Episode #131: Free-Rider Friday—February 2017

Ron’s Topics

More Hokum

As a follow-up to last week’s show on Personality Profiling: Helpful or Hokum?, I came across an updated article by Annie Murphy Paul, author of The Cult of Personality Testing, a devastating book on the cult of these profiles.

She’s even more critical of them in this article than in her book.

“Personality Tests Are Popular, But Do They Capture The Real You?”, June 25, 2016, by Annie Murphy Paul

Dramatically Reducing World Hunger

“A hungry world no more,” by Kevin D. Williamson, February 22, 2017, National Review Online

An excellent look at how world hunger has dropped dramatically. Another great, untold story of the power of the free market to alleviate misery and raise the standards of living of the poor everywhere.

Robots Pay Taxes?

“Bill Gates: Job-stealing robots should pay income taxes,” from CNBC.

“The robot that takes your job should pay taxes,” says Bill Gates, Quartz, February 17, 2017.

Here’s the video of the Gates interview:

My only question is if Gates would have been a proponent of taxing Microsoft Office for displacing jobs, and slowing down the diffusion of the software?

Number One Job

According to the Bureau of Labor Statistics Survey, which conducts a survey every two years that extrapolates current trends in various categories of jobs, and predicts the growth over the next ten years, the top job growth, with 108% expected growth, is: Wind turbine service technician.

Of course, this entire industry wouldn’t exist without government subsidies.

Other jobs with expected growth rates from 43% to 27% include: Occupational-therapy assistants, physical-therapy assistants, home-health aides, commercial drivers, nurse practitioners, statisticians, personal financial advisers, and optometrists.

See “Apply within,” from The Economist: The World in 2017.

Mark Cuban, in an interview on Bloomberg TV, said that candidates who excel at creative and critical thinking will be in greatest demand in the coming years. This means more majors in the liberal arts, such as English, philosophy, and foreign languages.

Management Ideas, RIP?

The Management Myth: Debunking Modern Business Philosophy

$15.15

By Matthew Stewart

Buy on Amazon

The Economist, Schumpeter, “Management theory is becoming a compendium of dead ideas,” December 17, 2016.

Business schools are the cathedrals of capitalism, and business consultants are its traveling friars. Yet management theory is ripe for a reformation. There are three myths it propounds:

Myth 1: Business is more competitive than ever

The story since 2008 has been not competition but consolidation, with over 30,000 M&A deals done every year, approximately 3% of GDP.

Myth 2: We live in an age of entrepreneurialism

The rate of business creation has declined since 1970s. One cause is a tax system that punishes growth (it’s not a tax on the rich, but on getting rich).

Myth 3: Business is getting faster

In some ways, it’s slowing down (regulations, compliance, FDA drug approval process, etc.).

Language Alert: All transformation is linguistic. Keep your eyes open for stories in the media about Trump reducing “Protections,” rather than “Regulations.”

The glaring weakness in management theory: its naivety about politics.

As a follow-up, in The Economist: The World in 2017, “Practice makes perfect” it reports that China cranks out about 50,000 MBAs every year, less than half the rate in the USA. But these are based mostly on Western knowledge.

It’s private firms that are innovating management methods, such as Alibaba, an e-commerce giant that pioneered escrow in its payment system, and WeChat, the world’s most advanced messaging and payment platform.

Chinese companies are rejecting the Western principle of core competence. Instead, “multiple jumping” is the new fad.

Baidu started as a search company, then moved into mapping and apps, and now AI and autonomous cars.

One Chinese consultant said of multiple jumping: “…the most critical event in global management science in 30 years, and the new inspiration is coming form China.”

Count me among the skeptics. Is Google, or Apple, not multiple jumping? Many Chinese companies rely too much on low prices, which is not sustainable in the long-term. One skeptic pointed out that even Baidu’s sexier investments couldn’t happen without government support.

Ed’s Topics

San Diego Story regarding pricing and personality profiles and an awful sign:

Prices should never be justified by an increase to costs. That said, prices (in this case wages) should not be set by government fiat. I am not sure which is worse. 

IBM Watson and H&R Block

AI might do your taxes this year, courtesy of IBM Watson from TechRepublic.

In partnership with H&R Block, IBM Watson's cognitive computing engine will be used to help tax filers maximize their returns.

