I put together a Twitter list of all the people how gave a shout out for Fixed To Flexible.
I have been wondering if they have something in common (besides having read the ebook).
Are they all people who needed help thinking about pricing?
Do they prefer thoughts and questions rather than clear cut answers?
Are they visual learners?
Do they all share some view about the direction the world is going?
It is an experiment of sorts. I’ll let you know if I find anything.
Pricing has gotten more shelf space in the last few years. Through the lens of behavior science, Dan Ariely’s Predictably Irrational and Richard Thaler’s Nudge both provided glimpses into our limited ability to assess prices. Chris Anderson proposed in his book Free that 21st century companies would build business models around the price of zero. There seemed little room for another title.
Yet, Bill Poundstone proves us wrong in Priceless: The Myth of Fair Value (and How to Take Advantage of It). The book is a narrative that threads history, story, science, and business while complementing the aforementioned and others you will find in the business section.
Much of the work on modern day pricing theory started in a still obscure field known as psychophysics. Researchers in the field spent time studying sensory perception. Tests showed our sensory systems are highly dependent on contrast to create meaning. For example, if you want your house to look twice as bright as others in the neighborhood, it doesn’t twice as many lights; you’ll need to buy four times as many lights.
A number of researchers took these findings into the realm of decision making. Daniel Lahneman and Amos Tversky probably did the most to expand on these ideas.
Take a minute and answer this two-part question they developed:
1. Is the percentage of African nations in the United Nations higher or lower than 65?
2. What is the percentage of African nations in the United Nations?
It turns out that the answer you provide to the second question is heavily swayed by that first question.
When asked in research experiments, the average estimate for question two was above 45 percent. When the number in question one was lowered from 65 percent to 10 percent, the average estimation of question two dropped to 25 percent.
This effect, known as anchoring, has since been confirmed in hundreds of experiments. Real estate agents value homes based on the asking price. Negotiators make more profit on their transactions when they provide the anchor and then make the first offer. And retailers are smart to show the original price alongside the sale price than show the sale price alone.
Poundstone takes some great diversions into the design of restaurant menus, the fact or fiction of whether ending a price in ’9′ helps improve sales, and the 20 years journey to sell Andy Warhol’s estate in Montauk.
One recommendation for readers is to take your time with Priceless. Over the fifty seven short chapters, Poundstone provides a dizzy array of permutations to consider and the slight varieties become hard to separate in the final pages. This is not an indictment of the book. Fewer examples would have removed precious nuance. A simple change in reading style will compensate.
⁂
Priceless is featured in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.
This week, the folks at ChangeThis published a manifesto I wrote titled How to Read a {Business} Book.
After writing The 100 Best Business Books of All Time, I decided to go back and document everything I had learned reading business books for a living.
Here is a small excerpt:
Leave Your Mark
Recording what it is you learned from reading a book should happen both inside and outside that book.
First of all, get over any fear you have of writing in a book. Business books are meant to be inter- acted with. Take a pen and leave notes in the margins. Get out that pink highlighter you used in college and mark up passages that strike you. The guys at Brand Autopsy used to keep a Dog- Ear Score for the number of pages folded over by the time they reached the end. Tim Sanders, in his book Love Is the Killer App, suggested that important learning points be written on the first blank page in the front of the book and great quotes for future presentations be recorded on the inside back cover. Personally I became a fan of 3-M Post-It Flags in writing The 100 Best for quickly marking pages that I needed to return to later.
Now you need to share what you have learned with the world. It doesn’t matter how. Pick a form and a medium and go with it. Steve Cunningham at readitfor.me decided videos were the best way to share his passion for business books. Chris Yeh builds book outlines on the aptly titled wiki, bookoutlines. Sean wrote short reviews and provided mind maps drawn on brown paper bags at stickybusinessbooks.com. John Moore uses SlideShare and creates quick presentations with the “money quotes.”
Just write a review—100 characters or 1000 words—and give it to someone to read. You get the idea.
Leaving marks in the book and leaving your own mark about what you learned will help you solve your problem and, in tandem, help others solve theirs.
Hope you’ll click through and take a look.
“Luxury good prices are not directly linked to any type of costs.
The art of luxury pricing lies in quantifying the value-to-consumer regardless of cost, competitor or market prices.”
-from a marketing report by Simon Kucher & Partners, the leading consulting firm on pricing in the world
⁂
This is great quote from Priceless by William Poundstone. It is one of the books I recommend in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.
A few days before Christmas I was in the grocery store doing the normal weekly shopping and a large chalkboard sign greeted me as I made the first turn: “Christmas Items 50% off!” I stopped.
The first item to catch my eye was the 42-ounce bags of holiday M&Ms. These candies are a weakness of mine and $4.28 for a large bag seemed like a great deal. And then I realized I didn’t know what a good price was for M&Ms.
Sitting next to them were small plastic candy canes filled with same red and green chocolates. The stocking stuffers were $2.28. They were eight times more expensive per ounce than the bulk bags. But then I wondered about those little packages at the checkout counter. I suddenly got very interested.
I searched out every package of M&Ms that existed in the store. The christmas clearance section had two seasonal versions. The store stocked three different package size in the candy aisle. The rack at the checkout carried the single serving above the larger Tear ’n Share bag. The Mars Company tempts customers seven different versions from grocery store entrance to exit.
The graph isn’t too surprising. The more you buy, the better deal you get. Mars is following what economists call the law of diminishing margin utility. Our satisfaction drops with each additional unit we buy and the only way to encourage us to purchase more is to keep lowering the price.
⁂
You might be interested in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.
