FIT: The Most Important Thing in Business?

I can't recall how the topic came up, but the other day someone asked me if it bothered me to lose clients.

My answer: "it depends."

If the loss is due to poor service quality or slow response, I hate it.  Fortunately, this has been rare, mainly because my staff works hard to make sure that any problems that arise get fixed ASAP.  We also do root cause analysis to figure out ways to prevent it happening again.

But if the loss is because our services are a poor fit with a client's needs, then I'm fine with losing them.  In fact, at some point, if our clients are successful, their needs outgrow our ability to provide effective service.  Rather than attempt to hold onto them or expand our services, we encourage them to "graduate" which usually means helping them hire their own, dedicated staff as our replacements.

In terms of new customer acquisition, because we aren't under pressure from investors for fast growth, we don't try to work with everyone.  Instead we focus on determining if there is a good fit between what we can do vs. what the client needs.  I estimate that I end up declining (or referring where possible) about 25% of the prospects who approach us because of poor fit.  "Poor fit: doesn't mean that the client is bad (although "nice people" is one of our fit criteria).  It means that after 5+ years doing this, we have a pretty good idea of who we can help vs. who we can't and have experienced the consequence of working with clients with whom we were poor fit. So while it means we may be giving up revenue, it also means we give up:

• Conflicts with clients who have different expectations about the work being done.
• Overextending ourselves into areas where we lack expertise.
• Arguments about our fees.

We look for fit along the following dimensions:

• Fit to our standard offerings vs. having to develop custom capability. 
• Fit to our flat fee revenue model vs. traditionally hourly billing
• Fit between our people and the client (i.e. we don't work with people we don't like)
• Fit between our response time capabilities and the client's response time expectation
• Fit between our quality levels and the client's expectations

And I don't think it actually has hurt our revenue growth.  For the past three years, we've actually grown our business at rates even a VC would find acceptable.  In fact, paradoxically, our focus on fit may have actually contributed because:

• Our sales cycles are short because we have a sharp focus on the value we can provide and what we cannot. We try to be clear telling new prospects what we do, and more importantly to them, what we don't do.
• Our standard operations are tailored to deliver that value making it easier to scale.
• It allows us to focus on improving adding new capabilities valued by the majority of our clients (vs. one offs) in a way which is clear to both parties that these are *WARNING* new services.
• We have high client satisfaction and loyalty which fuels referrals.  In fact we are at the point that over 95% of our new business is by client referral.  This is actually one of the metrics indicative that a business has achieved product/market fit.

In order to adopt a focus on fit, you first must accept the fact that not all revenue is good for your business!  That's tough to do when you are short on sales.  Then you must have an idea of what  your target customer profile is AND what value you provide.  For specifics on how to do this, see two earlier posts:

• Developing a Customer Profile
• Applying the Customer Profile

Thrice Around the Block Top Blog Posts of All Time!

The nice thing about blogs is that viewership can grow even when you neglect it.  Having only recently returned to blogging after an 18 month hiatus, I was pleasantly surprised to find that the average monthly viewership rate had doubled.

In any event, I thought it might be interesting to share what people have been hitting.  Here are the Top Nine Posts on Thrice Around the Block:

1. Developing a Customer Profile
2. How to Set Prices:  Pricing Strategy
3. Applying the Customer Profile
4. How to Set Prices:  Tangible Pricing Methods
5. The Growth Mystique: A Silicon Valley Parable
6. Education for the Small Business Entrepreneur
7. Process vs. "Product" People
8. My Top 25 (and counting) Business Books
9. How to Set Prices: Revenue Models and Pricing Mechanisms

Enjoy!

A NEW Shameless Pitch: BUS26 Building a Successful Service Business

This Wednesday, January 15th, 2014, I'm launching a new course for the Stanford Continuing Studies Program, BUS26:  Building a Successful Service Business.  The course runs for six Wednesdays from 7:00pm - 8:50pm.

With 55 students pre-registered and two guest speakers, it promises to be a stimulating time.  Hope to see you there!

Fourth Time Shameless Pitch: BUS213 is Now a Featured Course!

It won't go away!  For the fourth year in a row, I'll be teaching BUS213-Principles of Product/Market Fit at Stanford Continuing Studies this Fall.  Now featured as part of the "Mastering Marketing" track, this six week course starts on September 25, 2012 and is held Wednesday evenings from 7:00-8:50 pm.

Signs ups are happening now.
(https://continuingstudies.stanford.edu/courses/course.php?cid=20131_BUS+213)

Third Time Shameless Pitch: BUS213 is On Again!

