Tag Archives: marketing

The price trap

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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.

Discount subsidization strategy

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It would be natural to think companies run discounts and promotions to attract enough new business to be profitable.

That’s rarely true.

The cost of most discounts and promotions are subsidized by other customers who pay more.

Amazon encrapification part 2

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I wrote part 1 in March 2025.

This week Amazon announced it is laying off 16,000 employees, or about 10% of its corporate workforce, and that’s after 14,000 were laid off in October, to streamline operations.

Regular periodic layoffs are a sign of an encrapified company.

Even with the benefits of introducing ads on its Prime video and letting 2 day delivery standards slip while likely still raising its price for Prime service, that isn’t enough.

As a reminder, encrapified companies are ones where organic growth of their core product or service is slowing or halted, so they seek ways to take more of the value that is in those transactions.

Like introducing ads on Prime Video. Viewers of Prime who previously got to watch Prime content ad free now has that value removed, unless they want to pay more.

Or by charging suppliers to get high rankings on product searches. That takes a bit of the value from the suppliers, as it costs more for them to sell their product, and from shoppers, who have a harder time finding the products that they want because they have to swim through paid listings of products they don’t want.

Like how Google used to get you to your search result as quickly as possible, a value prop for Amazon was that it could get you to the product that you wanted quickly, too.

Both of those values have been eroded as both companies have sold out that value prop.

What generally happens in encrapified companies is that new leadership teams come in and promise to take the company to the next level. They fund their initiatives to do so, which means hiring a bunch of people to support things before they find if customers want them. They roll them out to discover that customers do not. Then the next leadership group comes in to streamline out the previous group’s failures and then build their own.

Lessons from Shark Tank: Customer Acquisition Cost

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If I taught a hands-on business course, watching Shark Tank would be part of the syllabus, because it offers great real world insight to how business investors with good track records and who put their own money on the line think.

One metric that comes up in nearly every pitch is customer acquisition cost.

Customer acquisition cost is how much it costs to acquire one customer or one unit sold. It’s calculated by dividing all marketing expenses by the number of units sold.

Sharks love products that have close to zero customer acquisition costs. That’s a strong signal that the product sells itself that keeps customers buying and telling others about it through word of mouth.

Products that sell themselves are some of the best, long-standing products around. Coke and Chipotle are two good examples. Chipotle didn’t have to spend much on advertising as it was expanding locations. A line out-the-door would magically form at mealtimes in each new location. A good example of such a product discovered on Shark Tank is Poppi.

Coke does spend a lot of money on advertising, but it doesn’t need to. It does because it can afford to. But, the product sells itself and would whether it spent money on advertising or not.

Sharks are interested, but less so, in products that have acquisition costs that are a small percentage of the margin. This signals that the products sell themselves, but need a little marketing to prime the pump, like maybe to gain awareness.

As customer acquisition cost nears the product margin, the less interested Sharks are in investing. For example, if a product sells for $50 and the business makes $22 on that sell, the closer the acquisition cost gets to $22 the less interested they are.

This is called buying sales. These are products that customers will buy but they aren’t excited about it otherwise. This is common for products competing in already crowded markets where there isn’t loyalty between products.

Sharks don’t like these products because they never truly become profitable. Marketing will always be required to keep them selling. It will always be a fight to sell their product.

Sharks hate products where the cost of acquisition is a lot higher than the product margin. These are products that won’t be in business very long because they burn too much cash.

Over the years, I’ve heard a lot of folks recommend more advertising for mature, saturated businesses.

The first question to ask someone who suggests this is a Shark question: How does the company’s customer acquisition cost compare to the product margin?

It’s surprising how many aren’t even aware of this metric.

At one company, the margin was about $2 and the customer acquisition cost was $3-4. So, every extra dollar spent on advertising lost $1-$2, which is not a good investment.

The Market Research Myth

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Here’s another good innovation article on Braden Kelley’s blog: Ethnography for Innovators by Chateau G Pato.

Here are the first paragraphs:

In our data-driven world, companies invest millions in surveys, focus groups, and A/B testing. Yet, these methods often only illuminate articulated needs—the problems people know they have and can describe. If you rely solely on these methods, you will, by definition, only produce incremental improvements on existing products.

