Hacking in Energy, Made Easy?

April 6, 2012 By 2 Comments

We talk about the energy problem being very complex. Just the other day, a clean web hacker was telling me why many coders miss the mark in disrupting energy: they do NOT understand the complexities of the industry. 

JD Hammerly’s note on Why you should fire your coders (and hire solvers instead) seems to be the vision of SURGE, it takes something complex and simplifies it down into individual parts that can be digested and nailed. But is “it” that simple? Can the BIG CODERS from energy who boast about how many lines they have written be able to pivot their mindset?

A group of incredibly smart entrepreneurs with backgrounds in part of the energy equation are working on bringing the CleanWeb Hackathon TEXAS style down to Houston. If JD is correct, the CleanWeb Hackathon, this time in Boston, is a great entrepreneurial way to disrupt organizations that cannot easily fire their coders and pivot into a new way of thinking about these problems.

Hackers Unite…If interested in Texas, keep posted.

Do you agree with JD?

Filed Under: Seed Accelerators Tagged With: , ,

Valuation Caps on Convertible Notes

April 1, 2012 By Leave a Comment

Our SURGE companies are spending a lot of time thinking about raising money before our demo day, SURGE Day, to drive momentum, hire more people, write more code and anything else that will help them solve the world’s energy problems…

How? The current trend is to use a convertible note. In a nutshell, the convertible note allows the founder to raise money without spending a lot of time stuck in due diligence in order to come up with a valuation. The convertible note seems easy to understand but no one wants to read the legalese. Well, I sure do not.

 

I found the best explanation (for an entrepreneur) on how convertible notes work especially when a valuation cap in added. The post also includes an excel template that models different scenarios and shows easy to use graphs.

Founders…worth the read

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Nation Building – How to Build a Company

March 26, 2012 By Leave a Comment

At SURGE, our companies are 3 weeks into the program. I have been using an analogy for years that seems to connect regarding the key stages of company development. Here it goes…

There are 4 key stages that are critical to building a dominant nation state and these apply to you:

  1. Define your Border
  2. Protect your Borders
  3. Diplomacy
  4. Wage War

Step 1: Define your Borders

A country comes together when like-minded people believe in a common and strong purpose. Why would anyone move to your country until you have a purpose? Or why would anyone sign the Magna Carta to challenge the King? You must define who you are (your core purpose, your core values, your business model canvas, your culture and rules) before anyone is willing to pickup and move. And people move for PURPOSE. A core purpose is a 100-year vision that does NOT change. the first document forced onto an English King by a group of his subjectsWhat is your purpose for being a country? It all starts with you: what are you passionate about? What are you talented at delivering that solves a customer need? And it must be unique from everyone else. Or why would someone move to your land? Do you have natural resources (oil, mining), skilled labor, or other assets like a port? If yes, are customers willing to pay for it at the quantity necessary to survive. No undue tax burdens here…(we are for-profit!). Ask yourself these questions amongst your team, are they the same?

Step 2: Protect Your Borders

Now that you have defined your borders, how are you going to protect them? There is an interesting book called, Why Nations Fail, by Acemoglu and Robinson. The authors suggest that prosperity is produced by innovation and investment. To promote a nation to focus on these two key attributes, a government has to become accountable and responsive to citizens (employees) and the great mass of people (other stakeholders). The book discusses Korea. Despite Korea being a homogeneous nation, the people of North Korea are amongst the poorest on earth while the people in South Korea are amongst the richest (and many can play a damn good game of golf…kudos). In essence, how will you become accountable and responsive?

Let me offer a suggestion. Make sure your entire team is on the exact same page. Here are a few questions you can ask your team. Answer: You all need to be consistent.

  • Can most of your team recite the same elevator pitch?
  • Can most of your team clearly articulate the company’s competitive advantage?
  • Does the entire leadership team agree with the company strategy?
  • Does the company values performance from employees above all else?

Step 3: Diplomacy

How are you going to protect your country externally and create an opportunity to trade to gain value from other countries? Look at key agreements in the world like Nato (for military protection), NAFTA (free trade between Mexico, Canada and the US) and the Euro (Europe’s common currency to make trade more efficient). While at Dell, Google, a young company that was known to very few at the time, approached us to distribute their search engine on our desktops. We decided to do this giving google a significant increase in access to customers. Ask yourself, what other help, collaborators, should we enlist to help us and how do we motivate them?