Yes, it's back!  For the third year in a row, I'll be teaching BUS213-Validating Business Models: Principles of Product/Market Fit at Stanford Continuing Studies (http://bit.ly/O5GXw7).  This six week course starts on September 26, 2012 and is held Wednesday evenings from 7:00-8:50 pm. 

Signs ups are happening now.

Shameless Pitch II: Stanford Marketing Course, BUS213

I'm back (more on this next post) and it's back!

What's "it"?

Starting September 28, 2011 I'll once again be teaching a six week evening course called "Monetizing Business Models" (Course Code: BUS213) as part of Stanford University's Continuing Studies program.  An improved version of the course taught earlier this winter, BUS213 will cover strategic marketing concepts and frameworks that can be used to evaluate the money making potential of a new business idea, whether as a startup, a new venture inside a corporation, or as an investment.  And per student request, we'll be going into more depth with respect to price setting strategies and tactics.

We'll be covering product/market fit and exploring different ways to analyze business models.  The course assumes no previous experience in marketing. We'll be using Customer Development as the backbone methodology, focusing primarily on the Customer Discovery phase.  Our course text is a great little book called The Entrepreneur's Guide to Customer Development, by Brant Cooper and Patrick Vlaskovits.

If you're interested, you can register online starting August 22, 2011 at the Stanford Continuing Studies website.  Here is the direct link to the course.

Hope to see you there!

How to Set Prices: Customer Value Analysis

5th and final post in a series on How to Set Pricing

I first learned about value pricing as a product manager at Metcal.  At that time the company was a startup making high end hand soldering equipment for PCB assembly houses.  To give you an idea of how high end, at that time a Metcal soldering station sold for 5x that of competitive units, and the consumable tips were 10-15x that of the competition in what most would call a commodity market.  Yet, in eight years, the company went from being the #8 to #2 market share player.

Now while there were many reasons for the company's success  - superior technology, ergonomically friendly design, robust product quality, etc. - the killer app in the company's sales arsenal was a customer value analysis created by one of the sales managers.  This simple spreadsheet model translated the product's feature/benefits into a quantified customer value proposition.

When distilled to the basics, B2B customers buy products and services for three ultimate value objectives:

• Reduce costs
• Increase revenues
• Reduce risks

Faster speed, greater convenience, and growth usually translate into one of these three.  In Metcal's case, the product features translated into the following benefits:

• Superior solder joint quality (reduced defect costs and risk)
• Faster soldering time (reduced labor cost)
• Elimination of calibration (reduced labor cost)
• Faster operator training time (reduced labor cost)

Metcal's value analysis was an Excel spreadsheet that allowed customers to input their time, process, and cost data, compare them against the cost of acquiring new solder stations and more expensive consumables and see the return on investment, payback, and net present value figures associated with the value created.  On top of that, the value analysis often prompted customers to consider factors that they may not have thought of, like training time.  The financial decision makers inside the customer quickly saw that the acquisition cost for Metcal's products was a relatively small percentage of the overall value created (in this case reduced costs), the essence of value pricing.

The main idea behind value pricing is that if your offering creates value, you price such that you and the customer share it.  Normally, this is not 50/50 but weighted in the favor of the customer;  the more value the customer captures, the stronger the value proposition.


Value pricing is widely practiced in B2B markets, especially where relationships are complex and long term.  Examples include logistics outsourcing where the supplier is paid on the basis of procurement costs reduced; SaaS vendors often price their subscription services to capture 10-30% of value created for customers over a three year time horizon vs. using a traditional enterprise software solution.

To create a value analysis requires a deep understanding of how your offering impacts a customer's business economics.  Gaining this insight takes time.  For a startup to gain this insight, it typically must have access to a someone with extensive, specific domain expertise, one who understands the customer's business model well enough to know where the lever points are that have the greatest potential to affect profitability and growth.

Creating a Value Analysis
In order to create a value analysis, you need to know the following well enough to code it into a spreadsheet:

• What is the main value proposition you are offering to your target customer?  Lower costs, higher revenues, lower risk?  For Metcal it was mainly lowering the per unit cost of production.
• How does this tie into the customer's value calculation? For Metcal, this had a direct impact on the direct labor line in cost of goods sold on a P&L.
  