The true gold standard of innovation—the breakthrough idea—lies in the unmet needs: the pervasive frictions, latent desires, or emotional compromises that people have simply grown used to and can no longer identify as problems. They are the invisible pain points that exist outside the structured environment of a corporate interview.

This gets to one thing I think holds a lot of companies back from doing meaningful innovation: the market research myth.

The myth is that managers believe answers on how to improve on existing products or create new products are as simple as doing market research, rank ordering the outcomes and executing on those.

It sounds logical. What could be wrong with that?

What’s wrong should be obvious. It doesn’t work. If it did, innovation would be easy and most companies would have more success in that regard.

What I find curious is how few people notice it doesn’t work and so the market research loop remains an unquestioned conventional business practice. When the last set of initiatives derived from the previous batch of market research flops, they go do start over. They do more market research to identify the next batch of initiatives and loop repeats itself.

It’s assumed that the initiatives or execution of the last batch was what was wrong, not the market research.

Here’s why I don’t think market research works.

Pato mentions one reason, the articulation fallacy. In a basic marketing course I learned about the difference between customers’ stated and revealed preferences.

People often say they want this or that (stated preference), but when given this or that, they still don’t buy it (revealed preference) and they can’t articulate why.

It’s usually because when the customers thought about a new feature in isolation, it sounded good. But, when faced with evaluating the value of that new feature relative to the other options available using their own money, it wasn’t worth it the extra cost or the risk to switch to something new, and they don’t think long or hard enough to understand this.

This is part of my business rule #1 of success: Have what customers want and customers don’t know what they want. In other words, you can’t count on customers to be able to tell you what they want. They will tell you what they think they want, but they don’t know what they actually want and they don’t know that they don’t know.

If they did know and could articulate it, again, innovation would be easy.

There are other things wrong with market research, too, like poor and biased analysis and overly simplistic conclusions.

I first noticed this while working with market researchers on pricing. According to the the market researchers, high price was the #1 problem to be fixed.

Managers listened to them and tried a number of price and promotional things to try to address it. None even budged the needle in sales or the market research. The same percentage of folks still complained about price even when they paid a much lower price than before.

After a few years of this, I asked the market researchers for the raw data that they used to base their claim on and analyzed it to discover that they had missed some important things.

Bad analysis: They assumed that the findings from a small disgruntled group of customers was representative of the whole customer population. They were not.

Missed: They missed that even in this small disgruntled group that these customers were really saying the value was not worth the price.

For example, one group said they thought their job was simple enough that they could DIY and save money. Market researchers saw the “save money” part and grouped it as a pricing problem. They ignored the part where the customer said they felt their job was simple enough to DIY, so the business folks were never aware of that.

Offering these customers discounts or lower prices hadn’t showed any signs of working.

My finding led to a few things that did work, like informing these customers that even if their job was simple, it’s also easy to mess up and cleaning up that mess can be costly. That worked better than any of the price offers because it addressed the value concern. It changed how those customers viewed the value from just the labor involved in completing the job to an investment to be made to avoid a costly cleanup.

Another problem with market research is that managers and market researchers believe it is a good substitute for putting products in market to predict a product’s success. It’s not. If it were, again, innovation would be easy.

The best innovators know that there is no substitute to the feedback you get from getting something in market, even if it isn’t the most perfectly refined product. There’s even a name for it: MVP or minimally viable product. It’s the best way to gauge interest and get start getting info on what will need to be improved.

The last problem I can think of with market research is that the MR folks usually don’t have any stake in the outcomes of the initiatives that stem from their findings, so they never have to consider that the initiatives failed because their findings were not right. They never have to course correct.

They will write-off that the initiatives or the execution and say those didn’t address the issue and keep repeating their same findings, as if it’s their job to point out the problem but not solve it.

If they had a stake in solving those problems and got to see firsthand what they personally believed wold solve the issue fail, that might cause them to consider that they missed something in their research and explore what that might be, instead of repeating the same old findings.

