Comments on: The Value Optimization Paradox http://personalmba.com/value-optimization-paradox/ Helping You Learn Essential Business Principles Without Mortgaging Your Life Wed, 24 Feb 2010 12:48:01 +0000 http://wordpress.org/?v=abc hourly 1 By: Geektronica http://personalmba.com/value-optimization-paradox/comment-page-1/#comment-488 Geektronica Tue, 31 Mar 2009 03:43:52 +0000 http://personalmba.com/?p=574#comment-488 Interesting post. Are you really talking about price elasticity? http://en.wikipedia.org/wiki/Price_elasticity_of_demand#Elasticity_and_revenue I like how you pointed out that there are multiple ways to increase profitability; however, I'm not sure that increasing the value you provide is one of them. If increasing the "size of the pie" cuts your profit margins to zero, you can provide all the value in the world and not make more money. For example, if your blog (a free distribution of value that serves as advertising for your consulting business) becomes so popular that you have to spend all of your consulting income on webhosting fees (even though the consulting business is growing due to the added exposure), your profit margin has dropped to zero. You may be providing more value than ever to your customers, but so what? You're broke. The key metric is the profit margin. If you can provide more value to customers by scaling up while maintaining an acceptable profit margin, go for it. However, the opposite strategy may be a better idea. Tim Ferris (granted, not really an expert in anything other than self-promotion) points out in The Four-Hour Work Week that it may be better to target high-end customers who will pay more, even if it means you sell fewer units. If you can make your money with fewer sales, and that means less work, go for it. Either way, what you're really looking for is the right amount to charge. If that's the case, it's not a paradox - it's an elasticity curve, which is a very well-known concept in economics. Interesting post. Are you really talking about price elasticity? http://en.wikipedia.org/wiki/Price_elasticity_of_demand#Elasticity_and_revenue

I like how you pointed out that there are multiple ways to increase profitability; however, I’m not sure that increasing the value you provide is one of them. If increasing the “size of the pie” cuts your profit margins to zero, you can provide all the value in the world and not make more money.

For example, if your blog (a free distribution of value that serves as advertising for your consulting business) becomes so popular that you have to spend all of your consulting income on webhosting fees (even though the consulting business is growing due to the added exposure), your profit margin has dropped to zero. You may be providing more value than ever to your customers, but so what? You’re broke.

The key metric is the profit margin. If you can provide more value to customers by scaling up while maintaining an acceptable profit margin, go for it. However, the opposite strategy may be a better idea. Tim Ferris (granted, not really an expert in anything other than self-promotion) points out in The Four-Hour Work Week that it may be better to target high-end customers who will pay more, even if it means you sell fewer units. If you can make your money with fewer sales, and that means less work, go for it.

Either way, what you’re really looking for is the right amount to charge. If that’s the case, it’s not a paradox – it’s an elasticity curve, which is a very well-known concept in economics.

]]> By: Josh Kaufman http://personalmba.com/value-optimization-paradox/comment-page-1/#comment-487 Josh Kaufman Thu, 26 Mar 2009 15:44:50 +0000 http://personalmba.com/?p=574#comment-487 Tom - good point. The problem with viewing things from an NPV standpoint is that it's easy to make almost anything pay out over such a long time period. I've personally worked on large projects where the 1 and 3-year NPVs were horrible, and the project just barely squeaked by at the 5-year mark. The 5-year NPV was used to justify the project, but the project was killed a year or so after it launched because the shorter term cash / profit consequences were too great. A hundred-year NPV would be great if humans were able to accurately forecast 100 years into the future. Unfortunately, we're not - 5 years is a big stretch. That brings us back to the present: what are you doing *right now* to increase or decrease the value you're providing to your customers, and are you making "enough" profit to justify your efforts? Little actions, positive or negative, accumulate in to huge results over long periods of time. Tom – good point. The problem with viewing things from an NPV standpoint is that it’s easy to make almost anything pay out over such a long time period. I’ve personally worked on large projects where the 1 and 3-year NPVs were horrible, and the project just barely squeaked by at the 5-year mark. The 5-year NPV was used to justify the project, but the project was killed a year or so after it launched because the shorter term cash / profit consequences were too great.

A hundred-year NPV would be great if humans were able to accurately forecast 100 years into the future. Unfortunately, we’re not – 5 years is a big stretch. That brings us back to the present: what are you doing *right now* to increase or decrease the value you’re providing to your customers, and are you making “enough” profit to justify your efforts? Little actions, positive or negative, accumulate in to huge results over long periods of time.

]]> By: Tom http://personalmba.com/value-optimization-paradox/comment-page-1/#comment-486 Tom Thu, 26 Mar 2009 14:53:18 +0000 http://personalmba.com/?p=574#comment-486 I've made the same argument in MBA courses, so let me offer the counter response. The response that I always receive is that "profit" is not defined over the short term. The normal predictive measure of profitability, as taught in schools, is the NPV of the strategic plan, where the longer the planning horizon, the better (ten years would probably be a minimum; a hundred years would be great). With such a long-term view on profitability, incraesing customer value pretty much falls out as an obvious business plan. I’ve made the same argument in MBA courses, so let me offer the counter response. The response that I always receive is that “profit” is not defined over the short term. The normal predictive measure of profitability, as taught in schools, is the NPV of the strategic plan, where the longer the planning horizon, the better (ten years would probably be a minimum; a hundred years would be great). With such a long-term view on profitability, incraesing customer value pretty much falls out as an obvious business plan.

]]> By: frontierblog http://personalmba.com/value-optimization-paradox/comment-page-1/#comment-485 frontierblog Wed, 25 Mar 2009 06:47:25 +0000 http://personalmba.com/?p=574#comment-485 I cannot agree more, actually I wrote a similar post weeks ago Edward Frontier Blog - No one ahead, no one behind http://www.hwswworld.com/wp I cannot agree more, actually I wrote a similar post weeks ago

Edward

Frontier Blog – No one ahead, no one behind
http://www.hwswworld.com/wp

]]> By: Josh Kaufman http://personalmba.com/value-optimization-paradox/comment-page-1/#comment-484 Josh Kaufman Tue, 24 Mar 2009 11:21:16 +0000 http://personalmba.com/?p=574#comment-484 <strong>Bill</strong> - Upselling is certainly part of the strategy, and their other dishes (kebabs, etc) are in the $20-25 range, which I'm sure they make a healthy margin on. I don't think that the vegetarian platter is a loss leader (i.e. product with low/no margin designed to bring in customers) since the ingredients are pretty simple / low cost, but the generosity with the food given the price certainly brings people in the door - the place is *always* busy, with a 20-30 minute wait for a table. Bill – Upselling is certainly part of the strategy, and their other dishes (kebabs, etc) are in the $20-25 range, which I’m sure they make a healthy margin on. I don’t think that the vegetarian platter is a loss leader (i.e. product with low/no margin designed to bring in customers) since the ingredients are pretty simple / low cost, but the generosity with the food given the price certainly brings people in the door – the place is *always* busy, with a 20-30 minute wait for a table.

]]> By: Bill http://personalmba.com/value-optimization-paradox/comment-page-1/#comment-483 Bill Tue, 24 Mar 2009 05:46:26 +0000 http://personalmba.com/?p=574#comment-483 Sounds like a great restaurant. I wonder if they price their food so low in hopes of bringing people into the place and selling some wine or beer, which is probably where greater profit margins lie. Sounds like a great restaurant. I wonder if they price their food so low in hopes of bringing people into the place and selling some wine or beer, which is probably where greater profit margins lie.

]]>