Sept. 11, 2000

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Time: It Really Is Money

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Now think about these two workers and redo the calculation that compares the two ways of purchasing the book. For an average worker in 1999, a cost of time of $24 per hour (or 40 cents per minute) means that the 15 minutes it takes to get to the bookstore and back are worth about $6 and the two minutes spent online are worth about 80 cents. Thus, the total cost of the purchase at the store is $26 vs. a total cost of $25.80 online. For the average worker of 1999, it's a toss-up. But for the average worker of 1949 or 1969, it would have been no contest. Even if the IT infrastructure for online purchases had existed back then, a service based on online ordering and package delivery of books might not have been a success.

Once you begin to think this way, it may change your thoughts about the impact of E-commerce. If the cost of your time is $60 an hour and you have access to online ordering and home delivery of groceries in your area, but you still go to the store to buy your grocery staples each week, either you are one of those rare people who enjoys grocery shopping--or you need to rethink the value you place on your time.

Thinking about the cost of time also helps you understand details of online commerce that would otherwise seem puzzling. For example, if you thought that direct monetary cost is the only important component of any purchase, you might have expected to see more convergence in the prices for goods sold online. After all, it's easy to search out the seller with the lowest price. Why would anyone buy from a site that charges more? The key isn't loyalty in the traditional sense. It's that purchasing things online still takes time, and some vendors offer processes that save the buyer time. This advantage can arise partly because of familiarity. It can also be the result of careful attention to the small details of the user interface and to good execution at the back end. If you think the vendor might ship you the wrong book, ordering online will not look like a time-saver.

A few companies with IT-intensive business models realize that saving time for consumers is vital to their success. If you look at the leading business-to-consumer vendor, the leading Internet service provider, and the leading portal, you'll see that each has tailored its product to make the customer experience as quick and simple as possible. But many other companies don't.

Together, PC and software vendors offer users a package that's flexible and powerful, but makes far greater demands on the user's time than should be required.

Part of the promise of server-based computing is that it will bring dramatic reductions in the total time required for users of IT equipment. As businesses are belatedly learning, the largest cost of hardware and software is the employee time needed to use it and keep it running.

Pressure to economize on customer time will come not just from competitors but also from customers themselves. Once they've seen how quick and easy things can be, they'll grow increasingly frustrated with business as usual. Napster has shown millions of users how easy and quick online delivery of music can be. For these users, the problem with the position of the record companies isn't just that they try to impose a monetary fee on each transaction. The deeper problem is that instead of proposing a model that charges money to save you time, the record companies have insisted on a model that wastes your time so they can charge a fee. No matter how the courts resolve the narrow legal issues in this case, it's hard to believe that an industry with this kind of model can persist for long.

Because technological opportunities are so promising--and because we've developed sophisticated markets and social institutions that help us take advantage of these opportunities--income, wages, and standards of living will continue to increase in the years to come. Our children will have more of almost everything, with one glaring exception: They won't have more time in the day. As income and wages increase, the cost of time will continue to grow and so will the sense that time is scarce and that life proceeds at a faster pace than in the past. Despite the perennial claims of the technological Luddites, this isn't a sign that technology is failing us. On the contrary: It's a sign that technology is doing precisely what we want it to do.

Along the way, new opportunities will emerge for businesses to make a profit by charging a fee and saving customers time. Companies that understand this logic will shape the future of the customer experience.

Paul Romer is a professor of economics at Stanford University's Graduate School of Business and host of this week's InformationWeek Conference in Tucson, Ariz.

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