• What are the factors used by the customer to assess value?  For Metcal, production rate, labor cost, defect rate, calibration and setup time were input factors in assessing value.
• What factors are not used by the customer to assess value and should be?  For Metcal, many customers neglected to factor in operator training time.
• What is the feature => benefit => value proposition chain for each of your offering's features?  For example, Metcal's superior technology => x% defect rate reduction => y% less rework => z% lower cost.
• What is the relevant payback factor used by the customer?  Is it payback time?  IRR?
• What is the relevant payback time used by the customer? 

Assuming that you can create a value analysis, two value methods can be used to set  pricing.


Method 8:  Share of Value Pricing
In this method, a "typical" customer use case is created using the value analysis.  Pricing is then set at 10-30% of the value, adjusted as needed for competitive market conditions.  This method is practiced by many SaaS companies relative to traditional enterprise software offerings.

Method 9:  Performance Pricing
Alternatively, for a specific customer, using the value analysis, compensation is based on a defined percentage of the value created (i.e. savings or revenue growth).  This method is often practiced by industrial logistics suppliers, auto parts suppliers, electronic contract manufacturers., and cost-control consultants.  Think of it as the corporate equivalent of a commission plan.  Because payment is dependent on performance, using this method requires you to have a good handle not only on the customer's economics, but your own.

Summary of Pricing Methods
To summarize the nine different pricing methods discussed, they are:

1. Cost Plus Pricing
2. Direct Market Competitive Pricing
3. Competitive Substitute Pricing
4. Target Customer Survey
5. Price Bracketing
6. Price/Feature Stripping
7. Customer Set Pricing
8. Share of Value Pricing
9. Performance Pricing

Happy pricing!

How to Set Prices: Value Pricing Methods

4th in a series on How to Set Pricing

Last post we discussed tangible pricing methods.  We now turn to value pricing methods.  Simply put, value pricing methods seek to establish a price based on some percentage of the value perceived by the customer.  While this seems straight forward in theory, this can be difficult to establish in practice for the following reasons:

• One must understand what the customer perceives as value in your offering
• One must understand the customer's time frame over which value is calculated
• The full value may be in intangible areas that the customer may not be aware of

Customer Perception of Value
In order to determine what percentage of value you can capture in your pricing, you must first understand what your offering's value is to the customer. This means you must first understand who your customers are.  Again, while this seems like a no brainer, I've found that for most startups, while they have strong beliefs about who their customers are and what value they are offering to them, they actually have NO CLUE.  Beliefs unsupported by data means NO CLUE!

Does that sound harsh?  See if you can answer the following question about your customer value:

• What is the demographic profile of your target customer?  What hard evidence do you have to support this?  Can you put this on paper?
• What are their acute pains in ranked order and what is your supporting data?
• How does your offering's features address each acute pain and what customer evidence do you have to prove this? (Not what hypothetical, logical reasoning you have that it should address this?)
• What competitive substitutes are your target customers using today to address their acute pain and how do you know this?
• What does your customer's life look like before they start using your offering?  How is it different afterwards?  What facts do you have to support this?
• Can you construct a mathematical model for value analysis that shows how different levels of acute pain reduction translate into customer value?  (This will be the subject of the last post in this series.)

If you can't answer these questions, I would argue that you don't truly understand the value of what you are offering your customers.  For help on this, see my previous post "Developing a Customer Profile".  A large part of the value of Steve Blank's customer development methodology is to convert these customer beliefs into customer facts.

There are a couple of methods that can be used to collect value data.  But unlike the four tangible pricing methods discussed previously, value pricing methods require (1) talking directly with individual target customers (2) an attempt to close a sale and (3) involve the risk of alienating a target customer to get the data.
The reason for this is that the only form of validated value data is a sale or other binding purchase commitment.  What people tell you they will pay in conversation is very different than when you ask them to sign a purchase order.

Each of the methods described below requires that you:

1. Know and have access to customers who fit your target profile
2. Have a hypothesis about your offering value that you can quickly communicate to customers (see my post on "Focused Selling")
3. Have hypotheses about how different features of your offering address target customer acute pain

Method 5:  Price Bracketing
Start discussion with an initial set of target customers.  Once you think you have a good understanding of the reasons the customer might buy and they have a good understanding of what you have to offer, to get an initial feel for value, ask two questions:

• Below what price would this be a "no-brainer" purchase that you could commit to today?
• Above what price would there be no chance of them ever buying and why?

