seth Godin — it’s a heck of a lot easier to produce great marketing when the product you’re selling is great. And it’s worth noting that great repeat marketing lives in symbiosis with great product / fulfillment / service — each works in symbiosis with the other, not in a silo.
Chuck
01/23/10
Great comments, Tim!
I would definitely agree – if you take the whole body of Drucker’s work together, there is no question he taught “acquire and retain profitably”. But words are important and when he says the only valid definition of a business is to “create a customer” he is not adequately describing his own belief about the purpose of business. We live in a sound-bite world and I’m just proposing that the sound bite be all-inclusive and still short. Most people aren’t going to study Drucker to see what he really meant, they’re going to take the sound-bite and run with it. I just want to give them a clearer sound-bite.
Re: “People buy great marketing once.” – Probably needed to amplify on that. What I meant is if you have a great marketing campaign that does a good job of acquiring, but you don’t back it up with quality products/services that help you retain, people won’t come back no matter how great your marketing is – “fool me once, shame on you…”. Apple and Nike have both great marketing (acquire) AND great products and services (retain), which you described so well as working “in symbiosis” with one another.
David Sandusky
02/05/10
Brilliant and useful post/advice. What I hope fascinates business owners about business is how many touch points are required for a sustainable brand. Have a mission? Great! Now what?
Chuck
02/06/10
David,
I would agree. There a lot of touch points we don’t address in business that we should, and a few that we can go 30 years without ever addressing – 1) Why am I in business? 2) What is my written strategic plan? 3) Do I have written processes? and 4) Where are the Outside Eyes on my business? Most businesses never address these four and never grow up as a result.