Dec 13, 2021 | Customers, retail
A dictionary will define price as something like: “The amount of money for which something is sold’
Pretty obvious.
However, price can mean many different things to different people in different contexts.
Years ago, I ran a food manufacturing business that sold product through multiple distribution channels. Supermarkets, route trade, distributors, food service, direct via our own vans, and export.
The pricing architecture had a common starting point, the ‘List price’ after which everything changed depending on a wide range of factors such as: the relative power of the channel, volumes, payment terms, negotiated promotional and incentive programs, supply and demand at any specific time, geography, variable freight charges, seasonal factors, clearance prices, rebates, and others.
Exactly the same products, subject to a whole range of variations, both formulaic and negotiated.
In that complexity, how do you define what the ‘right’ price is?
At one point we made the attempt to calculate the actual price based on the net cash flow from the products and customers. In the days before flexible digital tools, this was a brain buster, and consumed too much time and effort to deliver a return, but was a good idea at the time.
Added to the complexity which discourages most from developing the understanding necessary to optimise whatever the net price ends up being, is the impact of unintended consequences and the channel conflict that is almost inevitable.
For example, the small retailers we serviced saw their competitors as the supermarkets and were very noisy indeed when they could buy a case of product at Woolies cheaper than they could buy it direct or via a distributor. They did not care about the nuances of our pricing architecture, or the fact that they might buy a case, and a supermarket buy multiple truckloads. Their concern was serving their customers by not having them go to Woolies for cheaper prices, while remaining profitable.
As a young bloke doing the backpack thing around Europe, I stayed at one point for a few weeks on a small Greek island. On the occasions a cruise ship came in, the retailers of all types simply substituted one price list and price display for another, somewhat more expensive. The locals knew not to buy that day. Amazon takes that flexible pricing strategy to the limit with its use of your browsing and purchase history to automatically set the price their algorithms indicate gives them the best combination of the purchase being made at the maximum margin.
So, what is the right price?
Whatever you and the buyer who completes a transaction determine it to be, in those circumstances, on that particular day.
Dec 8, 2021 | Governance, Management
It is bonus time again, approaching Christmas. Many businesses have some sort of bonus scheme that matures at this time of year and are wondering if it is worth the effort.
Does it give you a return on the investment of time and money, or is it just an expected part of employee’s salary? Does it have the potential to result in disgruntled employees when they do not get as much as they expect or think they are worth, or worse, are angry that someone has got more than them?
Both are very common problems.
Conceiving and managing a bonus scheme is a really tricky management challenge.
We tend to give bonuses with little consideration of the psychology behind what makes them work, under what circumstances and in what contexts. We tend to take the easy way, which is just to tie it to a combination of increased revenue, some dodgy assessment of performance done by the manager, and profitability.
If you have a bonus scheme and want to see how they work best, go down to your local club that has pokies, and observe those playing. Compulsive, repetitive, continuous, despite knowing in the long term they cannot win, but the short term, they just might. This is the sort of behaviour that if mirrored in your business may be very productive in the short term, and destructive in the medium to long term.
Context is very important. For tasks that are repetitive, often referred to as ‘left brain’, financial rewards do increase productivity. Conversely, once an element of ‘right brain’ the source of critical thinking, creativity, nonlinear outcomes is required, financial rewards not only do not increase productivity, but they can impact negatively.
A bonus scheme that acknowledges these differences, and delivers has five parameters you need to consider, and work with to produce the best combination for your circumstances:
- Type of bonus. Money or in kind? Money is usually the default, but in kind can be a powerful motivator, and is less likely to be dismissed just as part of the salary package. You could offer a dinner out with their partner, gift vouchers, a cruise, some local adventure, there are many and varied options. Most will be more effective than just money in most circumstances.
- Eligibility. Who is eligible, how is the eligibility for the bonus to be measured, collated and communicated? Is it for the individual, the work group, or whole company, is there a qualification period, is it the same for everyone irrespective of rank, or is it on some sort of sliding scale? A field of landmines to be navigated in making those choices.
- Measurement. Is the measurement quantitative, qualitative, or a combination of both? What are the administrative processes that will manage them, and keep it consistent? How transparent will the results be?
- Frequency. What is the frequency of the bonus? Is it monthly, quarterly, annual, on an agreed timetable, or are the time lapses between bonus occasions random, as are the rewards you get out of a poker machine?
- Reward type. Are the rewards themselves random, or against a sliding scale of value. Usually this will be cost, but when giving in kind bonuses, what is value to one person may not be to another. For example, a former client who was an avid racing enthusiast offered time in a go cart in the west of Sydney as a bonus. To several of his employees, the thought of racing a go cart was as far from a bonus as they could get, the thought of winning was a disincentive.
There is a huge body of psychological evidence underpinning the drivers of behaviour, and we are learning more every day. The best known are Ivan Pavlov, who recognised in the late 1800’s that specific behaviour can be stimulated by a cue that the ‘subject’ associates with the behaviour. You see this every day, as people respond to such things as a ringing in a theatre to announce the end of interval, the traffic lights at the end of your street, and so on. It is a learned behaviour in response to a cue. The second is B.F. Skinner, who in the 1950’s recognised that variable rewards were more powerful than those that were known, aka, the poker machines. More recently, Daniel Pink has written extensively about the mismatch between what science knows about motivation, and what business does.
Header credit: Once again, the wisdom of Dilbert graces the header. My continuing thanks to Scott Adams for creating the cartoons that explain my thoughts.
Dec 6, 2021 | Change, Innovation, Leadership
The old way of thinking and working in silos, based on organisation charts, is gone.
The key commercial question now is how to develop and commercialise innovative solutions to problems faced by individuals, and the wider community, faster and more efficiently than others.