Once you've determined this, tell the customer your pricing is coming in at a figure that is 75% of the range (i.e. if the "no brainer" price is $100 and the "no way" price is $1100, the 75% figure is $850).  Try to close the sale.  Most likely when (not if) they balk, find out what's stopping them from making a commitment today and pay attention.  Assuming you still can't close the deal, thank them for the valuable information and let them know that you obviously have some work to do on your costs and find out if they would be willing to talk again in the future.  Most likely, if you do this with 3-5 target customers, you'll quickly be able to determine what parts of your value proposition are holding up and which need adjustment.  Adjust accordingly.

Method 6:  Price/Feature Stripping
Armed with a new offering presentation from Method 5, ideally meet with a different set of target customers.  (If you are in a small B2B market with a restricted set of target customers, you may need to go back to the first set).  This time, once you think you have a good understanding of the reason the customer might buy and they have a good understanding of what you have to offer, try to close a sale at the 75% price number from Method 5.  Depending on which reaction you get do the following:

• Customer Accepts:  Congratulations, you've gotten a sale...but you haven't learned much.  Raise the price by 20% before you talk to the next target customer.
• Customer Rejects:  Understand why.  Then get a counter-offer.  Once you have it, talk about which features you can strip to get to the counter-offered price.  As you have the feature stripping discussion, you should get a feel for the relative value of each feature.

Again, 3-5 target customers should give you a good feel for how your value proposition should be adjusted.  It should also give you a feel for your minimum viable product.

At this point, go back to the first set of target customers and let them know that you've found some ways to work the cost issue both internally and by removal of certain features to get closer to the the previously discussed "no brainer" price.  See if you can close the sale again, this time at the average counter-offer price from the second set of target customers.  You will then get one of two reactions;

• Customer Accepts:  Congratulations, you've gotten a sale and validated the feature/value hypotheses.
• Customer Rejects:  Understand why.  In many cases, the new objections won't be price based, but will be sales process based.  Congratulations, you can now move forward to address the non-price related set of impediments to gaining market traction.

Method 7:  Customer Set Pricing
One alternate method for determining value is to let customers set their own price.  Examples of this include self-published e-books where the author request that people pay what they think the item is worth and museums, which request visitor set donations in lieu of an admission fee.  The most obvious risk of letting customers set prices is not being able to set prices adequate to cover costs, but depending on the nature of your offering this method may work for you.  To be viable it helps to have:

• Large potential customer base where the volume of payers is likely to be large enough to offset the inevitable free riders.
• Target customer base has some social or peer pressure element to pay something - This works for many charitable organization and the museum example cited earlier.
• Low or no incremental cost to delivering additional offering vs. probability having more paying users - In the case of the museum whether they have 500 or 5000 visitors a day does not change their operating cost but greatly increases the likelihood of donations.  For the e-book author, once the book is written, delivering additional copies across the web is pretty cheap.

There is one final method for setting value based pricing.  This involves the creation and development of a mathematical customer value analysis.  Pricing is then based on some percentage of this calculated value.  This will be the subject of the final post in this series.

Next post:  Customer Value Analysis

How to Set Prices: Tangible Pricing Methods

3rd in a series on How to Set Pricing

In order to set pricing, certain decisions need to be made with respect to:

1. Pricing Strategy
2. Business Revenue Model
3. Pricing Mechanisms

As discussed in the prior two posts, these three elements can be combined in many different ways; arriving at the proper combination is part planning, part art, and part trial and error.  But assuming you've gotten this far, it still leaves the question of what price to charge? 

First, let me state that I've been pricing goods and services for many years and for those of you who like precision and certainty, the pricing process is messy and imperfect.  Nevertheless, there are several methods that can be used to establish initial pricing.  These tend to fall into two group:  tangible pricing and value pricing.  Tangible price methods stem from obtainable data.  Value price methods require more exploratory efforts.  This post will deal with tangible price methods.

Method 1: Cost Plus Pricing
The most basic and simplest to understand is cost plus pricing.  This is where you add up your costs, tack on your target margin to set a price.  Remember that one of the key objectives in pricing is to charge enough to cover your costs and make a profit.  At least on the surface, this would seem to address the issue.  However, cost plus pricing often results in a price that is not competitive in the market place (i.e. think $500 screwdrivers for the government).  So what to do?

First, you cannot ignore cost but there are two kinds of cost:  direct and indirect.  Direct costs, typically classed as Cost of Goods Sold (COGS), are the immediate costs tied to delivering a unit of product or service.  For example, if you're selling a widget, the cost of the parts in the widget plus the amount of labor time to build the widget plus the cost to ship it are direct costs.

 Your pricing must be greater than the direct cost.  Otherwise you are shipping dollar bills out with each unit.