It amazes me what companies get wrong about innovation #4: they don’t know how important innovation is

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Here’s a recap of what amazes me about what companies get wrong about innovation, so far:

#1: They think they can predict winners and losers

#2: They aren’t aware of the odds of success

#3: They don’t notice that their approach to innovation isn’t working

I found it tough to write about these as separate ideas, because they are so intertwined. For example, they think they can predict winners and losers (#1) partially because they don’t have a full appreciation of the odds of success (#2).

They are highly related ideas, but I felt they were also distinct enough to explore each one separately, because thinking you can pick winners is slightly different than not being aware of the odds of success, because you can be aware of the odds and think that you can beat them.

A ran into more of that as I wrote #3, because it #4 is entangled with it: They don’t realize how important innovation is (#4), so they don’t pay enough attention to it to notice it isn’t working (#3).

They pay lip service to innovation. “Of course innovation is important,” they will say. “We have an innovation group, don’t we? We try new things.” And, they believe it, too.

But, their actions speak louder than their words. They treat innovation as second fiddle to their strategic initiatives. Worse, they often constrain innovation to only explore ‘spaces’ they deem fit with their strategic vision.

I have seen this play out at a few mature companies time after time.

A new leadership team comes in. They set their sights on big improvements to the existing business through their strategic initiatives. They are very confident their strategy will result in great things for the business. They hype their plans up and rally the organization behind them. Failure is not an option!

Then they roll out that out and thud. Nothing happens. If you graph lines of the company’s revenue and earnings for the past 10 years, you will see no change in trajectory when their strategy started.

Then the Board turns on them, clears them out and brings in a new set of leaders.

Usually the Board brings in a new set of folks cut from the same cloth as the previous set, folks who believe their strategic initiatives will drive the company forward.

Rinse and repeat.

While all this goes on, the innovation group also keeps putting out duds and nobody notices because in the whole scheme of things nobody truly thinks innovation is as important as the leaders’ strategy.

But, there is no other quote that says it better than: Innovate or Die.

That’s how important innovation is and should be. It is most important for the future.

Instead of trying to fit innovation to their strategic visions, they should try giving innovation some rope and fitting their strategic visions to what innovation discovers.

Jeff Bezos said his version of “Innovate or Die” well in his distinction between Day 1 and Day 2 culture. He wants to keep Amazon in Day 1 startup culture because Day 2 is “stasis. Followed by irrelevance. Followed by death.”

“To be sure, this type of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final results will still come.”

Many of the folks in these companies, leaders included, aren’t aware that their companies are heading toward death because it is happening in extreme slow motion, as Bezos says, as they harvest the company’s past successes and every day they don’t realize how important innovation is one day closer to the company’s death.

Macy’s is a great example of this. Featured about a year ago on the Freakonomics podcast, I wrote about how that podcast and how they were implementing their Bold New Strategy.

The Bold New Strategy was the current leadership’s strategic initiatives to get the best products in stores, which is just the latest in the long line of similar strategies that successive waves their predecessors have tried to employ as the company has been dying in extreme slow motion over the past few decades.

If I were to guess, Macy’s innovation efforts over the past few decades have likely been structured around these strategies to save the business and make Macy’s the best department store possible, instead of just innovating.

Macy’s sort of won. It’s one of the last remaining department stores. It outlasted many others that went poof over the last few decades. But it’s a pyrrhic victory. Macy’s is worth $5 billion. Amazon is worth $2.4 trillion. That’s 500x more than Macy’s.

Sears started off as a mail order catalog and successfully transitioned to a department store only to die when it couldn’t successfully transition back its own roots when the internet came along. My Mom once said, “I don’t understand. Isn’t Amazon just doing on the internet what Sears used to do by mail? Why couldn’t Sears do that?”

Until it died, Sears was trying strategies like Macy’s Bold New Strategy to turn around the dying department store model.

The answer to my Mom’s question is this post. After decades as a department store business, Sears became department store business and forgot how important innovation was.

“Encrapification”

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Ha! Another Seth, a YouTube mountain bike content creator gives five reasons in this video why he’s selling his AirBnb:

The first reason is the ‘encrapification of AirBnB.’

