Globalization has enabled unprecedented hyper-competition, and all types of dynamic comparative pricing models. Yet pricing within many segments of our economy appear like something from the The Stone Age.

If you go into a white tablecloth restaurant and order the sea bass on a Wednesday, you might pay $30.  If you return to the same restaurant on a Saturday the price would be the same, even though demand in the restaurant is likely to be very different.  Eateries price on the cost plus model built in the industrial age; the price is based on some multiple of raw materials (or labor).

Our economy doesn’t work this way anymore.  Consider the market for sports tickets. Sports franchises (the Lakers for example) set the initial price for a ticket. But the market resets the price in real time based on supply and demand. If it is a Tuesday night game against the Raptors, a seat may command a few dollars more than the face value.  A Sunday game against the Celtics could command double that within a market being energized by the likes of Stubhub and other online exchanges.

Variable pricing based on nuanced supply and demand is the future, and it is the present.  Marriott has historically been the most profitable hospitality company, as its revenue per available room (the industry benchmark) often exceeds that of rivals. In the case of hotel rooms (or airfares), business-to-consumer pricing models can shift daily based on numerous variables such as weather, events, or the calendar.  Like it or not, exchanges that provide comparative prices are proliferating, in both B2C and B2B.

I am not advocating the companies participate in such portals: they the fastest way to commoditize an industry. What I am saying is that the acceptance of such tools points out a broader problem (or opportunity), that markets re-price based on real demand, not arbitrary prices set by the seller.

Businesses, including those that market products and services business-to-business will need to be more analytical about which products and services could and should command higher prices and which will command less.  To set up a fixed pricing schedule seems overly convenient in a world where buyers have far more sensitivity over some purchases than others.  A software developer may need to sell a project at a low cost to win the business, but could charge far more (on an hourly basis) for change orders that are not foreseen by the client.

Most small and mid-market companies have not done enough research to understand the relationships between the products and services they sell.  If an accounting practice sells tax work and audit services, how should they price one against the other and what is the likelihood that clients will gravitate to them as a result of their pricing model or other variables? I think few really know.

Companies should test various pricing strategies to see what works best, and be more purposeful about tweaking pricing to reflect current demand.

Whenever they call a day “black”, you know something bad is going to happen. On the Friday after Thanksgiving, I wanted to vomit. Not because I ate too much, but because of the destruction done to the U.S. economy. As a purveyor of value creation, I find Black Friday repugnant. Even if you are not a retailer, there are lessons here for all of those fighting off commoditization.

U.S. retailing used to be the Pareto Principle in action, with as much as 75%-80% of profits being realized in the 4^th quarter. The holiday season has turned into a race of who can open the earliest, and sell the cheapest flat screen TV (you could have bought a 42 inch flat screen at Best Buy for $199).

Last year I was talking to a corporate Vice President who was quite happy with herself after doing all of her Christmas shopping on a single day (I believe 4 AM is still the middle of the night if you want to get technical). I asked her, “how many items did you buy”, “17” she said. “How many were on sale” I asked- “17” she replied.  The defense rests.

Retailers work on “blended margin”, the ability to attract customers with lower priced goods, only to flip them to higher margin products.  In grocery stores, staples such as milk which are very low margin are at the back of the store, and higher margin produce and deli at the front in the “traffic pattern”.  Black Friday represents the destruction of 100 years of merchandising evolution, and creates a frenzy of deep discounts (one shopper in Porter Ranch, CA used pepper spray on another over an Xbox).

Some may argue that the “strategy” is to win shoppers for future trips and control market share. That may work for the low price leader (WalMart), but it doesn’t work for other retailers and boutiques. Those are the retailers trying to train their customers to realize the value of their service, knowledge, and unique offerings, and may only have one or two shots at the buying crazed mother with three kids.

Here is the single most important and basic business principle one could ever communicate in a business blog: prices should be high when demand is high, and prices low when demand is low. The destruction of the industry is inevitable if retailers continue to discount the deepest when demand is high. The shame, the shame!

Here is a prime illustration of how deeply this perverse thinking has infiltrated the industry. Recently I was shopping at Macy’s, selected a garment and brought it to the register, clearly marked with the price I was willing to pay. The cashier pulls out a coupon and says, I can give you another 25% off.  The defense moves for an immediate verdict your honor.

Defenders will say that the competition made me do it. What competition? China, WalMart, Best Buy? The true answer is Amazon and other online retailers who have changed the game forever, and this year kicked in free shipping to make their offer more compelling (online purchases are predicted to rise another 17% this year). So the real problem is not some evil empire. We have seen the enemy and it is us.

