That’s right! People don’t buy products or services.

They buy a way to rid themselves of:

  • a pain
  • a problem
  • a challenge

Or they buy to fill:

  • a desire
  • a need.

They want solutions.

They also want

  • Courtesy
  • Friendliness
  • Honesty

If you give them these, they’ll choose you every time over anyone who gives less.

My old mentor Michael Phillips taught his apprentices that the whole transaction of the exchange of goods and services. should be the basic unit of observation. This is contrary to contemporary economic theory’s focus on the basic unit of observation as money (or its equivalent).

He got this idea from Dr. Peter Sherrill who was for 20 years the vice president of Field Research, the organization responsible for the prestigious Field Poll.

Michael developed and clarified this concept in his book Transaction-Based Economics: Small Business Lessons for Economics Theory (Clear Glass Publishing, 1984).

What I learned from Michael looks very much like common sense, once you understand it, yet most economists and small business owners find themselves completely unaware of the ramifications of this transaction-based orientation.

Here’s the gist, as I understand it:

The primary component of the “exchange of goods and services” that traditional economics tracks is price. This is reflected in many ways, but the most obvious is how focused our whole culture is on the ups and downs of the Gross National Product. GNP is used as a metric for knowing how well our country is doing economically. It is made up of the total costs of all exchanges made for the period observed. Those costs were all prices prior to being paid. So price is the fundamental unit of measurement in traditional economics.[FOOTNOTE 1]

In stark contrast to this, transaction-based economics, as I learned from Phillips, focuses on the transaction as the basic unit of economic observation.

Beyond just price, a transaction includes many important components such as:

  • education
  • information
  • quality
  • recourse
  • repair
  • service

The delivery of these components, good or bad, creates the overall “customer experience.”

External components of a transaction include several spectrums active in the local, regional, and national arenas, including:

  • The spectrum of Competition to Cooperation
  • The spectrum of General (or “mass”) Market to Specialty Niche
  • The spectrum of Weak Economic Infrastructure to Strong Economic Infrastructure
  • The spectrum of Social Concerns

Competition to Cooperation

This spectrum reveals the degree to which the businesses and social agencies of a “market” view competition as a driving force. The stronger their belief in and practice of cooperation, the more robust and successful they become.

General Market to Specialty Niche

This spectrum observes the degree to which businesses and social agencies of a “market” recognize the need to differentiate themselves from others in their market. When a high degree of specialization is encouraged and supported, most markets will thrive.

Weak Economic Infrastructure to Strong Economic Infrastructure

This is the degree to which a culture, society, or political body makes available the internal facilities of communication, transportation, distribution, capital, energy, and customers.

Social Concerns

This is the spectrum of social issues that impact an enterprise at the local, regional, or global level, ranging from the social aspects of economic concerns as well as actual social and environmental issues.

Table 1. Examples of Social Concerns.

Equal pay
Cloud hacking
Computer hacking
Identity theft
Monitoring Internet presence
Social networking
Affirmative action
Airport security
Hate crimes
Health care reform
Insurance mandates
Disaster relief
Global warming

Michael also taught us that if we focus on the transaction it’s much easier to see that economics, rather than being universal, is unique to the predominant culture in which it occurs as well as the culture of the individual enterprise. This includes the concept of “corporate culture” as used by organization development experts but, more importantly, it includes ethnographic culture. As Phillips put it “Chinese economics becomes different from American economics because the components of the Chinese transaction are different from the American.” (TBE, p. 2)


GNP includes not just the costs of what we consume every day, but all the negative costs as well. Things like repairs of our highway and bridge infrastructure, clean-ups of polluted sites, the cost of treating diseases that could be prevented, our many wars, the costs of hauling and storing our garbage in landfills, the pollution of our water tables by landfills or fracking, the clean up of oil spills, and recovering from natural disasters to name just a few.

Would you count those as a measure of your well-being, economically or otherwise?

Maybe, if you are one of the businesses that get paid for the goods and services involved.

If you’re not, though, then a GNP based on only the more positive collection of goods and services would be considerably smaller.

This may be a moot point, but it is worth remembering as a lesson teaching us to look out for the hidden costs in everything if we are to calculate true costs.