Ten Price Commandments

Much of my time at work the last few months has been taken up with a profitability project.

Up until recently, we suffered from a problem a surprising number of mid-size companies have: we knew overall how profitable we were, and how profitably various product lines or manufacturing plants were, but we didn't have good data on what individual items cost, and thus on which items and customers were more and less profitable.

Over the last six months, we did a major project to get that item level cost data, and so now for the first time we have good, detailed information on which items and customers are profitable and which are not.

You might think that this would make it easy to increase our profitability: just take the stuff you're losing money on and increase the price or (if the customer won't accept the higher price) stop selling it.  Ta da!  Higher margins.

But everyone can come up with all sorts of excuses for why this just isn't possible: This is a strategic loss leader!  If we don't match (money losing) competitive pricing on this product, customers won't buy our other profitable products.  If we win this business (at a loss) it will lead to winning other (profitable) business, or maybe we'll build up enough sales volume that our cost of producing it will drop.

On and on it goes.

Those of us in the finance department decided it was necessary to put together a clear and short summary of what rules we needed to follow around pricing and profits.

"We need a ten commandments of pricing," I joked.

"Yes, that's exactly what we need," the CFO replied.  "Can you write one?"

I cheerfully signed up to write a pricing decalogue. After all, I write all the time, often about religion, and I'm a pricer, so why not?

Then I found myself staring at a blank page and feeling like everything I wrote was just variations of "don't lose money".

In the end, my solution was to think about how the actual ten commandments are structured.

The first three commandments are a basic statement of what is true: There is one God. We should worship him and no others.  Then the following seven commandments explain how we should live in relation to others due to those truths.

I tried to structure my pricing commandments the same way.  The first three attempt to sum up what is true about pricing and profitability.  The following seven then describe how we should conduct business based on that truth.

And here they are:

1. A good price is lower than the value of the product to the customer (better than the price of the next best alternative plus the difference in quality/service) but higher than our cost to produce the product and run our business
2. Price is the way we discover whether we are delivering enough value to the customer to sustain our business
3. We as a business exist to turn a profit: if we are selling below cost, we are not paying for our people and our owners
4. A market segment where we command strong margins is a segment the market is telling us to be in. A market segment with low margins is one where we are not currently delivering value.
5. Customers who offer us high margins want us. Customers offering low margins do not. Believe them.
6. New business that starts at low margins must come with a business plan for how it become higher margin and checkpoints at which we see if we followed the business plan
7. Never sell below product cost (cost of material + manufacturing before fixed overhead): sales at negative product margin do not help with absorption or overhead, they are a deadweight loss
8. We should seldom sell at a product margin below our SG&A rate
9. Acquiring business by pricing at low or negative margins buys us bad business: we want new business at accretive margin rates
10. Retaining business by matching a competitive price which brings us to low or negative margins retains bad business: sometimes we need to let go

Readers

 "In your forties," the eye doctor tells me as he jots down what magnification I should look for, "your eyes can change suddenly." Early- to mid-forties, says Dr. Google, is when presbyopia kicks in, a fancy word for age-related farsightedness. I am mid-forties exactly, 45, and sure enough, this past year I've started to notice that it's harder to focus on things close up. My eyes are remarkably healthy, says the eye doctor, good nerves and 20/20 for distance (which must mean that I was formerly more acute than 20/20, because it seems like distance isn't quite what it used to be either). 

For someone just starting in on presbyopia, drugstore readers are good enough ("buy a pack," says the doctor, "you'll lose one pair") at a mild 1.25 magnification. And what do you know, suddenly my phone screen is crisp, and the paperwork at the table, readable before, is now comfortable. "Dawg, you look like an old granny," howls my tall, suave 15yo son, who has never been old or fat a day in his life. Dawg, I feel like an old granny. I don't need my eyes to tell me that I'm aging. I feel old. I miss the days when my veins and ankles didn't puff at the mere thought of eating something salty. I envy the boundless energy of friends who always seem to be on the go. I am not always on the go, but I'm always pulled in seven different directions. 

This evening, I sat down on the couch with my readers and my almost 7yo son, who can sound out letters just fine but scornfully resists all my attempts to trick him into helping me read a book. I sat, I say, but quickly found myself drifting off to sleep between pages. I'm not the only snoozer in the house. My oldest has spent most of the week since surgery napping, and my second daughter, down with strep, has also been asleep all day. They have not been reading in their waking hours, mostly, but watching Columbo or other vintage mystery shows. Columbo is a show the whole family can get into, gathered in the living room, tucked on couches or a college beanbag which is absolutely not going to take up permanent residence on my floor. "Oh, just one more thing," we all chant dutifully as Columbo bumbles back into the room to deliver the coup de grace to the perpetrator, who always deserves it.

It's about my speed right now. I want to read something real and essential, something that sharpens my intellect. On my nightstand is The Cloud of Unknowing, which I'm dipping into in small bits. I started reading James in my Bible the other night, and fell asleep. Best I can do a lot of days is the Office of Readings -- just the readings, not the Psalms as well, because I often get interrupted. And then, this evening, when the heat and the humidity finally balanced out to something endurable, I took a walk with my daughter, who turns 14 on Friday, and we passed a Little Free Library. Among the books was one I'd read a review of in the Wall Street Journal, an escapist beach read, and friends, I almost picked it up. I don't even know myself anymore.