LORD DARLINGTON What cynics you fellows are! CECIL GRAHAM What is a cynic? LORD DARLINGTON A man who knows the price of everything and the value of nothing. CECIL GRAHAM And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything, and doesn’t know the market price of any single thing.
-from Act III of Lady Windemere’s Fan by Oscar Wilde
⁂
You might be interested in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.
On January 7th, 2010, Sparkfun, a Boulder, Colorado based electronics supplier, decided to give away free merchandise. Each customer who placed an order that day received $100 in free goods. No minimum order. No code needed at checkout.
Ten minute before the web store opened, Sparkfun’s servers were already buckling under the load. Their company name was appearing in four of the top ten search terms on Google Trends. It took one hour and 44 minutes for the company to pass their pre-announced limit and give away $100,587.
This extravaganza was originally announced on November 23rd, just ahead of the Thanksgiving holiday weekend. Founder Nate Seidle said in a blog post that he was inspired by Chris Andersen’s book Free and wanted to give back to his customers. I found out about this incredible offer from Chris Andersen himself that morning via his Twitter feed. In response to the offer Andersen said:
“Yikes, what have I done?”
Indeed.
⁂
You might be interested in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.
The 100 Best Business Books of All Time is one year old today.
My friend Ray asked me today if it felt like a whole year had gone by. I said yes. We talked to all sorts of media people, did 20 live events, and answered countless emails from people looking for the right book or idea. It’s something that has had my attention the last 365 days.
That is going to change now. I am starting to focus on other projects. Much of the team that made the book happen have moved on to new projects.
The book doesn’t really need attention any more. It has found its audience. People are still recommending it to others. And that is awesome.
Happy Birthday, 100 Best!
I published Fixed to Flexible on Tuesday. Everything was going well. People were starting to read it. They were starting to talk about it.
When I check my email Wednesday morning, I had an email from Evernote CEO Phil Libin:
Just read your ebook. It’s in my Evernote now. Great job, thanks!
Your Evernote math is a bit off.
Ugh.
I asked Phil if he would help me clean up the math and answer a few questions about the company. He agreed and the results follow:
Todd: So, I seem to have messed up the math a little.
Phil: It was my fault for being confusing. When talking to the BBC I switched back and forth between talking about all users and active users. Active users are people that have used Evernote in the past 30 days. That’s important because someone who doesn’t use the system in a given month, doesn’t cost us anything that month. So that 9 cents per month figure is for active users, but you did the math as if it was 9 cents per month for all users. Only about 30% – 40% of our users are active in a given month, so the mistake makes our margin looks a lot worse than it really is.
I ran the numbers from January 2010. At the end of the month, we had 2,335,676 total users and 41,598 premium users. Total variable expenses (hardware + software + hosting + network + operations staff + support staff) were $68,641. Total revenue from active premium users was approximately $145,000. I say “approximately” because this is recognized revenue, which trails cash, but is more relevant for gross margin calculations. The gross margin comes out to about 53%.
The gross margin increases every month because revenue per user grows (conversion rates go up because long-time users are more likely to convert) while variable expenses per user decline (Moore’s law + efficiencies of scale).
There are other sources of revenue (as well as fixed expenses), but they don’t move around much, so the gross margin is by far the most important factor. We launched the service into closed beta in February of 2008. Gross margin went positive in January 2009.
T: What other factors need to be taken into account?
P: There are many other factors, enough to fill a book. Maybe we should write one together. The gross margin is the single most important factor, but the other stuff that you have to worry about are fixed costs (which can be huge in a high-tech startup), fundraising, team building, product development, marketing, execution, lunch, etc.
The general recipe I try to follow is:
People ask about exit strategies, but my goal has always been to get big enough and profitable enough that the last thing you’ll want to do is exit. That’s when you’ll exit.
T: My original hypothesis was that you would benefit from declining costs in line with Moore’s Law/experience curves. Do you continue to see prices falling in processor power, storage, and bandwidth?
P: Moore’s law moves mountains on the decade-scale, but it’s not quite fast enough for the planning purposes of a tech startup. For a really quickly growing startup that’s always doing something new, you have to multiply Moore’s Law by Murphy’s Law; “The number of things that will go wrong will double every year.” Sure servers get cheaper, but you probably bought the wrong ones anyway…
The real medium-term cost savings comes from efficiencies of scale and getting better at what you do. For example, we currently have about 60 servers in the data center and four operations guys to maintain them (both included in the variable costs for gross margin calculations). When we get to 600 servers, we won’t need 30 ops guys, probably 10 will be enough.
T: I have always found the two options at Evernote interesting. There is some good research that says three options increases sales. What has been the thinking?
P: You’re probably right. We just haven’t had time to get into heavy price theory yet, but we might experiment with different price tiers down the road. We decided to go with a single, low price for the premium version to keep the decision for users as simple as possible.
I don’t know much about the black-art of pricing, so for my last 13 hour flight to Japan I brought three books on pricing strategy on my Kindle and a copy of the Lord of the Rings trilogy, “just in case”. Wound up reading LotR for the sixth time and still don’t know anything about pricing. Well, I know one thing: there will always be a free version of Evernote, and it will always be the “main” version.
T: Many entrepreneurs are at home dreaming of their version of Evernote, lured by extremely low cost of bits. Freemium still seems like a tough model. What do start-ups need to think about when rolling out a freemium model?
P: Here are three things I think about:
If you can’t see how you’ll do all three things, go with another business model.
T: Thanks writing me to correct my assumptions and taking the time to answer some questions.
P: My pleasure. Thanks for actually writing a book about this!
⁂
You might be interested in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.
I co-wrote The 100 Best Business Books of All Time. Rated 4.5 stars by users on Amazon.