On the other hand indirect costs are not directly tied to the cost of delivering a specific unit, though they may be needed for producing the product or service.  Often times they are relatively fixed costs like engineering wages, rent, or electricity.  They are real costs needed to support operations but not directly assignable to a specific unit of product or service.

These costs are often allocated across the total units produced. For example, if you have $500/month in rent and build 5000 units/month, you might allocate $0.10 of this cost to each unit built.  But if you only build 500 units/month, you would allocate $1.00 of this cost to each unit.  And this is what complicates cost plus pricing.  To cover this, do you charge $0.10 or $1.00?

Not only must you charge more than the direct cost, in order to make a profit, you must charge enough more to cover the indirect costs at a particular volume level.

To further complicate the picture, the line between a direct cost and indirect cost is often murky.

The bottom line is that you should not use cost as the sole means of establishing price, but you cannot ignore it either.  And if you find that you can't price high enough to cover all of your costs or reduce your costs sufficiently, you may have a more fundamental business model problem.

Method 2: Direct Market Competitive Pricing
If you have direct competition for your product or service, one way to establish a reference price point is by surveying the competition.  Where prices are posted (e.g. for retail goods) this is easy to do.  For services, where prices are often not posted, there are a couple of ways to get prices:

• Ask people who use the services what they are paying
• Attempt to contract for the service to get a quote
• Get a friend with a business to attempt to contract for the service to get a quote

5-10 quotes should enable you to get a feel for the average and range of competitive market pricing.  Keep in mind that this just establishes a reference point.  Depending on your pricing strategy, you may choose to price higher or lower than market.

Method 3:  Competitive Substitute Pricing
In some cases, there may not be a directly competitive product or service to your offering.  In this case, you should look at pricing for competitive substitutes.  Competitive substitutes are products or services that in combination with other things allow the buyer to gain the same functionality or achieve the same goal as your product or service would directly.  As an example, if I need to add up a bunch of numbers, I can use a calculator, my computer, my cell phone, my digital watch, a pen & paper, an abacus, or just do it in my head.  All are competitive substitutes to each other with different costs associated with purchasing the different items.

Depending on the strength of the competitive substitute in achieving the buyer's purchase objective vs. your product or service, the price being charged may limit the premium you can charge.

For example, lets assume that high speed rail service between San Jose, CA and Los Angeles actually becomes a reality in my lifetime.  If I have to price the service, three competitive substitutes are plane, car, or bus.  Transit time by high speed rail is 3 hours, plane is 1.5 hours, car is 6 hours, and bus 7 hours.

Assuming I own a car, this is the cheapest in dollars, involving maybe $50 in gas.  The bus is about $55 and I don't have to drive;  I can spend the time reading or on my laptop courtesy of mobile Wi-Fi.  The plane is ostensibly the fastest but when you add all the security and boarding issues associated with air travel, total time is probably closer to 3-3.5 hours for a ticket price of $120.

So what should the price of a train ticket be?  You can definitely charge more than the car or bus because of the speed advantage.  The plane is the nearest serious competitor so a floor reference price would be $120 per ticket.  Could it be more?  Absolutely.  It depends on how well the train positions its value to its target ridership;  this moves into the realm of value pricing.

Tangible price methods make it relatively easy to determine a current market reference point.  But if your product is meant to be a superior solution to the market, it does not help you determine what premium over market you might be able to charge.  (This is less of an issue if your product is meant to be a cheaper solution to the market.)

Method 4:  Target Customer Survey
While method's 2 & 3 look at competitive pricing, another way to determine pricing is to survey potential buyers.  This first involves understanding who are your target customers.

Customer surveys work best for familiar product categories with fewer options.  Most people find it difficult to establish an anchor price point for innovative or unfamiliar product categories and will therefore skew answers low.  Products with many features can be confusing, although conjoint analysis can help establish  feature/price tradeoffs.  It also helps to have product samples or some kind of demo; people give better feedback with things they can see or touch versus abstract concepts and ideas.

But one potential strength of this method is that it may tell you something about the nature of the price-demand curve.  Why is this important?  Let's look at two price-demand curves.  The one on the left is a stereotypical commodity demand curve where demand falls with increasing unit price.  The one on the right is typical of many branded goods where too low or too high a price can cause demand to fall (e.g. the Mercedes C-Class example mentioned in the first post in the series).

As you can see, depending on what the nature of the curve might be, and where you are on the curve a decrease in price may or may not improve demand.

