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How to set a price? How to define the value of things? This paper’s intention is to drive you from the apparent simplicity of traditional cost-based pricing methodologies to the highest level of complexity that integrate sustainability costs for people and the planet. From KISS mindset to the quest of optimizing always more complex interdependencies we will illustrate how the praneo way is benefitting organizations, value chain and eventually how it contributes to a more sustainable planet, healthier people and better shared economy.
Cost times two or three or 10, is a very efficient pricing method since everybody remembers it and understands it.
When in charge of pricing for large multinationals, I always had the same “simple” question: how much for this product?
At that time it was multi-million investment in foreign, high risk countries but the essence of the challenge is the same, whatever the product or the service whom ever you talk to : a CEO or the down-the-pyramid-middle-manager : how much. In this blog, we decided to tell you a story, the story of a nail that wanted to know its value.
First, let make it KISS, classical acronym for “Keep It Simple and Stupid”. Here the idea is that if you cannot make it simple and stupid, the vast majority of the “non-specialists” will neither remember it nor understand it, and all your efforts will be doomed. Fair reasoning that pushes us forward the simple and stupid!
OK. So let’s start with the rule of thumb : “cost times two”. As simple as it sounds, believe me it just worked fine for decades in most business, cost times “n” n, being 2 or 3 or 1000 is simple and stupid enough. Once you have the good n factor… you are good to go.
And actually not wrong in a stable and mastered environment. As the following costing breakdown demonstrates it: (50) for cost of good to be produced (the times two factor), some R&D for future product (5) marketing brochures (5) and sales volume rebate (10) , some financial costs like interest rates on debt (10), some headquarter allocation (10) and of course some tax on the benefits (3) . Leading you to a 7% net after tax, decent, not excessive. So if you know your product cost (here 50), any sale above 100 is worth taking. Simple, efficient, and it works.
Cost times two or three or 10, is a very efficient pricing method since everybody remembers it and understands it.
And now you enter a discussion with every stakeholder and you understand that cost times two was just too simple and too stupid !
Based on this rule of thumb or KISS model, believing that cost times two is enough, a decision is taken: sales price is 100 and you distribute the cost boundaries to every stakeholder: you engineers you have an envelope of 50, you sales: maximum 10 for the rebate, you marketing you have maximum 5 for the brochures etc…
And now you enter a discussion with the engineer with his $50 envelope and he tells you: ok a nail but what kind of nail? What resistance? Length, head diameter, and rigidity? And he starts telling you the recent story of another nail: he says “You know we had some issues with the Chinese alloy, Swedish steel is much better but if we manufacture it in Switzerland you have a much better sound when the hammer hits the nail. Study shows that 90% of the customers assess the quality of our nail through the sound. At 50 I cannot manufacture in Switzerland.
I can do it at this price but this is not a quality product.”
This discussion leads you to the marketing team who confirm that quality is essential, that the competitors are doing volume, chines made, cheap alloy, 2-years-obsolescence-programmed nails and that the marketing department decided to go for quality, Swedish steel, Swiss manufacturing, life long nail.
Based on that marketing study and decision, all the brochures and communication effort is now based on the sound of quality. You just cannot make it at 50, by the way it is written everywhere in the intranet !!! Do you never go there ? hmmmmm yes but etc…
Now you have a problem and someone in the marketing team tells you that you may also need to talk to the CSR team (Corporate Social Responsibility) who work closely with finance and executive office since a move toward sustainable practices has been decided at top level to attract long-term investors in the company. So here we go to another department.
And indeed you go there and learn that this department decided that, as of January of this year, the CEO committed himself in front of the investing community and the board that the company would enhance energy efficiency and recycling. So now you need to take care that no child is working in your steel provider’s mine, that at least 40% of the raw material comes from recycling and that at least 20% of the energy used to extract the steel and transform the steel comes from non-fossil fueled energy.
Before It was an internal challenge, now the whole value chain from the raw material providers to the transformation suppliers has to be considered…
Now you feel desperate and you say… ok let’s go back to the sales guy, at least this one knows what the customers wants and what is truly essential. Let’s Keep It Simple and Stupid you remember?
And you learn that the customer wants cheap products, that he refuses now to go in the suburban areas far from where he lives, that he is interested in the packaging, 20 box maximum since all the competitors use 50 nails box and that if we had smaller box closer to him the customer would be happier.
And just before you leave him he tells you as a secret… you know what, 3d printing manufactures good quality nails already. This market innovation is a complete shift and rings the bell of desperation for the whole business, and though he mentioned this several times to the direction, they never took it into consideration… But he knows it will have a HUUUUUGE impact on the business.
Etc etc etc…
And you keep spinning into the whole company with every department making its own best effort to really act well but loosing completely the overall picture.
Every silo is hence maximizing its effort to do well raising consciousness that every department is interdependent in a highly complex environment. KISS modeling is therefore not adapted to complex systems in changing environment.
