A Lesson on Layaway

People struggling with their post-holiday debt servicing may not be feeling celebratory, but at least retailers are grateful.

In the latest issue of The Futures Five, a bi-weekly newsletter from the consulting firm The Futures Company, the idea of “layaway”— used synonymously with installment buying—gets cited as one of five hot marketplace trends worth noticing. “Layaway was the unexpected hit of the holiday season,” notes the newsletter. “As The Wall Street Journal reported, retailers such as Toys ‘R’ Us and Wal-Mart expanded the practice; Target even blamed its slow toy sales on the lack of a layaway program.”

Today, much of the world finds itself working off a debt-binge hangover, but installment buying remains a linchpin of our modern economy. Peter Drucker also liked to cite it as an example of how innovation can take many forms.

“There is no greater resource in an economy than ‘purchasing power,’” Drucker wrote in Innovation and Entrepreneurship. “But purchasing power is the creation of the innovating entrepreneur.”

As Drucker recounted, American farmers, who “had virtually no purchasing power in the early 19th century” and therefore couldn’t buy farm machinery, completely changed their behavior when harvest-machine inventor Cyrus McCormick came up with installment buying. “This enabled the farmer to pay for a harvesting machine out of his future earnings rather than out of past savings,” Drucker explained, “and suddenly the farmer had ‘purchasing power’ to buy farm equipment.” [EXPAND More]

How important was this particular innovation? Very. “Installment buying literally transforms economies,” Drucker declared. “Wherever introduced, it changes the economy from supply-driven to demand-driven, regardless almost of the productive level of the economy (which explains why installment buying is the first practice that any Marxist government coming to power immediately suppresses: as the Communists in Czechoslovakia in 1948, and again in Cuba in 1959).”

What it goes to show, as Drucker wrote, is that innovation “does not have to be technical, does not indeed have to be a ‘thing’ altogether.”

What would you say has been the most important innovation in service or process in the past 20 years? [/EXPAND]