“Theologian John Drescher tells the story about a corn farmer who won blue ribbons for his corn year after year. Yet each year, he shared his best seed corn with all of his neighbors. ‘How do you expect to continue to win blue ribbons,’ someone questioned him, ‘if you give your best seed corn to others?’ ‘You don’t understand said the farmer. ‘If the wind carries the pollen from field to field. If I am to have the best corn, I must see to it that all my neighbors also have the best corn. If they produce poor corn, it will pollinate mine and pull my quality down.” – Dan Miller.

My point, you cannot build a country without partners to trade and help protect from the outside. In my experience as a CMO, the most under focused and utilized strategy of companies (the 4th of the 5 C’s of Marketing: Collaborators) is their failure to acknowledge strategic partnerships that help them scale, grow and deliver on customer promises. What key agreements and partnerships do you need to be successful? Do you need to get your goods from the Pacific to the Atlantic and it takes too much time to sail around Cape Horn? Who is your Panama Canal? Did you know that there are major real estate transactions taking place in the Port of Houston and billions in upgrades because the Panama Canal is being widened to double capacity? Houston is becoming a critical port to serve the middle continental US but this was not economically efficient without the Canal change which is scheduled to be completed in 2014. Keep your eyes open.

4. Wage War

This is where most of us as an entrepreneur and startup want to start. If you have a strong definition of your borders, you are able to defend your borders, and have partners willing to come to your aid, you are now ready to attack and be disruptive. This final step will be discussed in more detail on another note… Mañana!

Filed Under: Marketing Strategy, Seed Accelerators Tagged With: ,

The Ultra-Running Guide to being an Entrepreneur

January 10, 2012 By 3 Comments

As an avid trail runner and entrepreneur, I wanted to pass on a few interesting observations from my experiences. I ran a 50-kilometer trail run in the depths of the Texas rough country in early 2010. The race is known as Bandera, A Trail Run of Rugged and Brutal Beauty where everything Cuts, Stings, or Bites. The winner of the 100k race, Nick Clark, wrote an excellent RACE REPORTabout his experience.  The stakes of this race were high. There were 2 invitations being offered to Bandera’s top two finishers for the Olympics of ultra-running, the Western States 100 mile run. Nick’s explanation of what it took to win the 62-mile race applies very well to what it takes an entrepreneur and management team to win in growing your business.

First, winning does not preclude you from taking it in the chin during the race. As Nick explains, “As I sit here writing this report after a long day of travel, my feet continue to throb from the thousands of pokes, jabs and stabs they took in the hill country of Texas yesterday.” I only ran the 50k and my feet and pride are still beat down. 

Second, there will be times when you need to make a pitstop, to refuel, offload and change tactics. If the competition passes you by, be patient. You will catch back up, but if you go back out too fast, you may crash and burn. In the words of the winner, “I had to stop and unload my early morning coffee, giving up 30-40 seconds on Dan and Chikare. I didn’t bother trying to catch back up, realizing that there was a long, long way to go and the extra effort would be wasteful, so I just sat back and kept on the pace we had been running, getting visuals every now and then to confirm that I wasn’t loosing any more ground.”

Third, when you make a wrong turn, do not forget the ultimate goal (winning the race). Be flexible, patient and Forgive. You might need to change your short-term tactics. “A mile or two down the track, we managed to miss one of the best-marked turns on the whole course … We turned around and headed back the way we had come, thankfully finding the turn sooner rather than later. Dan seemed pretty agitated by the mishap and upped the pace. I let him go, as we still had over 40 miles to race and I just didn’t want to burn energy unnecessarily.” Dan ended up running out of gas and finishing 3rd missing one of the 2 qualifying spots for Western States.