It used to be good enough in simple markets with mastered production cost and distribution network. But with globalization, increase in competition and change in consumer consciousness it is just too simple and too stupid.
Does this story looks familiar to any of you? And if it sounds correct for a nail… can you imagine a truly complex product?
We have to accept that no decision is perfect and that not deciding or taking years of complex modeling is worse than any imperfect decision. So both approaches are needed. Together. Hand in hand. Valuing each other each for their complementary qualities.
As we saw it together, the challenge of synergetic thinking is made of small isolated true silo challenges.
It is not a question of judgment evaluating that a silo thinking is better or worse than the synergetic thinking, or to say that the one who wants simple answer is more “true” that the one who sees a complex questions.
It is not about opposing simplicity and complexity or opposing stupidity and intelligence. It is about a world in movement, a world of interdependency. And in the end it is about choice. How to choose, how to decide, how to engage the work of all your colleagues?
This is the essence of true leadership: decision making when you need a simple answer in a complex environment when there is no, when there will never be. But still. You have to choose. Arbitrage of antagonist interests and communication to make this decision acceptable, and motivating… this is the challenge of the leader.
From silo thinking (no consideration of other department) to synergetic mindset (considering every internal department and the close value chain) to systemic thinking allowing an always-broader perspective. We understand that this evolution brings more constrains to a conscious decision-making.
The systemic thinking is in essence a fall in the abyss. Competition is highly dynamic, Providers tend to merge, disappear or emerge, and Customers are following the flavor of the moment…
Those very few who tackle these multi-level, multi-timeline, multi-stakeholder interdependencies are usually fighting the accepted equilibrium within the organization. Why? Because these people always challenge the structure, its habits, its secure decision-making processes, its formal and informal rules based on chief’s respect and obeisance. They demonstrate the intrinsic complexity of “simple questions” like how much for a nail?
And in the other hand no one can leave, plan and decide on ever-changing parameters.
We have to accept that no decision is perfect and that not deciding or taking years of complex modeling is worse than any imperfect decision.
So both approaches are needed. Together. Hand in hand. Valuing each other each for their qualities.
Silo thinking like cost times two allow quick decision-making and strong focus on execution.
Synergetic and Systemic thinking is slow, patient, complex but also capable of anticipating trends and building up both the compass and the map into an always more complex territory.
Maximizing shareholder’s Return on Equity is essential but who denies the societal impact of corporations’ decisions?
This is where Systemic thinking starts to impact decision making. But let’s take a minute to summarize the first two mindsets, belief systems and decision-making processes.
With silo behavior the decision-making was based for the sake of my career or my department. This competition-based belief system is very efficient especially in stable environment as we just saw. This is the KISS costing example. Simple to understand, to remember etc…
With synergetic mindset the journey consists in witnessing that my interest is related to so many interdependencies. This is where collaboration starts to demonstrate its value and we saw that a KISS costing is simply not compatible with volatile and complex environment.
Discussion and empathy are needed to come up to a consensus arbitrating antagonists’ forces, that were hidden by the KISS modeling
But what happen if we realize that corporations have an impact on people’s and planet’s health?
What happens when, by a single tweet or a Facebook post the reputation of a company that took decades to build can be destroyed?
We know we are using natural resources at a much faster pace than the planet can manufacture it when China, India and Africa are not yet at their evolution peak! We all know that our way of producing, consuming and living are not sustainable.
So Systemic thinking is here to help balance decision making that could look good for a certain value chain or an industry cartel but are actually so negatively impacting people and planet that on the long run this decision shall not be taken.
We understand that this simply another way of assessing the value of our actions and decisions. That this mindset has to be fueled by compassion for nature and human kind as a whole. That this mindset is caring for more than just one generation, more than just shareholder’s return.
And again, as silo and synergetic thinking where complementary one to the other, so are synergetic and systemic mindset needed hand in hand.
This is the whole purpose of the praneo way: to have the right mindset at the right place so that individuals with silo mindset can efficiently operate trans-disciplinary projects that are managed by empathetic synergetic individuals and conceived by altruistic systemic professionals who ensure decision are made for the highest good of mankind on planet earth.
What is needed to face the human, ecological and societal challenge we need to overcome as specie?
Through this allegoric story of the value of a nail we aimed at explaining the following facts:
- Simple questions often hide complex problem-solving
- Since the 90’s the market is always more competitive, volatile and complex making a lot of simple decision making methods obsolete
- Silo thinking is very efficient in mastered and stable environment since everyone is doing his best for himself
- Synergetic thinking and mindset allows to include more complexity and interdependency in the decision making process taking the good of the company among its value chain into account.
- Eventually the Synergetic mindset that takes into account the altruistic need to include future generations and the good of the planet into account is what is needed to face the human, ecological and societal challenge we need to overcome as specie.