The price trap

The price trap is when a business relies on increasing price to grow revenue and that keeps it from innovating.

The math usually says it makes sense to raise prices because the higher revenue from charging all the remaining demand more is greater than the revenue lost from customers buying less.

Since this grows revenue and earnings more reliably than innovation, leaders come to rely on it and not think too hard about why their approach to innovation and product development isn’t contributing to results.

Price is often used to cover the costs of their flops, too. So, customers end up paying more to help cover for leadership’s ability to add real value.

That’s not how it should work. Innovation winners should pay for the flops. If a company raises prices to cover that, that’s a sure sign it needs to take an honest look at its innovation approach.

But, they won’t. Price is keeping them in the game. Companies stuck in the price trap can get 5-10 years down the road without solid innovations and find their products are suddenly losing relevancy against competitors and substitutes because leaders have not kept the product portfolio evolving with the tastes and preferences of customers, while the rest of the market has been.

Managers and employees will blame high prices for the businesses results, instead of the long period without meaningful innovation and product development, which is the real cause.

The price trap isn’t directly the fault of leaders who don’t know how to innovate. I blame Board of Directors who don’t know how to hire leaders who know how to innovate.

When a company is stuck in a price trap, leadership often changes because the Board does get a sense that there’s something wrong about relying on price to drive business results.

But, the Board doesn’t understand the root problem, so they replace leaders with the same type of leaders who don’t know how to innovate and keep the company stuck in the price trap.

These candidates look good on paper. They have polished resumes, have increasing responsibility in their carreer, happened to be at places that had some notable wins and can talk a good game.

From the Board of Directors point of view, they are low risk hires. If things don’t work out, ah shucks, what could they do? He or she was a solid candidate on paper.

Well, here’s one thing they could have done. The could have asked candidates what their innovation track records are and how they went about getting those results?

As for evaluating their answers, that’s for another post.

Strategy vs Tinkering

In my view, the main reason Day 2 (Bezos term for mature, bureaucratic and dying) companies have a hard time innovating is they don’t know how to tinker, leave no room to tinker and actively suppress tinkering.

In this interview with Bezos, he said his seasoned manufacturing expert at Amazon told him that he needed to pace the release his ideas at rate the the organization could accept them.

https://www.youtube.com/watch?v=PJcUQDtpkpY

He thought that was profound, even though obvious, and it made him change his approach to incorporate more discipline in prioritizing his ideas.

I think many Day 2 execs will stop there and say, “See! That’s what we do and we are doing it right!”

But, then he flipped the script (at the 2 minute mark) and built an organization that could handle more ideas. “We built a company that is very good at doing more than one thing at a time.”

Bingo.

Though, I wonder…Bezos makes it sound like all the ideas came from him. I’ve read elsewhere that Amazon had an open culture to ideas, so that they didn’t all have to come from leadership.

Why companies fail to innovate

They think they understand how innovation works, but they don’t, don’t know that they don’t know and aren’t the least bit interested in considering that they might have something to learn.

It’s an odd behavior. It’s standard practice in the rest of the business to benchmark the way they do things against what are considered leaders in those areas to get ideas on how they can improve.

But, innovation is a blind spot. Maybe a sore spot. To even suggest that there might be companies out there that are better at it is like poking the bear. Leaders take it personally. They see innovation as a reflection of their abilities and they don’t like their abilities questioned.

It’s like when running a household, you might not care enough about plumbing, so you hire a plumber to do it right.

But, if someone tries to tell you how to raise your kids, you take it personally.

Leaders of businesses seem to view innovation as that.

Search this site for “Project Mangers”

I did that looking for a specific post from awhile back and was pleasantly surprised by re-reading all of the results, so I thought others might find it interesting.

I believe the post I was looking for was the first one, but I feel I touched on this concept a long time before that, but I haven’t found that post yet.

Super Bias

It’s odd how many folks in professions that seemingly require objectivity are super biased and seem wholly unaware of it.

My assumption that those professions require objectivity is obviously flawed, because they never seem to pay a professional price for their biases.

Scientists and journalists come to mind.

I see it in less publicly visible professions, too. In my experience, market researchers have super biases. And these folks know bias. They carefully construct surveys to avoid these biases.

But, then they turn around and let their super biases influence their interpretations of their research data. Those biases lead to spurious conclusions that cause business leaders to bark up the wrong trees with business initiatives.

When those business initiatives fail, it doesn’t occur to the managers to push the market researchers on whether their conclusions are valid. Rather, they have them do more market research and produce more spurious conclusions heavily influenced by their bias.

Eventually, the managers get fired because all of their initiatives fail to move the needle. The market researchers keep their jobs and tell the next set of managers spurious conclusions based on their biased interpretations. Rinse and repeat.

Success Challenge

Tell folks who should be interested about a success that you had that you had that success.

Then see what happens.

Are they interested and want to learn more about it?

Or do they pretend that they didn’t even hear you?

For years, I went around telling folks about a big success I had in my career. Nobody asked any questions. I thought that was strange.

It’s okay to be wrong

That would make a great t-shirt.

I noticed something subtle in a business. It hurt way too much to be wrong and there was often way too much riding on being right.

That is a sign of a culture that needs some work.

Why does it hurt so much to be wrong? Because the culture doesn’t know how to try things in low stakes ways to find out.

Rather, they make big bets. To convince bosses to make a big bet, you need a good sales pitch. A good sales pitch promises something great when you don’t know if that will happen.

When bosses make big bets, they put the company’s resources and their own egos on the line.

If it turns out that the great things promised don’t happen, it hurts. It wastes a lot of company resources and bruises a few egos and reputations.

When I find myself in situations where there is so much riding on being right, I think about what’s causing that and how can I change it?

Great vs mediocre companies

First, ask what new stuff they have in the pipeline for the next 3-5 years?

Great companies will have tens of things in the next 1-2 years and hundreds or thousands of ideas cooking with a 3-5 year or longer launch horizon.

Mediocre companies will have a few things for 1-2 years and nothing on the drawing board after that.

Next, ask why they feel really good about those things?

Great companies will point to results from their proof of concepts, pilots, scalability and operational tests.

Mediocre companies will tell you they have a really good feeling that their new stuff will be game changers, but are short on actual, real world results to support it.

Finally, ask how of an impact do you think the ideas will have on the company’s performance?

Ask them to put some numbers to it. 1%, 3-5%, 5-10%, 10% or more growth in revenue or earnings?

Great companies will have a reasonable idea because they’ve been learning that through pilots and testing how well it will do.

Mediocre companies will tell you they hope it will be big, but we’ll just have to wait and see. But, they don’t really know because they do not piloted or tested in the real world, yet.

If I was advising a Board on hiring a leadership team, I’d advise them to look for candidates that had answers that sounded like the great companies.

I know it may not seem believable for business leaders to have the mediocre mindset above. But, I have experienced sample of about a couple dozen leadership teams at mature businesses that would give the mediocre answers and none that would give the great answers.

And, based on what I read about other businesses, gather from contacts I’ve made over the years at other places and who have come from other places, that’s pretty common.