[SIDE NOTE: As I came into the 20 mile aid station beaten up, sore, tired and over-trained from two months of running 5 marathons all too fast, I wanted to quit. Unfortunately, my coach and good friend showed up at the aid station at the exact same time. He looked at me and asked me how I felt. I said, “I feel terrible. I want to F’ing Quit Dammit”. But before I could say it, he told me to get back out on the trail, get out of the aid station and walk it off. The next 2 miles were HELL. Then after catching and stumbling with two other lost souls, my determination and spirit came back (it also might have been the 48 oz. of Coke I chugged 30 minutes prior).  The next 10 miles turned out to be my best. I wanted to QUIT, but I am sure glad I didn’t. This has served as a valuable lesson to me moving forward. When you feel your worst, keep going. There is a rule in ultra-running, “It Almost Never Always Gets Worse”. ]

Finally, good ole solid hard work is critical to victory. In the final few miles of the race, Nick just outran the #2. “And so it was, on Lucky Hill, the gnarliest and steepest climb of the whole course that I finally got a sight of Chikare’s blue singlet. He was working very slowly up the hill, which was all the motivation I needed…I got my hands on my knees, hunched forward and broke out a super-hard power hike…By the bottom of the drop I had a solid lead and continued to push on the flats taking a few quick glances over my shoulder with nothing in sight behind… I came through the finish, throwing out a few high fives, in 9:16 for the win, a new course record and a date at The Big Dance in June. Mission well and truly accomplished.”

Nick’s race report is inspiring to me as a runner and as an entrepreneur. There will always be great runners out there trying to beat you. The marketplace is usually filled with rocks, snakes, cactus, and unforgiveness. The difference between winning and falling behind is about preparing a good strategy, sticking to your plan, being adaptable to change short-term tactics when necessary AND having the patience and faith that you will eventually catch up over the long-haul. And with hard work, you will be able to beat your fellow competitors. Nick did out run the entire field to set a new course record. His strategy was excellent. His execution stuck to the plan. And at the right moment, working harder than the competitors pays off.

Please share your race stories and epic battles?

Filed Under: Marketing Strategy, Random Musings, Running, Seed Accelerators Tagged With: , ,

Getting your Startup to the Greek

February 6, 2011 By Leave a Comment

If you are a first time entrepreneur, “Your brain is full of lollipops, rainbows, and cheese.” Aldous Snow

Your biggest danger is yourself. In the words of brilliant entrepreneur, investor, and teacher, Keith Cunningham, always ask yourself the hardest question, “WHAT DON’T I SEE?”

I want to help you avoid one of the, if not the, most important lessons of a new venture: Validating Your Market. For an excellent study on the topic, Read If You Build It, Will They Come? (3 steps to test and validate any market opportunity) by Dr. Rob Adams if you are a STARTUP or No Man’s Land by Doug Tatum if you are a Mid-Market company struggling with growth. You may just thank me later.

Let me summarize the point of Rob’s book and the first part of Doug’s: Spend time validating your market, it is worth it. In another frame, companies that FAIL to reach their growth and business valuation goals almost ALWAYS under invest in validating their existing and future markets. Market and Customer Research is not just for start-ups, “It needs to become a part of your culture that you do over and over again.” Daniel Nelson, student of Rob Adams and Co-Founder of Phurnace Software, which was acquired by BMC last year.

Market Validation and Understanding Customer Needs may be the single most important lesson in my work! I have started and/or advised companies in different industries (entertainment, broadcasting, supply-chain and logistics, technology, construction, software) and of all sizes including startups (PGA TOUR Network, Chief Outsiders, Bigfoot Networks), mid-sized companies (All Access Today, Falcon Container, Compadre, BOWA) and large companies (Rackspace, Gaylord Entertainment). All of them need to create/enhance this skill inside of their company as a core competency. Read about BOWA’s new focus on market validation and understanding their customer and how it helped them grow, again.

Otherwise, you will fall into what my friend, advisor and founder of the largest executive services firm in the U.S., Doug Tatum calls in his best selling book: No Man’s Land (and become the reason Chief Outsiders exists). It all starts with your customers and knowing your market!

Validating your market (which I call Phase I: Market Research) for current and future products and services not only returns dividends in months, not years, but also protects your most valuable asset: your company.