Pine City, MN high-school only shoots 3s and layups

The Basketball Team That Never Takes a Bad Shot - WSJ (subscription required)

The NBA’s most efficient offenses seek out layups and threes. A high school in Minnesota takes the idea to the extreme.

On Bullet Proof Coffee and Kerrygold Butter 

This State Is Now "Protecting" You from Kerrygold Butter by Brittany Hunter

Food bureaucrats cannot stand to see a rule being broken, no matter how arbitrary it may be.

Episode #130: Personality Profiling: Helpful or Hokum?

First Up

Ed challenges you to to determine if the following are from his horoscope or a personality profile. See answers at the bottom of the post.

1. Horoscope or profile: Some words that describe you are: Directive, Decisive, Driven, and Friendly. You are task-oriented, and you probably get a great deal done. You probably like problem solving and getting results. You are comfortable interacting with others to make things happen. 

2. Horoscope or profile: If you have been given a task to do that hasn't been explained properly, you may feel at a loss. It's best to go back to the person who assigned the work and ask for more details. This could be temporarily humbling, but remember, it's better to ask a stupid question than to make a stupid mistake.

3. Horoscope or profile: It can be very difficult to work with a (Type or sign) as a co-worker. They are very ambitious and very hard workers—in fact, they have a tendency to overwork in order to accomplish the goals they have for themselves or to make themselves look good in the eyes of their managers and supervisors. They will do whatever is necessary to meet goals that will make them look good in the eyes of their superiors and don’t care whose feet they must step on in order to accomplish those goals.

4. Horoscope or profile: (Type or sign) are natural-born leaders and embody the gifts of charisma and confidence, and project authority in a way that draws crowds together behind a common goal. (Type or sign) are characterized by an often ruthless level of rationality, using their drive, determination and sharp minds to achieve whatever end they’ve set for themselves.

 Some background

Carl Jung pondered differences in personalities for a deeply personal reason: his split with Sigmund Freud caused him deep depression. Why did they see things so differently?

He concluded Freud was an extrovert while he was an introvert. Jung believed that personality was dynamic and it could change throughout life.

“Every individual is an exception to the rule. To stick labels on people is nothing but a childish parlor game.”

A midwestern mental hospital is where The Minnesota Multiphase Personality Inventory (MMPI) was created in the 1930s to sort mental patients into diagnostic categories.

It was a 567-questionnaire, and the quantification it provided gave it more validity than inkblots. Starke Hathaway, the developer, became skeptical in old age of assessments, doubting that personality profiling was possible at all.

Myers-Briggs Type Indicator (MBTI), 1940s

Some facts

• This is the leading profiling test administered.

• 89% of the Fortune 100 use Myers-Briggs

• 2.5 million people each year take it

• Some 2500 profiles are on market

• It’s a $500 million industry, with 8-10% annual growth

• Thrived in the shade of casual neglect

Created by Pennsylvania housewife Isabel Myers, along with her mother Katharine Briggs. Isabel thought the test could bring about world peace:

If President Woodrow Wilson had not been so wrapped up in his own introversion, he would have negotiated more effectively as Versailles, and World War II might have been averted.

Personality profiles were used to combat Frederick Taylor’s “one best way.” It was people themselves that need sorting and shaping, since every position in the company had the right profile fit.

Jesus was an ENTP, so is Steve Wozniak. Don’t ask how they know about Jesus. Of course, popularity does not at imply scientific validity.

Test data is confidential, so cannot be tested to determine effectiveness. The tests are popular among consultants, who are paid good money to administer them in a convivial atmosphere.

The fallacy is the tests measure what we are like and who we are, not what we know, believe, or what we can do. They confuse labeling personality with understanding it. They confirm what people already know about themselves (the “aha reaction”), what psychologists call the permanency tendency. They also tend to validate the positive characteristics we all believe we possess, the so-called Pollyanna principle.

As they say, if you really want to learn what someone is like, marry them or work for them. Annie Murphy Paul, former senior editor at Psychology Today, has written a scathing indictment against these tests, labeling them modern-day phrenology—the “science of the mind” (“bumpology”). A leading Phrenologist was Franz Joseph Gall, University of Vienna, in the 1870s:

• Phrenologize Our Nation, for thereby it will Reform the World!