"Mom," said my daughter, "do you know in the books section at Kroger they have something called Amish Romance? Why do people even read that? What are they about?"

"I have never read an Amish Romance," I said, truthfully. "I think people are looking for stories about love and connection and happiness, and they feel like something that seems old-fashioned is more wholesome."

"And there are the books with guys with no shirts on. Why do people read those?"

"People read those kind of romances because they're bored or lonely, or because they just want to read about sex."

"That's gross," proclaimed my daughter, who is in a pious phase. "Why do people want to read about that?"

"People sometimes look for a neatly-packaged thrill in fiction, because real life is often messy and tedious and has the added complication of being real."

"I think it's weird. Mom, look, that house is for sale. Mom, do you like that house? Someone I know said that someone she knows said that her mom said that houses were too expensive here. I think her name was Megan, or maybe it was something else..."

We strolled on, our evening constitutional untroubled by silence.

Perhaps an inexpensive pair of reading glasses from a chain drugstore is the magic bullet that suddenly removes all barriers to reading, and magnifies my energy and attention span along with the print on the page. I'd certainly read that neatly-packaged fiction. I expect, however, that my readers will go missing as often as my laptop and phone do, and I'll find the same culprits fooling around with them because it's funny to make things look bigger. "Look, Mom!" they'll say. "Mom, look. Mom, did you know..." And so we grow, in age, and, perhaps, in grace and wisdom, and eventually, time will make readers of us all, even the almost 7yo.

Silver-Plated

I am told by Google that 23 years is the Silver Plate Anniversary, a faux finish for a year without a nice round sound like 20 or 25. I haven't come across anything silver-plated lately, unless it was an item in the nirvana that is the local college theater's props lockup (where we hunted for Music Man decor). For us, 23 years is the Show/Recovery/Surgery/Wound Care anniversary, with the attendant exhaustion that goes along with all that.

The Music Man had a fabulous run. We nearly sold out every show. Audiences were enthusiastic, and well they should have been. Our excellent cast put on a marvelous production and broke all box office records. The final run-up to the show went so smoothly that I didn't have any stress dreams at all during tech week, which, as any director can tell you, is an anomaly dearly to be wished.

Not so much the week afterward. Every night I shook awake, dreaming of props and missed cues and notes to give the cast, and wondering whether we were going into the Saturday night or Sunday matinee. Perhaps it was delayed stress, or perhaps it was other stress manifesting: on Tuesday after the show closed, one of our college daughters had surgery to drain an awkwardly-placed abscess which was draining through a fistula.

The medical saga here is one that many people will recognize. Our daughter has been feeling increasingly poorly since the beginning of the semester, yet we couldn't get anyone to look at her. The college clinic passed her on to a specialist, who couldn't schedule her until right before graduation. She was increasingly unable to sit or even lean on anything, was dropping weight, was fainting, and so I drove up and took her to the ER in the nearest big city. The doctor didn't even examine her. "It's not life-threatening," we were told. "Take over-the-counter remedies." The GYN looked at her, but passed her on to a GYN in our city, who didn't have an open appointment until July. The week after she came home, I took her to our primary care doctor, who suggested that she could be seen by the surgeons at the local hospital, if she wanted. 

And finally, she saw the surgeon, and the surgeon saw her. Actually looked at her on an exam table, and diagnosed her immediately. I was never so glad to hear that someone needed surgery. There was a real problem, not just in my daughter's head, and it could be repaired! 

The abscess, as it happens, was larger than the surgeon had expected, and the corresponding wound care is rather intensive. It is in a location which is almost impossible for the patient herself to tend. It must be dressed and repacked daily, surgical packing nudged with a q-tip into a gaping incision, accompanied by murmurs of, "I'm sorry, honey," and "Okay, we'll take a break for a second." This kind of procedure makes me wonder if I squandered my education on theater, when I knew from freshman year I was going to get married, and consequently could expect children. Why did I not go into nursing or pre-med? 

This is generally a daily process, but yesterday we unexpectedly had to change and repack twice, an unhappy process. It is perhaps providential that this surgery didn't happen while she was in college. How could she have recuperated from this away from home? How could she have rested like she needs to during the semester? Which of her group of friends (a nice set of young people, to be sure) would have been willing or able to pack a wound in an exceedingly awkward location? How would this work, even at home, if there was not someone whose job was the household and its concerns? It's not that I'm trained to this kind of work. It's that I'm available to do it, and in the right sphere of intimacy to assist this particular vulnerable human body.

This is my 23rd year in this role of our marriage partnership. It is a partnership, and we are a team. Marriage is many things, love and friendship and companionship and affection, but it's also an operation, and we are operating partners, keeping things running in our areas of competence so our family has a stable foundation on which to thrive. We work and build and repair, and we don't just patch over the weak places in our foundation so that it looks good from the outside. We do the painful and boring work of chipping them out and making them stronger, of packing wounds in intimate places from the inside so that they heal properly. No silver plating here.