VeraSage

Can a PKF be a brand?

Ron Baker - 05/25/2008

I’m going to open a can a worms.

I’ve seen many PKF undertake a branding initiative in the past decade or so, usually at the behest of marketing consultants.  I’ve always believed it to be a fad, since a PKF cannot really be branded the way a soft drink, hotel, airline or automobile can be.

Brands provide marginal incremental value to their customers, by reducing search costs, insuring quality and consistency, not to mention the physiological effects a brand can have on the brain and body (yeah, I know, this sounds surreal, but it’s been documented with fMRI scans).

After working in the advertising sector for years, attending and speaking at the Association of National Advertisers conferences, and watching my brother work on brands at Procter & Gamble, I can confidentially add:  PKFs have no idea how to build a brand.  A company like Coke or P&G invests inordinate amounts of money in their brands, speaking and treating them as if they were human beings.  No PKF even comes close to this level of investment, detail, commitment, or reverence of a brand.

I don’t see how a PKF spending money on branding adds one penny of value to its customers.

I believe PKFs have reputations, not brands.  Perhaps a case can be made that the Big 4, as well as the major consulting firms—such as McKinsey, Bain, Accenture, etc.—are brands.  But one of the defining features of a brand is it enables consistent premium pricing.  It’s very hard to see how customers pay a smaller PKF a premium because of its “brand.”

Bruce Marcus, marketing consultant to the professions, has written about this topic extensively, and has a recent article in Rain Today that is worth pondering.  He has other articles on his Web site on this topic as well.

I know a few of my VeraSage colleagues disagree with me on this issue, specifically Paul O’Byrne and Chris Marston, perhaps others.  All I can say is when you look at the UK consultancy Interbrand’s Top 100 Brands for 2007, the only PKF that makes the list is Accenture, and depending on how broad the definition of PKF is, IBM (but they sell products, too).

I suppose my point is there’s better things a PKF below the Big 4 and Top-tier firms can invest in, such as better customer service, intellectual capital, pricing competency, understanding value, etc.  These things will actually add value to customers.  It’s hard to see how a consistent logo, letterhead, signage and advertising adds a nickel of value to the customer, though it may feed the partner’s egos.  Let’s leave branding to the pros.

I’d loved to hear your thoughts on this.

Don’t Read This

Ron Baker - 05/25/2008

Hat tip to Stephanie West Allen for passing this article along.

For all of you who are convinced that Marx’s labor theory of value is incorrect, all I can say is there is nothing worse than doing efficiently that which shouldn’t be done at all.

Don’t Watch This - It Will Make You Mad

Ed Kless - 05/22/2008

Dennis Howlett recently participated in a panel at a conference on going solo. He has posted the video on his blog, AccMan.

It is not for the faint of heart. One panelist, Stowe Boyd, is clearly a very smart man and I am sure a very good consultant. However, he demonstrates a complete lack of understanding of the realities of economics. He is blown away by Dennis and Martin Roell, a youngster (he is younger than me) who really gets it. He tells the classic story of figuring it out in the shower and having to account for it on the timesheet.

Give a watch, if you dare.

Basic Economics Rant #2,428

Ed Kless - 05/19/2008

Some of you may know that I have a burning love for baseball. When baseball and pricing intersect it turns into a conflagration.

Case in point, a recent column by Mike Lupica of the New York Daily News on the price of seats at the soon-to-be new Yankee Stadium, shows that while Luppy knows his sports, he should stay the heck out of economics.

Please read the article for yourself, but the synopsis is that he thinks the prices are too high and that something should be done about it. What exactly, he does not say. The story talks about a fan he knows who will be unable to afford to keep his season tickets for next year when the Yankees move into their new home. He seems to think that just because this guy is a “real fan” that he is entitled to change the law of supply and demand.

Please, spare me the sob story. What the Yankees and many performing artists are realizing is that it is the live performance that has the real value for fans. Price is set by the perception and demands of customer. If the value was not there, no one would pay.

Here is the kicker. Lupica’s column appears for free to all on the users of the Internet who care to read it. Of course, it requires three “pages” to read his whole column. Why? Because the model at the Daily News is still based on the 19th century model of ads supporting print. In order to read the story you must endure the ads from three pages.

The Yankees are just doing a better job of understanding economics. Good for them!

PS - I am a Met fan!

The Mother of All Executive Summaries

Ed Kless - 05/05/2008

I recently read Beautiful Evidence by Edward Tufte. I will post a full review shortly, but there is one item from the book that warrants a post unto itself.

During some of our recent phone calls, Ron and I have lamented the staggering number of surveys that seem to be cropping up throughout the professions. Not that there has ever been a dearth of them, but recently there seems to be an over abundant proliferation. We even joked that they all say the same things.

Coincidently, Edward Tufte quotes from a study by Bernard Berelson, Human Behavior: An Inventory of Scientific Findings. Berelson apparently reached that same conclusions Ron and I did, only he was scientific about it. He survey 1,045 survey on human behavior and presents us with a brilliant executive summary of all the executive summaries. His three findings are as follows:

1. Some do, others don’t.
2. The differences aren’t very great.
3. It’s more complicated than that.

There you have it folks, we can all eliminate taking and reading surveys from our to do lists. Let’s just refer to it as MOAES, the Mother of All Executive Summaries.

Sellers Change Pricing Strategies, Not Buyers

Ron Baker - 05/02/2008

The history of commerce teaches us that almost every single innovative pricing change has been done by sellers, not buyers.  This is because most pricing strategies are often changes in business models—that is, how companies monetize the value they create.

Yet, across the professional knowledge sector we hear endlessly how firms and their customers are going to have to jointly get rid of the billable hour.  This is nonsense. 