• Phrenology will improve the prosperity and material good of the next generation and greatly enhance the happiness of the race, besides abolishing poverty and nearly abolishing crime.

• Walt Whitman, Clara Barton (Red Cross), Charles Dickens, Edgar Allan Poe, and Oliver Wendell Holmes were all believers.

• Two US presidents, James Garfield and John Tyler, got readings. Mark Twain was a skeptic!

For business, it could no longer depend on reputation or word of mouth, so personality profiling was too useful not to be true. Rorschach test used thousands of time , the second most popular test among mental health professionals. It was created as a parlor game! Jeffrey Dahmer responses “were normal to the point of being mundane”

The Cult of Personality Testing

The Cult of Personality Testing: How Personality Tests Are Leading Us to Miseducate Our Children, Mismanage Our Companies, and Misunderstand Ourselves

By Annie Murphy Paul

Buy on Amazon

The Wall Street Journal wrote that Annie Murphy Paul “draws a veritable quacks’ gallery of modern personality testing. With an eye for the absurd, she makes a compelling case that such tests tell us more about the men and women who put them together than about the subjects taking them.”

Her book, The Cult of Personality Testing: How Personality Tests Are Leading Us to Miseducate Our Children, Mismanage Our Companies, and Misunderstand Ourselves (2004), is essential reading for understanding why these profiles are not at all effective.

Here a few of her more condemning facts:

• [A]s many as three-quarters of test takers achieve a different personality type when tested again (47% by proponents!), and that the sixteen distinctive types described by the Myers-Briggs have no scientific basis whatsoever.

• There is scant evidence that MBTI results are useful in determining managerial effectiveness, helping to build teams, providing career counseling, enhancing insight into self or others, or any other of the myriad uses for which it is promoted.

In 1968, Personality and Assessment was published, by Stanford University psychology professor Walter Mischel. He found the correlation between personality and behavior was .30. In other words, at best personality explained about 10% of behavior. Mischel believed that our actions are driven by situations, not personality.

The Life Story interview protocol, developed by Gordon Allport, is an alternative to sterile personality profiles.

Defined by Our Beliefs, not Our Knowledge or Personality

Professor Erkko Autio, department of management at HEC Lausanne in Lausanne, Switzerland, pointed out the same defects with respect to the current fad of “emotional intelligence” in a letter to The Economist:

It might interest you to know that not a single serious study has ever been able to demonstrate a link between “emotional intelligence” and leadership effectiveness. The most robust and consistent single predictor of leadership effectiveness is, simply, intelligence. Emotional intelligence sells well, but scientific evidence supporting it is almost as solid as that supporting the effectiveness of homeopathy (The Economist, Aug 26, 2006: 14).

Bell Curve: Intelligence and Class Structure in American Life (A Free Press Paperbacks Book)

By Richard J. Herrnstein, Charles Murray

Professor Autio is certainly correct in the assertion that intelligent quotient (IQ) is a better predictor of executive effectiveness, as The Bell Curve has scientifically demonstrated.  If you were confined to learning one number about an individual to predict their standard of living, you would be hard pressed to find a better one than their IQ.

However, firms are not confined to knowing just one thing about their human capital. As Rabbi Daniel Lapin wrote in Thou Shall Prosper: “You are best understood and appraised by others on the basis of the things you believe rather than on the basis of the things you know.”

Or, we might add, rather than on the basis of your personality or year of birth (see Generational Astrology). [See Ron’s book review of Thou Shall Prosper, and his LinkedIn blog post on Generational Astrology].

We are better off understanding people’s beliefs if we want to even begin to understand how and why the Germans of the Third Reich could carry out their murderous orders in acquiescent servility, or the people who flew airplanes into buildings killing innocent civilians on September 11, 2001.

Trying to simplify the spirituality and soul of a human life by labeling it with a personality type (or even an IQ) is to disregard the uniqueness of individuals, which requires judgment and discernment far more than measurement.