Here are a few key facts:

  • 90% of all start-up businesses fail
  • 65% of all new products fail
  • The US alone spends a whopping $260B annually on failed products and ONLY $140B on successful products

Why is this? Rob suggests and I concur through our experience that companies focus internally and do NOT focus externally on their current and potential markets. 85% of product failures can be traced to market related issues.

KEY: VALIDATING YOUR MARKET AND LISTENING TO YOUR CUSTOMERS IS CRITICAL FOR STARTUPS, MID-SIZED COMPANIES AND LARGE COMPANIES!!!

If you build it will they come

What are the 3 Steps to test and validate any market opportunity (READ THE BOOK) or scroll down for a sneak peak:

  1. Ready- a process taken on by the team to understand if the business model of the company is working (I help companies by working with the CFO, COO and CEO to understand this).
  2. Aim- a deep dive into the market to understand the value proposition of the company, the correct target customer(s) and his/her key needs, and the competition. Out of this come the key features that your customers are looking for. (Who on your team manages this process and works to make it a culture of the company?)
  3. Fire- converting the key features into a product and/or service and then creating and executing a go-to-market plan.

In explaining one of the key points of the book, Rob made a brilliant statement, “achieve success through a series of fast failures.” If you take 60 days validating your market and spend ~ 5% of the expected cost of developing the product, you will be able to make better decisions and avoid the potential failure of the entire program (which is 100% of the budget). It may also tank your company.

If your advisors, mentors, investors have hammered you with your market validations questions, consider it LOVE. It just may get your company to that 5x – 10x return.

“What you did was very spiteful, but it was also very brave and very honest and I respect you for doing that. But the content of what you said has made me hate you. So there’s a layer of respect, admittedly, for your truthfulness, but it’s peppered with hate. Hateful respect.” Aldous Snow

Filed Under: Marketing Strategy, Seed Accelerators Tagged With: , , , , , , , , ,

Why Entrepreneurs Fail Lesson #2; No Skin in the Game

February 4, 2011 By 1 Comment

I originally wrote this blog about the CMO (a C-Level role that I love to pick on due to my belief that its only reserved for those with strong business & FINANCIAL Acumen). For the start-up, this message applies to all of you. It matters.

The Chief  Outsider likes to swim in a 1/8 mile long natural spring-fed pool with a year-round average temperature of 68 degrees. Goggles, Speedo (square, not triangle), that’s it. One thing that bothers the CMO is the massive amount of wetsuit wearing triathletes that dominate the pool in the mornings paying little to no attention to etiquette. Not only do they remove the element of freezing to death, they also believe that their wetsuits give them the right of way. It is not uncommon to be kicked in the face just after being cut off or have to completely stop and swim horizontally to avoid being punched in the face.

The Wetsuit Warriors show No Skin (& No BLOOD)

While trying to go stride for stride with one of these ironmen this week, it (he) hit me. This is one of the reasons why CMO’s fail. There is no skin in the game. Let me explain.

When I started my first company, the first question every potential investor asked me was “How much are you investing in the idea?” There is only one correct answer. Everything I have. My children are on Ebay. After getting an enterprise off of the ground, entrepreneurs pour everything they have back into their company. That is just the way it is. Why would an investor or stakeholder invest in an idea, company, vision and/or branding campaign if the person asking is putting in nothing themselves?

As the CMO posted in The Art of the Business Plan, Part I, one of the first reasons CMO’s fail is that they are unqualified. A CMO must be able to blend the art of the vision and the science of the business case. If your CMO cannot write a business plan (or has never written one), you may have a serious problem. These CMO’s have little to no financial acumen and are unable to understand how their strategies and expenditures impact both the income statement and the balance sheet.

Here is the 2nd reason, the CMO has no skin in the game. According to AdAge, the average CMO-level executive last year took home $1.5 million. At the same time, according to the January 2009 McKinsey Global Survey of 587 C-level executives, CMO’s are not using available tools or best practices to assess their marketing campaigns, make their budgets, and plan new campaigns. “Many companies, the survey shows, don’t use basic best practices such as clearly allocating—or even defining—marketing spending across the whole company or regularly reviewing the results. Further, companies typically allocate their marketing budgets based on historical allocation levels and product-level priorities, rather than campaign effectiveness or the goals of the company as a whole.”