In order to fend off deep discounting:

1. Find products that can co-exist with online purchases. How can your products compliment the deeply discounted products? An iPad offers very little margin to the retailer, but accessories such as head phones and adapters are very high margin and offer the opportunity for repeat business.
2. Reinvent your model so that you are purposeful in selling complimentary goods. If you are going to sell them a gun at cost, you had better have the staff, expertise, merchandising and inventory to sell them some bullets as well.
3. Teach your employees the profit formula. Most of your employees think you are making a ton of margin on those handguns, so you need to teach and incent based on your objective of selling more ammo (I would have picked a more pleasant example but I am feeling like a curmudgeon after all of this discounting).
4. Provide the ultimate in-store experience that rivals or beats the online experience. Perhaps customers can see, touch and feel products that are shipped to them later, or to their loved ones.
5. Select targets (product, location, etc.) that are less vulnerable to price attacks from discounters and online retailers.

Let the treasure hunters go to the competition; they are the least loyal of shoppers and you can’t make any money selling to them anyway.

With the sluggish selling season will be plenty of opportunities for deep discounts. Deep discounting marginalizes a business (unless you are the low cost leader). Retailers may need to offer products at cost, but should do so with a clear pricing strategy built on balancing market share and profit.

I recently had a conversation with a CEO who was lamenting about the disparity between public company valuations and those of privately held concerns. As of July 2011, the S&P is trading at a multiple of 14, while private company multiples remain in the 5-6 range. Investors value public company access to capital, and scalability into large consumer markets.  Of the Top 10 U.S. companies by size, none are pure play B2B companies.

Small companies come in all forms; some compete with larger branded companies, and some market directly to them.  In the age of confluence, some do both. How can small companies survive in a land of giants?

The primary difference between Fortune 1000 companies and smaller ones is more fundamental than which markets they serve. Intel founder Geoffrey Moore makes a distinction about business architecture – the difference between “complex systems” and “volume operations”[i].

Many smaller B2B companies are built to support specialized and custom solutions, while most Fortune 500 companies are built from the ground up to serve the masses. While customization may command higher prices (per transaction) than generalization, high volume companies cross a threshold where their infrastructure promotes a lower cost per unit and the experience curve takes full affect. Thus, B2B companies face an inherent profitability disadvantage.

Where Microsoft offers its highly useful suite of Office products at around $400 per license, Apple’s B2C model (which is often utilized by small businesses and micro-businesses such as designers and the like) offers Pages and Numbers at $9.99 each. One offer is based on high intellectual capital value and the other on mass appeal and ease of use.

For smaller B2B companies to reach new levels of profitability, requires they find a path to scalability. Of course not every business wants to be big. Some entrepreneurs prefer a “family culture” and more tempered growth (with less risk).

One way to effect profitable volume is to find a balance, where products and services are “mass customized”. Mass customization is all the rage in consumer products where individuals can even build their own handbags and Nike basketball shoes to their specifications.

Smaller companies (B2B and B2C alike) should seek out solutions that allow for better utilization of existing solutions across more customers. In other words, the provider should not need to reinvent the wheel with each project. Often, optimizing margin requires leverage of a base product or service that can be replicated, at times with features configured to the customer’s individual needs. To configure from a menu of choices is considerably different than satisfying each specific whim, which may offer greater intimacy with the customer, but may also require the business to sacrifice profit. For every feature created for an individual customer, there is a resulting opportunity cost (time, money and energy that could be invested elsewhere).

The other requirement for getting big is a shift towards systems thinking, where management teams make decisions within the framework of their company’s capabilities. For a new initiative to succeed requires careful analysis of the resources required to implement it. The key for smaller companies who aspire to do business with larger ones it to utilize systems and processes consistent with the expectations of the customers they serve.

Competing against larger companies requires a unique mindset. Often small businesses use concepts like judo (where the larger opponents energy is often used against him) to beat the larger foe at the point of attack. Consider the depth and width of the market you want to serve, and scale your resources accordingly.

Being Opportunistic in a Volatile World

Last week my post drew considerable attention, perhaps because of its shock value at a time when the news was truly shocking. While the tsunami was a natural disaster, the response on the part of the Tokyo Electric Company was a human calamity. Lack of preparation will invariably lead to unintended consequences, if you are managing a nuclear power plant or any other business.

The reverse is also true. The entrepreneur capable of understanding seemingly unrelated external forces, and weaving them into a thoughtful strategy, will clearly realize strategic advantage. How might the strategist consider social, technological, economic, ecological and political factors to gain insight on how to take advantage of ever changing market conditions?

Scenario planning is a methodology whereby the entrepreneur considers converging factors that (in combination) creates a tipping point. Consider some of the following predictions, based on facts already in evidence today.