As Peter Drucker once wrote, “There is no such thing as an infallible judge of people, at least not on this side of the Pearly Gates.” Chinese philosopher Lin Yutang, from his book, The Importance of Living:

To me…man’s dignity consists in the following facts which distinguish man from animals. First, that he has a playful curiosity and a natural genius for exploring knowledge; second, that he has dreams and a lofty idealism…third, and still more important, that he is able to correct his dreams by a sense of humor, and thus restrain his idealism by a more robust and healthy realism; and finally, that he does not react to surroundings mechanically and uniformly as animals do, but possesses the ability and the freedom to determine his own reactions and to change surroundings at his will. This last is the same as saying that human personality is the last thing to be reduced to mechanical laws; somehow the human mind is forever elusive, uncatchable and unpredictable, and manages to wriggle out of mechanistic laws or a materialistic dialectic that crazy psychologists and unmarried economists are trying to impose upon him. Man, therefore, is a curious, dreamy, humorous and wayward creature. In short, my faith in human dignity consists in the belief that man is the greatest scamp on earth.

Michael Novak, R.I.P.

Michael Novak was one of Ron’s all-time favorite authors. A former Democrat who converted to the right, and a profound defender of free market capitalism, in the pantheon with George Gilder, Rabbi Daniel Lapin, Father Robert Sirico, Milton Friedman, Deirdre McCloskey, among others.

Here is Father Robert Sirico’s video tribute to Novak:

George Weigel’s Tribute to Novak, and the Tribute by Joe Carter of Acton Institute.

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Answers to Ed's Quiz

1. Disc Profile

2. Scorpio for February 2017

3. Myers Briggs Profile

4. Scorpio - About your sign

Episode #129: Memorable Mentors: Ludwig von Mises

Ludwig von Mises, economist, author, and one of the founders of the “neo-Austrian school” of economics.

Mises told his future wife: “If you want a rich man, don’t marry me. I am not interested in earning money. I am writing about money, but will never have much of my own.”

Our show was a discussion of the eBook, The Essential Ludwig von Mises, published by the Foundation for Economic Education, available for free.

Biography

At last, economics was whole, an integrated body of analysis grounded on individual action; there would have to be no split between money and relative prices, between micro and macro. –Murray Rothbard

Ludwig von Mises (1881-1973), born in Lemberg, 350 miles east of Vienna (today, part of Ukraine).

The oldest of three sons, from a prestigious Jewish family. His father was a construction engineer, who was titled “von” for his work on the Austrian railroads—similar to “sir” in Great Britain, but the title is inherited by all male, and unmarried female, descendants.

Carl Menger, one of the discoverers of the subjective theory of value

Mises entered University of Vienna turn of century, where he read Carl Menger, one of the creators of the subjective theory of value. In 1906, age 25, he graduated with a doctorate of laws, and became the chief economist at the Vienna Chamber of Commerce.

In 1912, published The Theory of Money and Credit, which challenged Irving Fisher’s quantity theory of money.

He finally got a teaching job, but only part time. He failed to be appointed for three reasons: 1) he was Jewish; 2) he was a staunch advocate of laissez-faire; and 3) he was personally dogmatic and intransigent. He was a private man, a confirmed bachelor for many decades, who finally married at age 57.

His younger brother, Richard, earned a PhD in mathematics, who became an aircraft designer. Mises always worried he’d be outdone by him.

Both brothers fought for Austria in the Great War, Mises being an artillery officer at the Eastern front who was decorated for bravery three times.

In 1934 he left Vienna to teach at the University of Geneva. In 1938, Nazis stormed Mises  Vienna apartment and confiscated his writings, 38 cases in call.

In the 1990s, Richard Ebeling of Hillsdale College discovered them stored in KGB files in Moscow, over 10,000 pages. What Irony! One of the foremost intellectual opponent of socialism in the 20th century, had his papers in the tender care of the Communist Party of the Soviet Union!

Ebeling has written Austrian Economics and Public Policy, among other works, which describe the contents of some of these papers. Mises personal library is located at Hillsdale College in Michigan

Mises emigrated to New York City in August 1940 (brother Richard was at Harvard). He never got a full-time teaching position, so his salary was subsidized by friends and foundations.

Brother Richard was a member of the  “Vienna Circle,” which included members such as Ludwig Wittgenstein and Karl Popper. They favored logical positivism, using empirical evidence to test theories.

Mises rejected this approach, preferring to rely on pure deductive reasoning instead.