Is there a correlation between the average tenure of a CMO and the large compensation packages that lack alignment and comparable risk?

I met with a senior Dell marketing executive to discuss the recent Mark Jarvis fiasco. What did not make sense to me (besides Enfatico) was that while Dell was laying off people, cutting bonuses and halting raises, they bring in the $6M man. According to Dell’s SEC filings, Jarvis had total compensation of $6.85 million and had commuting expenses of $315,387. “As part the employment arrangement with Mr. Jarvis, we pay Mr. Jarvis’ commuting expenses for travel on chartered aircraft between our headquarters and his principal place of residence in Northern California,” the company said. A Company Jet for commuting!

Not only did Jarvis have nothing to lose by going to work at Dell, if he completely created a mess at the company, he had a severance agreement that paid him $1.2M.

If you want a CMO (or any CXO) that will succeed in your organization, make sure they bring skin in the game. You must align their performance with measurable results. For the role that is responsible for ultimatley driving warm leads and increasing the value of our organization, you must create alignment with their success to your bottom line both short-term and long-term. How and what does this look like? How to do measure long-term brand value? Will bark soon on this exact topic.

Barking from the pool.

Filed Under: Marketing Strategy, Seed Accelerators Tagged With: , , ,

Napster killed the Radio Star’s Daddy

February 4, 2011 By Leave a Comment

The key takeaway of today’s bark is this: If you don’t change the rules of the game, someone will.

Yesterday’s blog outlined how the music industry went from individual performers to 5 large labels that sucked the bone dry.

What happened?

In 2001, Napster was invented. The Chief Music Outsider was working in the music industry in 1999 and 2000 trying to convince labels to distribute their rights online. The labels were so scared and intimidated, they decided to slow play all efforts to reach out to the fans. They wanted to keep THIER MONEY!!! (How many companies voluntarily give up profits to survive?) Enter Shawn Fanning. In less than 5 years, the music industry radically shifted- from the spider-like big labels to the starfish like companies such as Grokster and eMule. Sure, the industry shut-down Napster. However, the entrepreneurs became even more decentralized. If you don’t change the rules of the game, someone will.

Chart from Starfish and the Spider: Music’s 100+ Year History

The record industry has been hammered in recent years by online piracy and a dearth of mega-hits, with sales sliding steadily since their peak of $14.6 billion in 1999. As CDs sales have dropped, the labels have tried repeatedly to develop digital strategies to make up the difference, and they’ve all come up short. Last year was the industry’s worst yet in terms of revenue losses. The total value of digital and traditional sales dropped 12% in 2007, to $10.4 billion, compared with a 4.4% slide the year before, according to the Recording Industry Association of America (RIAA).

Today, Tower Records is bankrupt and the largest labels have consolidated. And the latest generation of music buyers, kids, have only bought (or “borrowed”) music online. The latest generation doesn’t even know the concept of a record store. The combined revenues of the remaining four music giants is 25% LESS than they had been in 2001. According to the book The Starfish and the Spider, the revenues vanished. “As industries become decentralized, overall profits decrease.” Ori Brafman and Rod Beckstrom.

Where did this revenue go? Did the revenues disappear? In the CMO’s mind, the revenues do not disappear (maybe for a short period). Instead, the profits and revenues become re-distributed to Blue Oceans. More on this in my next bark.

 

Filed Under: Marketing Strategy, Seed Accelerators Tagged With: ,

Can your Management Team pass the Financial Literacy Test?

February 4, 2011 By 1 Comment

The CMO once made a strong statement that one of the requirements to be an entrepreneur, at least a good one, is to have written a business plan. I am not talking about the back of the napkin strategy, but rather a true Business Plan. The purpose is this exercise is not to show the world that one can write a long document but rather it shows the readers whether the writer truly understands the entire business from vision to the model to research to marketing strategy to the management team to operations to sales and finances and funding.

Before an entrepreneur can write a great business plan, they first must be financially literate. Are Your People Financially Literate? According to the article, “Asked to take a basic financial-literacy exam—a test that any CEO or junior finance person should easily ace—a representative sample of U.S. managers from C-level executives to supervisors scored an average of only 38%. A majority were unable to distinguish profit from cash. Many didn’t know the difference between an income statement and a balance sheet. About 70% couldn’t pick the correct definition of “free cash flow,” now the measure of choice for many Wall Street investors.”