He explains:

Encrapification occurs when a service provides excellent value to consumers like Amazon, eBay, Nefflix and Uber once did. Uber’s so great it put taxis out of business and cornered the market. And that’s precisely when the encrapification begins. They start collecting larger and larger fees from every party involved, and selling your information until the service is worse than the one it replaced.

You might notice how a $95 a night rental somehow become $285 and then they pretty much expect you to clean the place. Seems like greedy hosts must be solely responsible for this, yet they are having a harder and harder time making a profit.

Encrapification is a good term for when a business reaches maturity of it successful value proposition, growth slows and then they turn to business school trained professional ‘managers’ and management techniques to do what everyone else is doing to try to keep the glory growth days going — like raising prices, cutting costs that they don’t think customers will notice (but they do), taking more of the fees they collect, sharing less revenue with partners and essentially trying to take more and more of the meat on the bone to the point that it becomes less worth it to everyone else involved — including customers — and the business starts its decline or opens the door for competitors to come in.

In fact, I’ve been hearing from several of the YouTubers that I watch on a regular basis that they aren’t making as much money from YouTube as before and making it is less worth their while to keep their channels going. Sounds like encrapification.

What about Amazon? If you want to have a chance of selling something, they charge you to get your product placed. So, it’s no longer about seeing the best products that you want. You are seeing the products that paid the most and vendors now not only share the margin of their product with Amazon, but also pay Amazon to show their product as high up the list as possible. So, Amazon is taking more of the meat for themselves and making it less worthwhile for vendors to put their product on Amazon, so many are starting to go back to selling direct to consumer.

It’s not just newer businesses. Encrapification has been going on for a long time.

I remember first noticing it decades ago at Olive Garden. I loved their original bread sticks. I still remember the visit when they had switched to the partially pre-baked bread sticks to save costs.

Is there a better way? I don’t know. Once startups get through their growth phase and mature, there isn’t an easy answer.

What should they do? Just maintain the original value prop and pump out steady cash flow?

Maybe. McDonald’s has managed to stick around and do well over the long-term by evolving to stay relevant and to generally make non-encrapification changes, in other words, changes that are more win-win for McDonald’s and customers, and not just McDonald’s taking more meat off the bone.

The double lane drive thru is a good example. While it has pros and cons (con: negotiating the merge), the customer still generally gets their food quicker than the old single lane, which is a win for the customer. The win for McDonald’s is that it can get more cars through the line.

I think a great way for companies to avoid encrapification changes is to consider if it is a win-win or win-lose.

Price hack: What price would make you feel better about that?

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A common oversight I see when it comes to pricing strategy is to view costs as if they are completely unrelated to the prices charged.

This leads managers to fixate on reducing big costs to improve the bottom line.

The problem is that these costs can be inherent to the value of the product the customers are buying, so reducing the cost also reduces the value of the product and could hurt sales. This approach is effectively a price increase that doesn’t pay off.

Price hack: Instead of asking how much the big cost can be lowered, they should ask what price can they sell the product at that would make them feel better about that big cost?

The next question is, what will happen if we charge that price?

Raising prices enough to make you feel better about the cost might reduce the number of units sold, but will still come out ahead on revenue and make you feel better about every unit that is sold. This is price increase that does pay off.

Managers should also ask, is this cost already priced in? Often it is, as evidenced by the product’s healthy gross margin. I advise against pricing the cost in twice or three times, because that’s when customers start really noticing the disconnect between price and value.

Steve Levitt wonders why natural experiments are absent in the business world

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Near the end of his recent People I Mostly Admire podcast, Freakonomics co-author Levitt recalls a speech he gave about why businesses don’t use or appreciate natural experiments.

He describes a talk he gave…

I was talking about something that puzzles me, which is, why is it that natural experiment thinking is almost completely absent in the business world? Natural experiments or accidental experiments, the kind of research that I do, where you can’t run a randomized experiment, so you’ve got to go out and find other ways to get at causality. It’s really just an approach. It doesn’t take a lot of knowledge of statistics, it’s an attitude for finding answers to problems. And I think it would be really useful to businesses if they adopted it. But, I think in part because in high school or college or even in the M.B.A. programs, I don’t think we teach about the idea of what a natural experiment is and how to run it. It just doesn’t happen. So it was sort of a polemic about how business economists should latch onto the idea of analyzing their data through the lens of natural experiments.