Murray Rothbard once asked Mises what he thought of Richard’s book, Positivism: “I disagreed with that book, from the first sentence until the last.”

Peter Drucker, who knew Mises in his youth in Vienna and in New York, said of Mises: “He was the most depressing person I ever saw.” Murray

Rothbard disagreed, said Mises was a “joy and an inspiration.” Mises’ wife, Margit, said: “He wasn’t gentle. He had a will of iron, his mind a steel blade, and he could be unbelievably stubborn.

At a Mont Pelerin Society (founded by Friedrich Hayek in 1947) meeting in 1953 Milton Friedman chaired a session on income distribution. During the discussion, Mises stood up, announced “You’re all a bunch of socialists” and stomped out of room.

During his time at the Vienna Chamber of Commerce, he did support use of “limited trade retaliation” against countries that raised import taxes, to nudge them back to free trade.

In the early 1920s, Austria resorted to hyperinflation, like Germany. Hayek recalled his salary was 5,000 kronen/month in October 1921, then raised to 15,000/month in November and to 1 million/month by July 1922.

The League of Nations sent a commission to Vienna, along with some Austrian government officials, who paid a visit to Mises, asking for his advice on stopping the hyperinflation. “Meet me at 12:00 midnight at this building and I’ll tell you.”

“Hear that noise? Turn it off!” The Building was the government printing office. They did, and inflation ended.

Mises was Hayek’s teacher, and Eugen Bohm-Bawerk  was Mises’ teacher.

Mises and Hayek forecasted the Great Depression, Mises being the originator of the Austrian theory of money and business cycles. He thought unemployment was a pricing problem, not a demand-management problem, and felt Keynesian was nothing but special-interest group politicking. Hayek advanced Mises’ theory of business cycles, winning a Nobel Prize in 1974.

Mises died in New York City on October 10, 1973, age 92.

The Foundation for Economic Education ebook: The Essential Ludwig von Mises, contains five chapters, which we discussed.

1. Liberty and Property

A lecture to the 9th Meeting of the Mont Pelerin Society, October 1958

The Greeks and Romans thought freedom was only for the elite. Pre-capitalistic system was based on military conquest and opposed to innovation.

The characteristic feature of capitalism: principle of marketing, to satisfy the needs of the masses.

“If any of the socialists chiefs had tried to earn his living by selling hot dogs, he would have learned something about the sovereignty of the customers.”

“Government is a necessary institution, the means to make the social system of cooperation work smoothly…Government is not a necessary evil; it is not an evil, but a means, the only means available to make peaceful human coexistence possible. But it’s the opposite of liberty. It is beating, imprisoning, hanging.”

2. Profit and Loss

Mont Pelerin Society, September 1951

Bureaucratic management is the only alternative where there’s no profit and loss. Capital does not beget profit, as Marx thought.

It’s the entrepreneurial decision—mental acts, a product of the mind, a spiritual and intellectual phenomenon.

Lenin believed that production could be easily accomplished, since it consists of simple operations.

Taxing profit is tantamount to taxing success of those best at serving the public.

One main function profits: shift capital to those who best deploy it to satisfy the public.

Why is anyone better to expropriate than anyone else? Why shouldn’t immigrant’s wealth be taken by residents of their native country?

There is no third system: the choice is between capitalism and socialism.

3. Planned Chaos

Socialism: An Economic and Sociological Analysis

$12.32

By Ludwig von Mises

Buy on Amazon

Socialism, 1947.

Statoltry: combines idolatry with the state.

No such thing as a scientific ought. Science is only competent to establish what is.

Opponents of capitalism argue it hass no plan? Sure it has plans, just not that of the state, but those of individuals pursuing happinesss.

Capitalism vs. socialism: it’s not a fight over distribution, but which system best serves human welfare.

Marx never distinguished between communism and socialism, nor did Lenin who used socialist in the name of the USSR. In 1928, Stalin, at the  Communism International, made a distinction between the two words.

Ending: “What’s needed to stop the trend towards socialism and despotism is common sense and moral courage.”

4. Middle-of-the Road Policy Leads to Socialism

The so-called third way between capitalism and socialism is known asinterventionism, such as price controls, minimum wages, the National Industrial Recovery Act of 1933 (part of FDR’s New Deal), etc.

