The Price is Right

December 22nd, 2014

I want to talk with you about pricing in the context of a company led by a true entrepreneur.

The case I present involves a deeper issue that has become endemic: disrespect.  I am no social scientist so please take my comments as specific to the interplay between the true entrepreneur and the highly trained professionals.  The highly educated risk hubris, and it arises from two assumptions.  Stated in plain language: 1) only people like us know what is good and best; 2) those not so trained are incapable of right decisions and must therefore be instructed in the execution of limited responsibilities.

Years ago I overheard (yes, eavesdropping) a conversion between 6 mid-level managers of a company in which several of our clients had major investments.  They were discussing how to deal with their suppliers who were “too stupid to do the right thing”.  If that had been so, I thought that the real stupidity was persisting in doing business with such stupid suppliers.

Because of that discussion, I pulled reports on this firm going back 10 years and had my staff do an analysis.  At first pass, we found nothing notable.  I ordered a second pass to test if the company was an efficient producer.  The findings were startling.

We called our clients suggesting this company, and their investment, would crash once people realized the glamour of the investment was now just that of memory.  It did crash, and worse than we estimated–showing once again that facts are important but less so than the reaction thereto.

I have another story that begins similarly.  The owner of a company said he wanted to sell.  Asked why he replied, “Everyone around here thinks I am stupid”.  (Notice the similarity is the presumption of stupidity in those on whom we depend.)  It was a clash of views between an owner who was a true entrepreneur and the professional team working for him.

In fact, much of what I do is intended to minimize this sort of misjudgment.  Part of it is meeting the pro on his terms; part is cloaking the wealth creator’s [entrepreneur’s] ideas which fuel their decisions.  They are unusual thinkers.  I believe they are misfits, unreasonable people; but all progress depends upon being unreasonable.

Pricing in innovative content is challenging.  In an array of products, some will be little more than commodities, and others will have varying degrees of innovative content.  Even where innovation changes customer value, it depends on application.  As you know, conventional pricing is based on cost, price to win, last price, or the P&L.  The advantage is, allowing for the acceptance of underlying assumptions, it offers objectivity.

But what an idea is worth is subjective.

I proposed a means of strengthening the owner’s position relative to his employed naysayers.  When he gave us the go ahead, he said, “The check is in the mail.  I don’t think it will work.”  To get done what we were hired to do we would need more than solid thinking, economic understanding, and jaw boning.  We would need numbers.

What a change from my first work on these things back in the 60’s.  In 1973 our out of pocket cost of $100/hour for computer access.  Our first serious computer was $300k.  Small business did not have internal data that could be cheaply accessed.  By 2000 all that had changed.  Outside data was cheap.  Horsepower, memory, and software were cheap.

This owner was courageous and far-sighted.  He overrode (rolled over?) his team by hiring us.  Together we found a way to identify and charge true market price for his innovative content.  The results were astounding.  It was our genius, but it was his value proposition that, his product, that brought our findings to market.  That value not primarily ours, it was product of that misfit mind and force of personality.

This was not a company in trouble.  At the start of our project, it was in the top 25% of its industry.  Yet the additional positive effect of “our” improvement on capital investment, employment, and wages should not be missed.  Oh, and not to forget, profits.

Part 2, next month