Wednesday, April 11, 2012

Not so epic fails

A few weeks back, “Schumpeter”, a columnist for The Economist, had a piece on business flops.

I was, of course, disappointed that none of the flops I was involved with made the list.

But how can the petty-ante failures I was associated with dare to compare with Disney’s Ashtar-esque fiasco, John Carter? Or McDonald’s attempt to enter the luxury burger market, or Colgate’s foray into TV dinners – neither of which I had even heard of. (Colgate? TV dinner? Gasp. Gag. Gasp.)

Of course, as Schumpeter pointed out:

Flops are part of business life.

He then ticks off the three no-fail ways to have a business failure:

First: slaughter a sacred cow.

Example here: Coke’s introducing New Coke – and having to back off almost immediately.

Second: mix oil and water.

Witness McDonald and Arch Deluxe. And those Colgate frozen dinners. (Wonder if they came with a disposable toothbrush cum toothpaste. In its own little slot between the green beans almandine and the apple crisp.)

Third: produce a genuinely awful product.

Think exploding Pintos. The Yugo. And – I believe somewhat unfairly – Microsoft’s Vista, which I actually didn’t think was half bad.

Schumpeter goes on to note that:

…the surest way to guarantee failure in the long term is to be so paralysed [sic: this is a Brit publication] by the fear of it that you don’t try anything new.

But I think that he missed at least one sure-fire failure guarantee.

The one that seemed to recur throughout my career was pricing your product in a way that’s completely out of whack with the value that the product provides. The decision to take this approach is understandable. Business 101 will tell you that your company won’t last if, at some point in its life, it can’t start covering its costs. Now, it may take a good long time for a company with a poor price/value ratio to end, but I can guarantee that it will happen. There are only so many sugar daddy investors who are going to keep your coffers filled with walking around money without eventually smartening up and inquiring when you’re actually going to start, umm, turning a profit. And if you have terribly priced products, you won’t.

I worked for one small software company that lived off sugar daddies for a good long while. When our investors at long last made their polite, cough-cough, inquiry about when were were going to start paying him back, our CEO told a friend of mine that they “were trying to screw us.” I suppose that that’s one way to look at it… No surprise here that this company specialized in over-priced products and services. We had one market-priced product which did quite well. Naturally, we decided to ignore it – except for grabbing the cash it did throw off to subsidize development of the high-priced offerings that were going to make us rich.

These weren’t colossally awful products. They just cost too much.

And the problem with having products that have a skewed price/value ratio is not that you won’t sell any of them.

The problem is that you will sell just enough to convince yourself that there’s a market. And, having convinced a handful of customers to spend big on your whatever, you’ll go broke (and out of business) trying to find enough of them to keep you going. Putting more pressure on you to raise your prices to cover your costs. A very neat way to enter the death cycle, I can tell you.

Been there, done that. Been there, done that. Been there, done that.

Now I understand – having seen it with my very own eyes – that a higher price can confer value on a product. And I put that value at 10-15%, maybe 20% if you’re lucky. But if your “pricing premium” is anything beyond that, eventually buyers will realize that they can get what they want and need for a lot less.

A variation on this theme, of course, is the product that does too much, which, in my day, was a frequent situation in the tech world. Let the engineers put in whatever bells and whistles they could think of, without anyone figuring out whether customers were really interested. And, of course, because you’ve got so many more bells and whistles, you’re going to charge more…

Been there, done that. Been there, done that. Been there, done that.

Anyway, the failures that I was associated with were never quite as epic as the Yugo, the Pinto, the Edsel.

But they were epic enough for us, and are the reason that I’m so sure that your business ain’t never going to succeed with products that are priced to cover your costs, without making sure that those prices also cover the product’s value.

Oh, well.

Live and (sometimes) learn.

1 comment:

Rick said...

Good point about pricing. You see that a lot in real estate, where someone says "I bought the house for $X, and I spent another $Y fixing up the kitchen, bathrooms, and whatever, therefore I am putting it on the market for a price that, after negotiations and broker's fee, nets me $X+$Y."

All well and good, but as in software the market doesn't care your cost is, just what the value is versus alternatives. It is amazing how many people have trouble understanding that.