We all know that we work better in small groups, differently but better, more productively. The problem is we have had imposed on us the structures originally conceived to enable scaling from cottage industries to mass manufacturing, where the benefits of scale outweighed the transaction costs incurred.
We have now reached a point where the worm has turned.
The transaction costs are greater than the scaling benefits, because of the transparency enabled by digital.
The nasty covid pandemic has accelerated the process of digitisation to the extent that we have consumed a decade or more of change in a year or so. Some have not made the change, and long for the return of the ‘normal’ way before covid. However, the truth is that we must go forward, we need to accommodate the new world as it is now by the way we collaborate.
For the last 30 years we have struggled with the growing inefficiency and resulting lack of engagement of employees down the organisation chart, driven by the remoteness from decision making.
We tried to fix it with various forms of matrix organisation, but we approached it from the old mindset of accountability and responsibility. ‘How can I be responsible for something over which I have no control????’ This question has loomed large on many occasions.
Matrix organisations with a silo management mentality do not work.
We need to embrace not just the ‘radical transparency‘ espoused by the likes of Ray Dalio, and Atlassian where it is a core value, but ‘radical adaptability’ to prosper.
Giving control and accountability for outcomes over individual workplaces to the people in them is the new way. Finding ways to speed up the process of change, to be able to adapt and innovate has become the path to commercial survival. We have been talking about it for ages, but trying to build it from a siloed mentality starting point will go nowhere.
The ‘radical transparency’ of Dalio will not suit everyone. You need to be a resilient personality to take and grow from the negative feedback. Recognising this, Dalio only hires what he calls ‘arseholes’, those who are resilient enough to take the feedback and learn from it.
A business with a culture of being ‘nice’, polite, keeping ideas and views to yourself, and not articulating those views and ideas to others, leads to the politics we see in most organisations. Things that are thought, and said privately, that will not be said publicly are corrosive of trust and collaboration.
Radical transparency needs an entirely different mindset.
That different mindset can lead to ‘radical adaptability’, as any idea is a good one until it is taken down by a better one, or by finding some flaw in the argument. By another name, in other circumstances, this is ‘Evolution’ or ‘Survival of the fittest’, and John Boyd’s OODA Loop at work.
Accountability & candour lead to collaboration, and collaboration is the key to growth in this new, digitised world, as it compounds effort and outcomes.
Header cartoon credit: WWW.Gapingvoid.com Highlights the challenges of enabling transparency. It is usually great for others, and in principle, but not for me!
Dec 3, 2021 | Leadership, Management
How often have you heard the question ‘tell me about your weaknesses‘ in an interview of some sort?
As a corporate bloke climbing the greasy pole I heard it a lot, and it has popped up from time to time in the last 25 years I have been consulting.
It always struck me as the question disinterested people would ask, when they ran out of sensible questions.
However, all is not lost.
A recruiter I know looking to fill an interim role called me, and we got caffeinated, during which he expanded his view that I was partly wrong.
A part of his process is to define the four crucial ‘Must haves’ for a role he is filling. Towards the end of an interview, he asks the candidate to rate themselves on the 4, best to worst.
It is a more sophisticated way of asking the dumb question, and engages the candidate in a conversation about their self-confessed strengths and weakness in the context of what is important to the role, after the interviewer has had the opportunity to make their own assessment. Any significant divergences can be further investigated.
If I was interviewing for a B2B sales manager, I might have the following 4 ‘must haves’ :
Coaching – How do you work with front line sales people to help them improve their performance?
Attention to detail – Are you a detail person, or a ‘big picture’ person?
Creativity – Are you someone who finds creative solutions to problems, or are you best communicating and working with an established process.
Growth – How good are you at finding new avenues to grow, by better leveraging the resources you have?
Recruiting for a senior financial manager, or CMO, would require a different four questions, but you get the picture.
I was not the right person for the job my recruiter friend had open, we both knew that, but I came away from the conversation with a great insight into a common question, one that I have sometimes had difficulty answering politely (I once responded with ‘you will have to hire me to find out’. Did not get that gig).
Dec 1, 2021 | Branding, Innovation, retail
Promotional pricing is often the only tool used to generate volume. Ask any salesperson ‘Why’ and they will say ‘because it works’. Go next door and ask a marketer, and their response is more likely to be something like: ‘to encourage non-users to try the product, and if they like it, to come back, become loyal customers’
Therein lies the paradox. The well intentioned promotion of a brand results in killing it.
By promotional pricing the product down, you reward current users who would have bought at full price, while not being effective at persuading potentially new users to try for any reason other than price.
The power of habit is huge in routine purchases, like the ones we make every week in the supermarket. A regular consumer is not necessarily loyal to a particular brand, they are more unthinking, more habitual than most marketers will concede, especially to themselves. If a choice is to be made to change brands, that decision takes up cognitive capacity better dedicated elsewhere, and involves risk, which we are programmed by evolution to avoid.
To change habits, we must change behaviour, an extremely challenging thing to do.
Psychologists have found over and over, the best way to change habits is to change little things, one at a time, progressively leading to the changed behaviour that in its turn becomes a habit. Each stage takes 3 or 4 times to become sufficiently entrenched to start to take on the characteristics of a habit.
Back to our supermarket.
Price promotions follow each other on a weekly basis. No brand is given the time to establish its routine purchase as a new behaviour, as there is a price promotion of an alternative brand every week, often several at the same time.
The net result is that for every product on shelf, the discounted price becomes the ‘real’ price, which becomes less and less relevant as consumers are trained by the retailers to think that the discount price is the real price for the products and the categories.
That, in a nutshell, is why we are seeing less and less brands on the supermarket shelves, and as a direct result, less and less innovation, as suppliers have little chance of recouping development costs in such an environment.