I hope that this scares the “#$%&” out of you. Do you know who is coming into your business to help you grow? Hey CEO/Founder, you are off the hook, you do not have to be the expert on finance, but I guarantee that you have a strong sense of financial literacy (especially if you funded the business out of your own pocket). If this is not a core competency of yours, your team better have an even stronger understanding of finance.

I discussed Why Entrepreneurs Fail before. They have No Skin in the Game. Based on this new research, maybe you should ask your management team to put skin in the game. Maybe they will understand how money flows through the business when it is their own money on the line.

Do you agree with me? We put our money where our mouth is with our clients. Do you? Financial literacy is not a nice to have, it is a must have, especially when growth is on the line.

“Accounting is the language of business, and you have to learn it like a language. You can’t be comfortable in the country if you aren’t comfortable with the language. To be successful at business, you have to understand the underlying financial values of the business.” Warren Buffett

CAN YOU PASS IT? I met the team at FINANCE DOG who created the financial literacy test to implement their services in my company. I now make it a requirement that my management team(s) must pass this.

The Chief Marketing Outsider and Financially Literate

Filed Under: Marketing Strategy, Seed Accelerators Tagged With: , , , ,

The Big Bertha Myth

February 4, 2011 By Leave a Comment

Read this blog and I promise that your golf game will improve…

Welcome to 2011! As I sit in the freezing cold, I crave being on the golf course. It occurred to me that the Social Media craze reminds me of the golf technology revolution. When the new metal driver came out and then the revolutionary Big Bertha Driver by Callaway appeared, Golf changed forever. But, did it actually make golfers better? More specifically, did golfers’ scores go down?

I assume that the new technologies did increase people’s drives off of the tee, (it extended reach), but did it lower scores? 

I wanted to pass along an interesting article about the top 10 B2B (Business to Business) Marketing Trends. Six of the top Ten revolve around social media. I will let you make your own conclusions from this article. The author does a great job of trying to explain the myths and expectations from it.  Social Media reminds me of Golf. There is a lot of hype and talks of Social Media saving strokes (meaning… at the end of the day increasing companies revenue and profitability and most importantly free cash flow), but does it?

The difference between the #1 PGA TOUR player in the world and the one who does not get invited back the next year is less than 2%. In 2007, the #1 PGA TOUR player in the world, Tiger Woods, stroke average per 18 holes was 67.79. The last player to make the cutoff, #120 Kent Jones, stroke average was 71.08. Less than 2% (3 Strokes) cost Kent Jones over $10.1M in earnings. The evidence suggests that we CANNOT leave any strokes out there.

BUT…does Social Media add or subtract strokes? Let’s look at the best golfers in the world and ask the same questions. Does new equipment and new tricks (LinkedIn, oversized clubs, blogs, tricky putters, facebook, better golf balls, SEO) lower golf scores?

Arguably, the greatest golf championship in the world is the Masters. Reviewing the scores that won the Masters over the past 40+ years tells an interesting story:

  • In 1964 – Arnold Palmer won by taking 276 strokes
  • In 1965 – Jack Nicklaus won by taking 271 strokes
  • Between 1965 – 2008 – the average winning score was 279
  • In 2008 – Trevor Immelman won by taking 280 strokes*
  • In 2009 – Angel Cabrera won by taking 276 strokes*

The reality is that to WIN, a golfer and a company must practice great marketing strategy. New clubs and new tactics just do not pay off by themselves.

DO YOU AGREE?

* Besides Ray Floyd that matched 271 in 1976, no one else even came close to matching 271 until Tiger Woods shot a 270 in 1997. In all fairness, in 2001, Augusta National increased the distance of the course from 6,925 yards to 7,290 in 2002 and then 7,445 in 2006. What happened after the change? The scores went up. One might actually make an argument that PGA TOUR players skill went down (PGA TOUR players today do not use the longer irons that were absolutely necessary just a few years ago to reach the greens).

