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05/16/2004: "This is why VCs bring in the MBAs"

The new CEO at one of my former companies is well-known for emotional pricing. He appears to not understand concepts like price points, the network effect, social capital, prospect theory, conjoint analysis, sustainable competitive advantage or porter analysis, but I can pretty much guarantee he recently became very, very familiar with price elasticity.

Those links and 20 minutes should give you a handle of why they're in trouble, but at this point it doesn't really matter. They've run an excel spreadsheet that says X users at Y price will mean mad cash... or at least a path out of the pit, showing them something like a bell curve with price points is voodoo to himafter he's seen that spreadsheet sum.

I pointed this out to him when he wanted to adjust price on a product that was actually moving. "Obviously", he said, "if they're selling that fast, they must be underpriced." So, he raised price, and sales stopped, except for the channels that already had a contract at the lower price. The situation lasted a mere six weeks, but the damage was done. The market for the product vaporized.

Now don't get me wrong... he might think he understands some of these things in a roundabout way: like I said, he knows where he wants to get... and I'm sure if he could think of a way, he would create vendor lock-in. He just has no clue about getting there, nor will he listen to other voices.

To quote someone else who used to work there, "Its like the Internet never happened for him."

He's not the only one still there that thinks higher prices are the path to success. One of the founders used to beat on me that the price of the first product, which by any rational judgement has been a failure in the marketplace, was priced too low. Apparently, this is (or was) common practice at HP. He also enjoyed suggesting that I was ruining the company by directing it to compete with "commodity products". The thing is, everyone else in the space understands that the space has been commoditized. Those few who try to suggest that they have additional value are being destroyed.

This explains why less than 50% of the total manufacturing run has been sold. I anticipate that a warehouse full of these will soon catch fire, or otherwise be forced to evaporate.