Mises labeled this third way nothing but “socialism by installments.”

5. The Place of Economics in Learning

Human Action, 4th ed, 1949

Cancer research can help fight disease, but business cycle research cannot stop recessions or depressions.

Economics is abstract reasoning, it can never be experimental and empirical.

There’s no such thing as labor economics, agriculture economics, etc. The same is true of ethics. There’s only one coherent body of economics.

Present-day universities are by and large “nurseries of socialism.”

Economics too important to be left to specialists.

Mises’ Magnum Opus

Human Action: A Treatise on Economics (4 Volume Set)

$29.75

By Ludwig von Mises

Buy on Amazon

Human Action, published in 1947, was the culmination of Mises work.

Human Action is to capitalists what Das Kapital is to Marxists.

What’s it about: “Everything!”

Economist Gary North has posited a “fat-book” theory: Producing a revolution requires a fat book. Examples:

• Adam Smith, The Wealth of Nations (1,097 pages)

• Karl Marx, Das Kapital (2,846 pages)

• Joseph Schumpeter (1,260 pages)

• Murray Rothbard, Man, Economy and State (987 pages)

• Milton Friedman, Monetary History of USA (860 pages)

• Deirdre McCloskey, Bourgeois trilogy (2,000+ pages)

• Mises, Human Action (907)

• Baker, The Professionals Guide to Value Pricing

Mark Skousen says this is nothing but the Labor theory of value, since the Communist Manifesto was only 62 pages, and probably the second most influential book in history, next to the bible. The Four Gospels of the Bible are only 177 pages.

Mises built his system of economic though on logic and self-evident assumptions, similar to geometry. He rejected econometrics and mathematics in economics, believing there was no such thing as quantitative economics:

If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 per cent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or at another time. He has not “measured” the “elasticity of demand” of potatoes. He has established a unique and individual historical fact.

Mises was a dualist who divided nature into two components:

1. Human beings, who think, adopt values, make choices, and learn (social sciences)

2. Animals and things, mechanical and predictable (physical sciences)

Revolutions to produce new words, and Mises introduced a few.

Praxeology is the study of human action. Then economics was the study of praxeology under conditions of scarcity. As Mises explained:

The field of our science is human action, not the psychological events which result in an action. It is precisely this which distinguishes the general theory of human action, praxeology, from psychology.

Catallactics is a theory of the way the free market system reaches exchange ratios and prices. It aims to analyze all actions based on monetary calculation and trace the formation of prices back to the point where an agent makes his or her choices. It explains prices as they are, rather than as they "should" be.

Episode #128: The Three—and only three—Pricing Strategies

In every market there are two kinds of fools. One charges too much, the other charges too little. Russian proverb.

There are only three pricing strategies: Skim, penetration and neutral.

Pricing is how we divide up value.

Pricing Done Right: The Pricing Framework Proven Successful by the World's Most Profitable Companies (Bloomberg Financial)

By Tim J. Smith

Buy on Amazon

Tim Smith, author of Pricing Done Right, refers to these as price positioning. He believes pricing strategy includes things like segmentation, competitive reaction, and pricing capability.

Penetration Pricing

Price is the primary driver of the purchase decision with penetration pricing.

It can be effective and profitable, yet it is by far the least understood. After all, if your goal is to maximize market share, you could set your price at zero, or negative—pay customers to use it!

The literature is overwhelming: there are more failures than successes with this type of pricing.

It tends to attract the least loyal customers, who are thus the first to defect to a lower-priced offering.

Price cuts easy to match by the competition, then you get neither market share or profit.

Companies who appear to have implemented this strategy successfully:

• Wal-Mart

• Southwest Airlines (Ryanair in Europe is even more profitable)

• Costco

• Dell

• IKEA

• Timex

• Freemium variation of Penetration

 One question with all these strategies is: your price compared to what?

• Your offering’s value, or

• Your competitors’ price

Reed Holden has changed his mind on this issue. In his prior book (written with Tom Nagle), The Strategy and Tactics of Pricing, he wrote that it was compared to your offering’s value.

Yet, in Pricing with Confidence, he writes it’s compared to your competitor’s price.