I promised that I would improve your game. The numbers don’t lie…

Filed Under: Marketing Strategy, Seed Accelerators Tagged With: ,

Strategic Pricing Exercise with Wild Turkey

February 3, 2011 By Leave a Comment

My father was an entrepreneur and executive that built an IT services enterprise. He drove a van. Then he converted to one of the original mini-vans. I was embarrassed. My friend’s parents drove cool vehicles: Suburbans, station wagons with 3rd seats facing backwards, anything but a mini-van (& it was puke brown). In my friend’s station wagon, we used to make faces and “kept up relations” with the cars behind us back then. I wonder if our generation started the road rage epidemic? 

I remember my father driving to his offices throughout Texas (Yes, in the Mini). Then one day, Southwest Airlines changed his travel habits. My father began to fly. He also began to ONLY travel using Southwest Airlines to all of his offices located throughout the South. As someone who dreamed of being “first class”, I couldn’t understand why my CEO Dad was traveling common style. This could have been due to his loyalty to SWA’s free Scotch promotion, but more likely, it was his loyalty to the low prices and convenience of getting to his destination is less time.

When is the last time that you considered your pricing strategy? Most of us take a cost plus approach to almost everything. If SWA tried this, we would not be talking about them. I want to challenge you to work on an exercise that starts with arriving at the ideal pricing to dominate a market, and then work backwards to arrive at the costing that will get you to that plan. It may just save your company.

Try this approach and let me know what it reveals.

  • First, determine your “Usual Suspects”: all of those products and services that most closely resemble your offering (this is your traditional Competition).
  • Second, determine your “Non-Customers”: all of those products and services that do not take on the same form as your offering BUT perform the same function.

Take Southwest Airlines. “We’ve always seen our competition as the car. We’ve got to offer better, more convenient service at a price that makes it worthwhile to leave your car at home and fly with us instead.” (Colleen Barrett, executive vice president). This is not the time to be proud of your offering. What are all of the ways a customer can solve the same problem that you fix but in different forms?

  • Third, determine what price range you will need to attract this larger market (in SWA’s case, those people that drive cars) in order to compete.

Your price range needs to attract the mass of target buyers that fall into both the Usual Suspect and Non-Customers so that they will have a compelling reason to buy.

In SWA’s case, they priced their fares  based upon the cost for someone to drive instead (not for someone to fly using another airline).

In the case of Ford and the Model T, the Usual Suspects were over 500 automakers in the United States that built custom-made luxury autos. Henry decided to focus on the horse-drawn carriage as his competition instead of the luxury custom made shops. The carriage offered the same utility as the automobile but it was very different in form. The Model T was designed and priced to compete against the horse carriages.

  • Finally, determine the cost structure that you will need to deliver in order to make a profit on your new determined pricing.

In Ford’s case, the Model T had to offer the same utility as a horse drawn carriage that could travel anywhere (smooth and uneven roads, during rain or shine) and was easy to maintain. As a result, Ford achieved a breakthrough in innovation by limiting options that did not enhance utility and by creating an assembly line that could use interchangeable parts. Ford was able to achieve a competitive cost position that allowed him to price his product against the mass market, automobile owners and horse carriage owners (Where is Ford’s cost position today?). Back then, the 500 other auto manufacturers focused on customization (high prices, low utility).

What operations breakthroughs can you uncover by turning your analysis around and focusing on your pricing first to arrive at your achieved cost targets?

One last thought on promotional pricing. When Braniff Airlines moved into Texas to take SWA head on, it offered flights from Houston to Dallas at 50% of SWA’s prices. In response, SWA did something absolutely brilliant. SWA cut it fares to the same price BUT for those passengers that paid the full fare, SWA would give the customer a bottle of liquor (or an Ice Bucket for “the Mormons who claimed they don’t drink” according to Herb Kelleher). Herb told a group of us a few years ago that in 1973 during the promotion, Southwest Airlines was the #1 distributor of Whiskey in Texas.

Cheers and Bottoms up to that!

Now that I think about it, I think my Dad flew SWA for the Wild Turkey

Filed Under: Marketing Strategy, Seed Accelerators Tagged With: , , , ,
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