May 15, 2006
Beware of constant numbers
The fuel-thirsty RV I drove for the past two weeks has a 70 gallon tank. I discovered quickly that some gas stations have pumps programmed to shut off after dispensing $75 worth of fuel (or $50, in some cases). This amounts to around a third of my tank; a friend with a large van reports that the pumps often stop for him, too.
I am told that this limitation is imposed by the credit card companies, presumably to reduce fraud and keep no-signature transactions small.
This is a rare example of a lose-lose-lose situation (as compared to the more common lose-lose situation). Both the credit card processor and the gas station are losing volume, and profit, and the already-antagonized-by-gas-prices consumer is being further annoyed.
It is also an example of the danger of constant numbers in business processes.
Inflation, efficiency, scarcity, competition. The numbers are always going to change. Some go up and others down, and always more than we think possible.
In computer software design there is the Zero-One-Infinity Rule, which suggests that zero and one are the only constant numbers you should worry about. Beyond one you want a limitless formula.
I am sure that the person who came up with the $75 pay-at-the-pump limit used a reasonable formula: “Three times the cost of a full-tank in a full-size car.” The mistake was in programming that day’s answer into all the pumps instead of programming the formula into the pumps.
Gas prices also caught some car rental companies off guard recently. Corporate rental contracts had fixed per-gallon costs for cars returned without a full-tank of gas. This was a great profit center until retail prices rose above the contract rates, which were set at constant numbers instead of a ‘premium over average retail rates’ or some other formula.
A century ago, Frank Woolworth resorted to selling hammers disassembled -- the head and handle separate -- to maintain his promise that everything in the store was five or ten cents. From 1903 to 1970 Hershey shrank its chocolate bars 12 times to avoid crossing its own nickel price barriers as costs increased.
Yet businesses continue to marry themselves to constant numbers. Dollar stores continually seek new lows in quality to maintain their premise. Each year inflation chips away at the profit in the 99 cent value menu and the iTunes music store. How small can the burger get? Will they make the songs shorter?
Check your code, your contracts, and your business processes. Trade your constant numbers for flexible formulas.
Posted by Bob Pritchett at 10:47 PM | TrackBack
January 3, 2006
Everybody hates a winner
Being number one is great. In many cases:
- Customers assume you have the best product.
- Good people want to work for you.
- You can charge a premium price.
- Partnership opportunities come to you first.
- You have more resources.
- It is fun!
The downside to being number one is that everybody hates you.
Sometimes number one is hated for good reasons; maybe you stepped on a lot of fingers on your way up the ladder. Often, though, number one is hated for being number one. In the article Losers Take All Jill Neimark reports on a study (Are People Willing to Pay to Reduce Others' Incomes?) in which game-losing participants sacrificed some of their own winnings in order to reduce the winnings of the game-winners. Participants weren't just envious, they were willing to sacrifice in order to pull down number one.
A few weeks ago the Economist ran a story subtitled “being second best is underrated.” It points out that “Ford, Burger King and Target do not have documentary-makers queuing up to attack them” the way GM, McDonald’s and Wal-Mart do, and that Apple’s doesn’t have as many hackers attacking its operating system as Microsoft.
Among the other benefits of second place:
- You have more room to grow.
- Number one takes all the heat for unpopular industry practices.
- Underdogs get nicer press.
- It is easier to innovate if you are not the standard-bearer.
Jack Welch famously said that you should be number one or number two in a category or get out. There is a lot to be said for being number two.
Posted by Bob Pritchett at 6:05 AM | TrackBack
December 29, 2005
The Attorney General as extortionist
This kind of stuff sends chills down my spine:
Illinois State Attorney General Lisa Madigan asked 18 operators whose prices jumped significantly after Hurricane Katrina to donate $1,000 to the American Red Cross or risk a potential consumer fraud lawsuit, reports the Chicago Tribune.
If I ran a gas station I would take this deal. It is a lot cheaper than mounting any legal defense. But the whole idea of threatening businesses in this way bothers me. Plea bargains may be useful tools in the messy struggle for justice but this is a lot more like extortion. You haven't been charged, you aren't admitting guilt, there may not have even been a crime. But the AG can make it sound bad in the press and will fall on you like a ton of bricks if you don't pay up.
"If you don't want something bad to happen to your business, send a check for $1,000 to this address."
Coyote Blog, where I found the link, addresses this well, so head there for the full treatment.
Posted by Bob Pritchett at 6:13 AM | TrackBack
December 9, 2005
GM can die
Coyote Blog says it's okay if GM dies, and it is okay with me, too.
Don't get me wrong – I'm not rooting for GM to die. (Well, I did wish it a few times while sitting in an Avis rental.) But the thought of what wonderful things could follow GM’s collapse is pretty exciting.
Talented designers and engineers would find new employment where they could actually do something exciting, free of GM’s heavy baggage. Autoworkers paid to "spend their time doing crossword puzzles" would rejoin the working workforce. There would be room in the market for competitors to create new cars and maybe even for new auto companies to emerge. GM's assets – facilities and patents and people – would be split up and placed with companies that would make more efficient use of them. Hundreds of ex-GM'ers would become entrepreneurs.
Would it hurt? Yes. It isn't called creative destruction for no reason. But how much worse off would we all be if we propped up a dysfunctional organization by wasting funds and labor and time?
I hope GM can turn things around in a way that doesn't crush its individual employees and retirees. I hope GM can find a way to build a car I could love. I hope GM can be reborn as a great company. But if it is destined to lumber into failure, I just hope it dies quickly. Because I want to see what all those people can do once they are freed of the big, bureaucratic monster.