Success Factors with Penetration Pricing

1. Begin with strategy from day one

2. Operate extremely efficient, constantly driving costs out of the system and sharing those saving with customers

3. Guarantee consistent quality

4. Focus on core products/customers

5. High-growth, high-revenue focus

6. Procurement champions

7. Little debt

8. Control as much as possible (brands, value chain, etc.)

9. Advertising focuses on price

10. Never mix messages

11. Understand your place (there’s room for only a tiny number of companies, in any industry, that can successfully deploy this pricing strategy)

As one pricing manager said: “In a war, the atomic bomb and price are subject to the same limitation: both can only be used once.”

Pricing with Confidence: 10 Ways to Stop Leaving Money on the Table

$22.75

By Reed Holden, Mark Burton

Buy on Amazon

Skim Pricing

If any of these strategies guaranteed success, everyone would do it. That said, skim pricing can be very profitable, as these companies that use it prove:

• Apple

• BMW

• Bose

• Disney

• FedEx

• Godiva

• Gucci

• Nordstrom

It’s not unusual for a premium priced product to have the highest market share. For example, P&G’s Gillette razor, at one point, had 70% of the market.

Success Factors with Skim Pricing

• Superior value

• Innovation

• High quality

• Branding, Marketing (vs. sales)

• Shy on special offers

An excellent example of how dangerous this form of pricing can be because it invites competition is Xerox vs. Canon. Xerox never defended it’s higher position with a lower-priced flanking product.

Contrast Xerox with Apple, which is very adept at protecting it’s high-end value.

Beyond skim pricing is luxury whereby you take advantage of prestige, or so-called snob, effects. For instance, Switzerland is 2% of world’s watch production, yet it produces 53% of value.

The president of USA Porsche once said: “The second Porsche on the same street is a catastrophe.” It obviously focuses on profits, not market share, which might explain why, in 2013, it generated an18% profit margin, higher than any other auto company.

With skim, or even neutral, pricing, if you can offer a world-class guarantee, that can be a very effective strategy.

Such as the guarantee offered by Florida based “Bugs” Burger Bug Killers (BBBK)” exterminators:

• Guaranteed to eliminate to rodents and roaches

• If you or a guest see one, you get a refund of one year of our services

• And we will pay another exterminator for one year

• And to the guest who sees a roach: we will pay their bill, send a letter of apology, and invite them back as our quest

BBBK’s price is as high 10x its competitors.

Michael E. Raynor and Mumtaz Ahmed (both with Deloitte Consulting), in their April, 2013 Harvard Business Review article, “Three rules for making a company truly great,” April 11, 2013, wrote the three rules

1. Better before cheaper—in other words, compete on differentiators other than price.

2. Revenue before cost—that is, prioritize increasing revenue over reducing costs.

3. There are no other rules—so change anything you must to follow Rules 1 and 2.

They also point out that very rarely is cost leadership a driver of superior profitability—Amazon is a good example.

Neutral Pricing

Tim Smith, in Pricing Done Right, says that neutral pricing is the default strategy, and generally the most profitable. It’s also least likely to trigger a price war. Successful examples:

• Buick

• Seiko watches

• Sony

• Toyota

• Über

• Zappos

Where the basis of competition and the purchase decision is focused on other attributes rather than price: service, features, guarantee, convenience, etc.

Good for no-growth, or slow-growth markets.

It can leave money on table, and it tends to signal average value.

Confessions of the Pricing Man: How Price Affects Everything

$18.80

By Hermann Simon

Buy on Amazon

Herman Simon, in his book, Confessions of the Pricing Man, cites a survey his firm conducted and found that managers spend 70% of their time focused on cost reduction; 20% on increasing volume; and only 10% on price. These percentages are the opposite of profit effects of these actions!

Choosing a Pricing Strategy

From Reed Holden’s Pricing with Confidence:

• Understand your value, absolute and relative

• Where’s your offering in the life cycle?

• Industry economics (capacity, fixed vs. variable costs)

• Competitive dynamics

• Consensus (Ron says leadership, the opposite of consensus)

Life Cycle

• Introduction

• Growth

• Maturity

• Decline

You can use Skim and Neutral across the cycles, but penetration is not optimal during introduction/emerging, mature, or decline phases.

From Pricing with Confidence by Reed Holder and Mark Burton