Professional firms will have to eliminate the billable hour by changing their business model, from one of “we sell time,” to “we sell intellectual capital.” Companies that sell intellectual capital don’t price by the hour, or maintain timesheets.

I have compiled example upon example of business model and pricing innovations throughout history, all of which were developed by the seller.  Here are just a few examples, among many:

• During 1815-1835, England’s postal revenue was flat, even though the economy grew considerably during this period.  The average price of mailing a letter was 12 cents, and it was priced according to weight, enclosures, origin, and destination, with each letter requiring individual inspection.  Paradoxically, payment was due at time of receipt from the addressee, not origin from the addresser, and if the letter was rejected no payment was earned.

  In 1840, Rowland Hill, an unknown British schoolmaster in England, proposed a radical idea to change the way letters were priced.  He suggested a price of one penny for a half-ounce letter, along with a prepayment system utilizing an adhesive postage stamp, to be paid by the addresser.  This suggestion was met with virulent opposition from the Postal authorities, who claimed it was “preposterous,” and a “wild and visionary scheme.” It took several years for the idea to be tested before its merits were convincing.  From 1838 to 1863 the annual mail volume in England increased from 76 million to 642 million letters, and the revolutionary pricing method spread to other countries.

• Remember Disneyland’s A-E ticket pricing scheme (E stood for Excitement)?  This was classic price discrimination, a method of charging those customers who valued the more exciting rides more money for the extra value.  It worked quite well from 1955 to 1981, until Disney changed to a one-price admission in response to the competition, mostly from Six Flags.  An example of a competing seller changing the business/pricing model.  Disney and Six Flags never asked the customers, they just did it and the let the market figure it out.

• Xerox failed to capitalize on the computer technology it developed because its business model was to be paid by the page.  In the electronic office of the future, there was no page counter, so how would you get paid?  This pennies-per-page model was so endemic in Xerox it blinded them to the opportunity of other pricing strategies.  Steve Jobs and Apple were the ultimate beneficiaries of Xerox’s myopia.

• Knowing what, exactly, your customers are paying you for is extremely important.  Does anyone think customers pay professional firms for time?  When General Electric asked this question they discovered the customer was not merely purchasing its airplane engines, but also the ability to keep them continuously in service, as downtime is costly for airlines.  As a result, General Electric innovated the “Power by the Hour” program for its aircraft engines, whereby it would be responsible for maintaining the engines and price for the serviceable usage the airline received.  The customers didn’t ask for this, General Electric figured it out.

• AOL switched from charging for Internet access by the hour to a monthly fixed-rate price, which was so popular it shut down their operations as it didn’t have the capacity to keep pace with the demand.

• If you have ever been bribed off an oversold airplane—with a free flight voucher, upgrade, or airline money equivalent—you have the late economist Julian Simon to thank.  Until 1978, travelers were bumped off overbooked planes rather capriciously—the airlines preferred to bump old people and military personnel on the theory they would be least likely to complain, causing enormous amounts of customer complaints and ill-will.  Worse yet, the problem fed upon itself, because passengers began to expect being bumped and so would book several flights under various names to insure a seat on at least one; this caused the airlines to increase bookings even more in order to insure decent load factors.

  One day while shaving, it occurred to Mr. Simon that “there must be a better way; indeed, an auction market could solve the problem by finding those people who least mind waiting for the next flight.  The practical details fell into place before the shave was complete.” Once the airlines tested this pricing procedure and learned it worked, it spread rapidly throughout the industry.

• Netflix founder and CEO Reed Hastings tells this story in the April 2008 issue of Wired magazine:

  I had a big late fee for Apollo 13.  It was six weeks late, and I owed the video store $40.  I had misplaced the cassette.  It was all my fault.  I didn’t want to tell my wife about it.  And I said to myself, “I’m going to compromise the integrity of my marriage over a late fee”...I started thinking, “How come movie rentals don’t work like a health club, where, whether you use it a lot or a little, you get the same charge?”

  Hence, a new business model, and pricing strategy, was born with Netflix.  Customers had nothing to do with it, except to vote with their dollars their approval.

• An excellent article in the May 2008 SmartMoney magazine profiles how price optimization—sometimes referred to as yield management, or price discrimination as economists call it—is being adopted by banks, apartment managers, retailers, live entertainment (such as sports teams, symphony orchestras, ballets, etc.), car rental companies.  I encourage you to read this entire article and see for yourself if customers had anything to do with these changes.

• In that same article, on the third page, they profile Bob Cross of Revenue Analytics.  I’ve had the great pleasure of meeting Mr. Cross, and he is a giant among pricers.  He brought Yield Management to Delta Airlines in the mid-1980s, wrote a fantastic book about it (Revenue Management), and then founded a software company that installed price optimization software to hundreds of companies (read:  sellers).
  

You can probably think of numerous examples on your own.  There are many more.

I don’t know how much proof has to be assembled before leaders of professional knowledge firms realize that they are in control of their pricing strategies, not their customers.  For more reasons, see this post.

If you innovate a new business model, the pricing strategy will change as well.  Customers don’t have anything to do with it, except to validate it by voting with their pocketbooks.  Customers hate the billable hour, but they aren’t going to have an alternative until more firms offer a different pricing paradigm. 

Customers don’t run your business, nor do they spend their waking hours dreaming about how you should monetize the value you create.

It’s truly tiring to listen to professionals repeat how the customer has to be involved in developing an alternative to the billable hour.  It’s an abdication of their responsibility.  How can you change something if you don’t take responsibility for it?

Just offer your customers fixed prices, based on value.  Like the above examples prove beyond doubt, you have the potential to change an entire industry, or at least your part of it.