I use natural experiments in the business world for my own work to great effect.

I agree that natural experiments are not appreciated.

Professional business managers aren’t interested in accidents. In their minds, business is driven forward by deliberate, smart strategy. Their deliberate, smart strategy. Or, at least, the flavor of the day management strategy that they are trying to emulate.

Natural experiments seems like a cop out to these folks.

They think, I didn’t go to Harvard or Yale just to learn to rely on happy accidents. Anybody can do that.

Bring up the idea of natural experiments with them, and they tend to get defensive and list all the successes they’ve had or heard about that they believe was smart strategy.

After all, some have told me, the iPhone wasn’t a happy accident. Steve Jobs has mythic status for smart strategy and they want to emulate it. They’ve cast themselves as the hero in that same type of story.

Then I start to list all the things that were precursors to the iPhone, including Apple’s first attempt at the personal digital assistant, the Apple Newton about 10 years prior to the first iPod, and then the iPod itself and the other products on the market that influenced the design and direction of the iPhone, including competing music players like Microsoft’s Zune & Blackberry phones.

In hindsight, it’s easy to attribute the the success of the iPhone as a lesson in smart strategy and dismiss the truer story of trial-and-failures and evolutionary processes and a bit of luck that led to it.

The winner always looks smart. And maybe they are.

But, dig a little deeper and you might find that the winners often leveraged natural experimentation to great effect. They may not have realized or it, or make the same attribution mistake when looking at their successes in hindsight.

I worked in a mature company where the leader came from a tech company that was growing while he was there. It was growing before he got there and stayed on the same trajectory until he left.

In hindsight, he attributed its growth during his tenure to things like an open office environment, instead of the company simply being on a natural growth trajectory after stumbling on a good value proposition.

So, he started implementing the open office environment at the mature company, hoping it would change its revenue trajectory to look like the growth company’s.

Spoiler-alert: It didn’t budge. It cost a lot of money and caused lots of strife in the workforce.

He quietly abandoned that about one-third through when it became abundantly clear to him that there wasn’t some magic elixir growth in having everyone be able to watch each other pick their noses all day long.

Coke’s bad decision was more of an issue of its science norm

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In this post, I wrote about Andrew McAfee’s book on innovation culture, “The Geek Way.”

In it, he writes about the blunder Coke managers made in swapping its classic soda with New Coke in the 80s. I also mentioned in my previous post on why I’m not a fan of the term, ‘data-driven decisions.’

Full disclosure: I lived through the trying times of the Pepsi Challenge. My buddies and I thought we found a cheat code for scoring free soda.

I thought the New Coke story was a good choice for backdrop for McAfee to discuss one of his four innovation norms (listed in the linked post), just not the one he used it for: openness, or how free people are to speak up, even to senior people.

I think it could serve as a better backdrop for one of his other norms, ‘science.’

In McAfee’s telling of the story, he points out that the taste tests are not a good predictor of what people will actually buy.

But, then McAfee claims if Coke’s culture had more openness, someone may have made that point and prevented the CEO from making a big blunder.

It turns out that while people preferred sweeter soda side-by-side after they came into a mall from the heat of summer, there were reasons and situations where people still preferred Coke. Some folks, for example, preferred a less sweet drink paired with dinner. For others, old Coke was what they were used to.

I doubt that openness alone would have led to that discovery. I think believing it would is hindsight bias.

Had they asked Coke employees to list why this move might not work beforehand, this reason may have appeared on that list, along with hundreds of others and it would be impossible to tell which are valid or not.

If managers let those reasons prevent any new trials, then we would never get any new hits. And it would just be a guessing game to try to pick the good reasons from the bad.

This is why the other norm of science is so important. It can help you discover what will really happen despite the hundreds of reasons we can imagine why it won’t work.

Taste tests might be an early indication to help guide product development and new products.

But, before making the bold move of replacing a core product with a new one, it’s best to dip your toe in and try it in small experiment that as closely resembles how that decision will play out as possible, like a pilot or test market, to see how customers will truly respond.