Low-hanging fruit

Someone recently asked me what I thought was the biggest missed opportunity in small business.  I didn’t have to think long: price discovery.   That is, people selling non-commodity products or services have an incomplete understanding of the true value of their wares to the customer.  We know when a bid is refused or perhaps accepted too eagerly.  We know our costs to build.  But are we missing volume because we’re overpriced?  Missing margin because we’re under?  What if we’re wrong?  Margins are too thin to risk sales to real-time tests of market resistance.  All these legitimate worries reinforce the status quo, which in its defense emerged for good cause, but it’s bound to drift and at some point be flat out wrong.

Maybe 70% of my career has been in agriculture, and the rest has been dominated by mfg with rare and sometimes odd forays into retail, service, and arts.  Economics is the constant through any sort of human action:  the need for cash flow, profit, and growth, to meet the stakeholders’ claims.

Parentheses, a short rant on buzzwords old and new--

“Stakeholder” was in some ways a Lilliputian attempt to exert or extort control over property or contract where one’s claim was abstract at best.  By way of qualification, I mean the people who concretely supply capital (owners/investors/lenders), the people who supply labor and materials (which we won’t secure without paying the rates acceptable to those sellers), and the general desire of people to secure a future—to manage uncertainty and risk so they have some sense that all this delayed gratification on which capital formation rests in fact is eventual gratification and not some great swindle.

Whether the severity of our economic cycles, the mismanagement by central banks, the cost of runaway and counterproductive regulations, is tantamount to swindle is something we just need to set aside for the moment.  Let’s just say that reality places a premium on economic insight, without which no amount of talent can overcome a seismic shift (2008, 2000, 1982, et al), and with which even only middling talent can still be profitable.

Back to the topic at hand—

Price discovery.  Farming has it in spades.  Probably more than they’d wish, the information overload can be paralyzing.  Due to their visibility and the close communities, farmers have been collectively living The Truman Show for ages.  And there’s the superficial homogeneity of production—copious data is publicly available and resorted to by lenders and others as benchmarks to measure against local and regional competition. 

In town:  it’s mostly nil.  Anonymity is our blessing, and curse.  One resorts to cost-plus price setting with some hope that our skill, training, and internal puts them at the market.  Innovating and growing firms tend to misprice--to give their advantage away in a race to retain customers and keep growing.

Where there’s a dataset, there’s a way. 

For those whose operations have been around a few years, even as few as five (many locals are much older than that), you have the internal resources to synthesize a price index.  Contract manufacturing, outside of agriculture, is the most interesting and promising.  They’re complex and highly susceptible to outside economic forces, but especially:  they have lots of room for entrepreneurial initiative.    

I’ll leave mechanics off, since a) they’re proprietary and of immense value to the firms who paid for the work and b) it’s likely to be different for each business depending on industry, process, and years in business.

We can just say that the means of creating an actionable price level and trend measure and relating it to external economic conditions is possible and massively advantageous.

Our happiest case—already a profitable, well-regarded firm known for handling jobs no one else could—made more in the 5 years after the price discovery process was created than in the 15 years prior.  No less than the owner credited our work.  Of course, it was cooperative and most of the credit (and $$) went to them; you can’t institute targeted price increases as a manufacturer when you’re known as a low-skill operator.

Why is price discovery an easy win?  Not many are doing it.  It’s:

a)      speculative

b)     disruptive

c)      expensive.

Speculative.  Only in the sense that what specific advantage you gain by turning a light on in a dark room.  Like most information dives, you win just by looking.  Our client enjoyed a 20:1 payback on their investment, which is a positive outlier.  You WILL recover your costs with interest AT LEAST.  All we need to do is show up and look.

Disruptive.  Sure, in a good way, but the right data is placed in the hands of the experts on site, the decision makers (the CEO and lead RFQ guy in our case).   It becomes seamless.  We don’t take the reigns out of anyone’s hands, the process just gives them a firmer grip, and a more responsive horse.

Expensive.  Sorry, it’s a massive undertaking and our fees, while affordable, are not inconsiderable.  One CEO actually said, “It’s expensive and probably it won’t work, but we’re blind to the outside market and we have no choice but to try.” 

We’re grateful but not surprised that his bet was vindicated.