Price is Right, Part 3: Torn Outside In

April 20th, 2015

For several years Tom, Jr. argued that not only do companies not know what is going on outside (as the owner in my story admitted), but that they don’t know what is going on inside.

I had tended to doubt his premise, although I knew the limits of management, recalling Munger and Drucker.  And yet here was the evidence: they did not know that those products showing the highest profits were those that would tend to support still-higher prices; they did not know that the lowest profit products would tend not to support higher prices, and in fact that price decreases and would be necessary to avoid losing the customer.  In the market they were exactly wrong and did not know it.

What made their business calculation so wrong?  It was a chronic adamant introversion — effectively “we know so we don’t have to look.”  This owner, like many others in his position, upset the ordinary rubric.

Some knowledge is so deep that there are no words able to describe it.  (God gives gifts, explain that or Him.)  One might say if we can’t describe it, then how do we know it is so?  People tend to try to resolve their discomfort and further their understanding by asking really stupid questions of like “How did you know [it would work]?” and “Why did you do that?”  “What made you think the customer would care [you didn’t ask, did you]?”

It is this owner’s skill–skill without explanation–that is outside the firm and outside so-called Best Practices.  It turns the inside on its head.

It was several decades ago I began searching for answers.  I wanted to prove and defend the better judgment: the owners’.  Some people are gifted enough not to have to paint by number.  Gifts are obvious once they are seen.  The burden should not be on the gifted to explain the source of their knowledge or conform to others’ methodological expectations; the burden is on others to support.

That his team couldn’t understand it [how he knew what he knew] does not excuse their failure to apply their skills to his support.  They were threatened by his unexplainable gift, so they denied the gift, even suggesting he was stupid.

Of course, his customers never once felt dissatisfied, much less threatened.

For 30 years I kept track of owner “oddities,” trying to understand the impact of giftedness.  I worked for these guys.  In fits and starts we developed tools to support them.  We fought off the attempts to “rationalize” them.

Notwithstanding, I still see no need for conflict over managements’ view of reality so long as it is subordinate to the person with skin in the game.

When I pitched the price-discovery project, I knew he was not yet rationalized.  He had been around long enough to have been tamed, but he wasn’t.

It was scarcely 10 years after outside data started to be available and affordable for our size clients, and therefore, my client was an early adopter of economic data mining.  It was great fun to demonstrate, to the consternation of the willfully blind.

I knew that if I proved the owner right, he and I would be able to follow the money.

I didn’t care primarily about showing the experts who was truly smart or wowing the uninformed with thrilling economic data discovery.  I just wanted to prove the reality of the owner’s gift.  It’s more than just a new set of better data.  What you need is the means to try different things, engage in trial-and-error, and measure the results of refinement.  It is the means of discovery, or the means of reaping the full reward for things already discovered.

Imbedded in the owner’s mind was a natural sense of positive asymmetry, identifying decisions that risked only small losses but had potentially big gains.  I had seen it play out with one major customer years before.  It was his to fix by trial and error. If successful the payoff was huge, but if not, the outcome was no worse than continuation with the option of dropping the product.  This is the exact circumstance in which his gift functioned.

Gifted people create superior products; customers prove superior products.  We tested the assumption by raising prices and watching for fallout.  Our client was not interested in a trade between volume and margin, a calculation which in the end is not provable.  Further, if the value differential is the impact of the gifted owner’s input, then the impact was likely to be uneven.  Some products and processes are close to his interest [gift], and hence get more attention.  Some products are priced up, and just as likely some are priced down.

In the end, there were no quantifiable losses of customers.  As prices rose, so sales rose and with flat overhead, the P&L showed the dramatic impact.  After a time it was enough for the owner to make his own determination.  He called me to say that he had examined everything and only one thing accounted for the tremendous gains in the past year or two: our work in pricing.  Giving me this credit signaled another phenomenon which I’ll write about in a future installment.

Vindication felt good.