In the next decade, we are likely to see:

Predicative Modeling-Cloud computing enables the migration and cross-referencing of large institutional databases.  For example, actuaries, using sophisticated algorithms are able to model ailments based on lifestyle choices monitored in real time. They are able to calculate your risk of a heart attack based on which smoothie you tend to order at Jamba Juice, your frequency of exercise, prescriptions you use, etc. Offered as a benefit of a health care plan, the member is offered incentives to opt-in and receive preferential rates. Such tools slow down rampant health care inflation.

A Cashless Society-The majority of transactions amongst big banks are managed by exchanges where no money actually changes hands. Coins of small denomination are nearing extinction. Today, you can download an iPhone app that serves as a debit card, and can be swiped within Starbucks locations.  For most transactions, cash is already irrelevant.

Smart Infrastructure- Automobiles come preinstalled with all of the features of an iPad (the 2011 Hyundai Equus will come with one) and all the benefits of the internet. Smart grids control the flow of traffic, directing drivers to particular lanes at a given speed to optimize drive time and reduce accidents. Traffic signals are regulated based on traffic volume. Sensors predict bridge and rail failures.

Of course, rapid change will occur in every industry, and the strategist must weigh various opportunities based on an organization’s ability to take advantage of them. As a general rule, organizations should seek to achieve scale and reach within its core (at least 30% market share) before expanding into new endeavors. As Jim Collins points out in his sequel to Good to Great (How the Mighty Fall), many companies fail because of an “Undisciplined Pursuit of More”.  In their zeal for diversification they often leap too far from their core competency.

Each opportunity must be assessed within the context of the organization’s resources, bandwidth, and human capital.  For every opportunity there is a cost, and an opportunity cost. To pursue any new opportunity an organization must leverage resources which dilutes focus on the core business.  Choose your opportunities carefully.

Double and triple bottom line companies were all the rage a few years ago. As quickly as they peaked our interest and fed our social sensibilities, they faded into the depths of the great recession.

Many have long assumed that to serve the public good yields some type of opportunity cost. That is to seek any other outcome besides profit robs an organization’s ability to deliver the highest return on investment. Yet some of the world’s hardest charging enterprises such as GE and WalMart consistently lead global movement towards sustainability and similar pursuits. They do so not only because of the obvious public relations benefits but because they view such initiatives as driving some form of competitive advantage.

Thus there is a movement underfoot to understand how our businesses make our communities better, and how our communities (including government) can support economic development. One lesson of our economic malaise is that cities and small towns are drowning as a result of failed businesses; a reflection of an environment in which business and government can be in conflict with one another.

We have a number of clients such as People’s Care, Lincoln Training Centers and the L.A. Fireman’s Relief Association that blur the line between profit and non-profits. These are financially responsible organizations that also provide shared value; i.e. they contribute social benefit to our communities.

I once completed a project for Rio Tinto, one of the world’s largest mining concerns. They were extremely committed to reducing their consumption of water in North America, and invested heavily in seeking out solutions that reduced their impact on the environment, while reducing their cost and risk. My point is that these goals do not have to be in conflict, and can actually be synergistic.

Brands such as Starbucks combine their economic and social interests in a way that enhance their brand and positioning, and promote higher perceived value. Our penchant for spending $3 on a latte instead of a $1 coffee at McDonalds or Dunkin Donuts is due in part to our interest in being part of a social contract (precipitated by Starbucks).

Give some thought to how your enterprise can augment its thirst for profit with the ability to deliver shared value.

Inspired by “Creating Shared Value” by Michael Porter and Mark Kramer HBR January 2011

I have to admit I am a hater; a Cowboys hater. Clearly one of the most talented teams in the NFL, the Cowboys are off to a 1-4 start, and leading the league in penalties. They are an undisciplined bunch.  Organizations take on the personalities of their leaders, and America’s team carries on with the swagger of its egocentric owner (Jerry Jones). The Cowboys look the part, but do not execute very well.

Most everyone reading these words knows the fundamental principles of business.  I am not suggesting any of us stop reading, and learning; we all need that. But the basics are clear: create a compelling offer, hire great people and manage your cash and balance sheet.

It is one thing to know what to do, and another to actually execute. Like the Cowboys, many businesses have a fundamental lack of discipline. They do not stay true to their business discipline and core competencies. As Jim Collins points out in “How the Mighty Fall”, many of the Good to Great companies have not sustained their success. Collins blames an undisciplined “pursuit of more,” as some Good to Great companies expanded into new lines of business too far afield from what they knew best.

The organizational effectiveness of a company is often tied to the discipline of its leaders. The lowest functioning entrepreneurs are the ones who simply do not follow through on their own commitments. Some talk of corporate values but act irresponsibly. Others say they have a premium offer, but discount vigorously. Some come up with a plan and do not follow it.

