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Changing Values and Characteristics 247

facturers, was that none of the large established manufacturers saw any
possibility of selling a copying machine. Their calculations showed that
such a machine would have to sell for at least $4,000. Nobody was
going to pay such a sum for a copying machine when carbon paper cost
practically nothing. Also, of course, to spend $4,000 on a machine
meant a capital-appropriations request, which had to go all the way up
to the board of directors accompanied by a calculation showing the
return on investment, both of which seemed unimaginable for a gadget
to help the secretary. The Haloid Company—the present Xerox—did a
good deal of technical work to design the final machine. But its major
contribution was in pricing. It did not sell the machine; it sold what the
machine produced, copies. At five or ten cents a copy, there is no need
for a capital-appropriations request. This is “petty cash,” which the sec-
retary can disburse without going upstairs. Pricing the Xerox machine
at five cents a copy was the true innovation.
Most suppliers, including public-service institutions, never think of
pricing as a strategy. Yet pricing enables the customer to pay for what
he buys—a shave, a copy of a document—rather than for what the
supplier makes. What is being paid in the end is, of course, the same
amount. But how it is being paid is structured to the needs and the real-
ities of the consumer. It is structured in accordance with what the con-
sumer actually buys. And it charges for what represents “value” to the
customer rather than what represents “cost” to the supplier.

III

THE CUSTOMER’S REALITY

The worldwide leadership of the American General Electric
Company (G.E.) in large steam turbines is based on G.E.’s having
thought through, in the years before World War I, what its customers’
realities were. Steam turbines, unlike the piston-driven steam engines
which they replaced in the generation of electric power, are complex,
requiring a high degree of engineering in their design, and skill in
building and fitting them. This the individual electric power compa-
ny simply cannot supply. It buys a major steam turbine maybe every
five or ten years when it builds a new power station. Yet the skill has
to be kept in being all the time. The manufacturer, therefore, has to
set up and maintain a massive consulting organization.