Discipline and organization are often linked. It is those who have the hunger to execute who seem most organized, and most committed to outcomes.  It just takes a little more time to delve into details to insure your organization is fulfilling its commitments.  Setting goals and following them takes work. If you accept mediocrity, so will others.  We should all aspire to do the best work we can, and hold our people accountable for doing the same.

There is an old saying that #%$@ roles downhill. If the leader lacks focus and discipline, so will his or her followers. I have had the opportunity to work with some world-class entrepreneurs and they are spot on with follow through.  For the crème de la crème, discipline is part of their DNA.  They do what they say, and say what they do.

Here we go again. Suddenly, people are fleeing the stock market for the safety of muni’s and other low risk investments. The U.S. dollar is strong only because of the weakness of the Euro and other foreign currencies supported by extraordinary deficits.  Emerging markets such as China, India and Singapore are the only ones growing and even China’s forecasts are cooling. Some economists are calling all of this a dreaded double dip.  Is this spasm an overreaction?

I am not here to offer a prediction as much as some perspective. Historically, there have been two elements that have preceded U.S. recessions.  Typically, there has been a scandal such as the Savings and Loan Crisis, Michael Milken, Enron/Worldcom, and most recently the liquidity crises triggered by the likes of Goldman Sachs, AIG, Lehman Bros, and Bear Stearns, where someone has manipulated a market (most recently derivatives and credit default swaps).  Secondly, the recession usually follows a bubble (dot.com, real estate, etc).  In other words, our economy gets fat and happy, investors take advantage, and then the bubble bursts.

We certainly have not seen our economy swell over the last 12 months.  People have been so desperate for good news that we accepted what little there was as signs of a recovery.  The reality is that our economy grows at about 5% in times of prosperity, and 2% in times of stagnation.  Three percent swings us from optimism to pessimism, which reinforces the magnitude of emotions in our decision making. Fear is always the most powerful emotion and motivator, greater than love and all the others.

So how will the next few months play out? I don’t have a concrete answer for that but what I do know is that our reaction to the sound bites from economists and experts is quite personal. Our practice is thriving at the moment (in part due to the acceptance of the book) which is proof positive that the performance of an organization can be driven in part by one’s confidence and sheer will. Certainly, market forces are in play and in some businesses (like construction) you can still hear the giant sucking sound.  In others the business can best be described as mediocre and the entrepreneur must decide how much investment (in sales and marketing for example) is appropriate.  What I have seen from manufacturing clients is that are petrified of expanding their factories out of fear that they will not be able to dial back capacity.

In a universe where most are passive, there is more opportunity for the aggressors.  I read of one recent investor who bought BP and shorted Apple, a counter strategy that clearly made him a lot of money. While I am not dispensing any investment advice, I am suggesting that we all must make individual choices on the level of risk we are willing to accept. In an age when things are uncertain, there is as much evidence that we will continue along a modest recovery path as there is that the bottom will fall out, and I have made the choice to stay on course. If you are not comfortable with the status quo, it may be time to find new product, services, channels or sectors because there does not appear to be a hockey stick coming any time soon.

Back in 2008, there was a waiting list to buy a new Toyota Prius. As oil prices surged, hybrid vehicles exploded on the scene. In the first half of 2009, the economy and gas prices slumped, and “Cash for Clunkers” drove automobile demand. Prius sales fell off a cliff (declining by 45%).

For years, idealogs have led the charge for the environmental movement, and environmentally sensitive products have experienced modest demand. While most of us intuitively wish to preserve the planet, the pattern has been that the masses have not been willing to pay a price premium for alternative energy and green products.

Until now, wind and solar power were more expensive than the fossil fuels they were intended to replace. We may be at a tipping point. Regulation is increasing the cost of electricity and coal and technology advances have reduced the cost of solar power.

The state of California (evidently flush with excess cash), is funneling $200 million a year through 2015 into low emission vehicles, including 5,000 charging stations for electric cars. It takes 60-90 minutes to charge an electric car at a charging station (about 8 hours in one’s garage), so the consumer wanting to buy one will certainly have to sacrifice convenience.

The economic realities of the recession have been a setback for the green movement. Fortune 500 companies had upped the ante on vendors measuring their carbon footprint and the like but clearly pulled back in their quest to survive the downturn.

So where do we go from here? My belief is that we are at a crossroads where the most economically viable energy sources will emerge, government will use its bully pulpit to drive consumption, and leading companies will place their gambit on specific energy saving initiatives. The time for talk has probably passed.

The minute the consumer has options that are relatively equal in cost to that of traditional energy sources there will be an avalanche of change. Green represents a set of tradeoffs that businesses and their customers will have to adopt and accept. The green movement has always been a function of leaders who believe, and never in history has there been more opportunity for leadership to make a difference.