The other pro of this method might be to identify the existence of an optimum price point different from the current competitive market price.  For example, when LCD TVs first came out, a 42" model was ~$4500.  But the LCD TV makers knew this was not the optimum point; it was a price constrained by their costs.  By conducting customer surveys, they determined that $1000 was the magic inflection point at which demand would skyrocket.  They worked diligently to drive costs down so as to be able to price to this point.  Sure enough, 42" LCD TVs hit the $1000 retail point in 2008 and took off, in spite of the fact that a global recession was underway.

Next post:  Value Pricing Methods

How to Set Prices: Revenue Models and Pricing Mechanisms

2nd in a series on How to Set Pricing

In setting prices, three major elements need to be considered:

1. Pricing Strategy
2. Business Revenue Model
3. Pricing Mechanisms

Last post, we discussed Pricing Strategy.  This post, we give an overview of Revenue Models and Pricing Mechanisms to show how they impact pricing decisions.

FULL DISCLOSURE:  Most of this information has been paraphrased from Business Model Generation by Alexander Oesterwalder and Yves Pigneur.  If you are interested in business models, I highly recommend this book.

Revenue Models
As with pricing strategies, while there are many variations, the most common generic revenue strategies are as follows:

• Title Passes to Buyer
• Asset Sale - The straightforward one.  Buyer pays Seller; Seller gives Buyer the goods which the Buyer then owns.
• Title Stays with Seller
• Usage Fee - Buyer consumes a service.  The more consumed, the more paid.  Example:  telephone minutes.
• Subscription Fee - Buyer pays for time based access to a service.  Example:  gym memberships, Netflix streaming
• Renting - Similar to a usage fee but in this case Buyer pays for temporary exclusive access to an asset.  Example:  office rental, car rental
• Licensing - Buyer pays for right to use intellectual property owned by Seller.  Example:  media rights
• Middleman
• Brokerage Fee - Company takes a fee for providing services to connect two or more parties.  Example:  real estate, credit card issuers
• Advertising Fee - Company takes a fee for providing and promoting Buyer access to a prospective Seller base

The different pricing strategies discussed before - predatory, skimming, bundling, and multi-tier - can be applied to each of the revenue models.  For example, American Express pursues a premium brokerage fee pricing model and strategy vs. Visa which pursues a more mainstream brokerage fee model.  Both charge fee for card usage but American Express's is substantially higher than Visa's.  This fits American Express's strategy of going after higher net worth individuals.  In line with this strategy, American Express also charges a relatively high annual subscription fee for card access vs. Visa, which in many cases does not charge any annual fee.  This goes hand-in-hand with American Express's travel and other services most likely to be of interest to higher net worth consumers.

Pricing Mechanisms
Once you understand the revenue model and pricing strategy you wish to pursue, you need to decide on the actual mechanism of how you will charge.  Once again, while may variations and combinations are possible, the generic options are:

• Fixed Pricing
• List - The basic one.  Fixed price for an individual product or service.
• Feature Priced - Price depends on the number, quality or type of features offered.  The default mechanism used with a bundling pricing strategy.
• Segmented Discriminated  - Price depends on the type of customer being targeted.  The default mechanism used with a multi-tier pricing strategy.
• Volume Based - Price is a function of the quantity purchased with price usually decreasing with increasing volume.
• Dynamic Pricing
• Negotiated - Price is set by active negotiation between Buyer and Seller.
• Yield Management - Price depends on inventory and time of purchase.  Often used where capacity is fixed and perishable.  Example:  airline seats
• Real-time Market - Price is based on supply and demand usually facilitated by an active exchange.  Example:  stocks
• Auctions - Price determined by competitive bidding.  An auctioneer often establishes a floor reference price then facilitates the bidding up process.  In the case of a reverse auction, a Buyer sets a ceiling reference price, then facilitates a bidding down process.  The reverse auction is only possible where the Buyer has unique leverage over a group of Sellers.

Again, it is possible to combine any of the pricing mechanisms with any of the price strategies and revenue models, although in this case, some price strategies fit together better with some price mechanisms (e.g. bundling with feature pricing).

Once a decision has been made with respect to pricing strategy, revenue model, and pricing mechanism, the final decision that needs to be made is what price to charge.  In the case of dynamic pricing, the question is what reference price to open with as the final price will be ultimately be determined by the market.

Next blog post:  Tangible Pricing Methods

How to Set Prices: Pricing Strategy

1st in a series on How to Set Pricing

I recently received the student feedback from BUS213:  Monetizing Marketing Models, the course I taught for Stanford Continuing Studies during the Winter 2011 quarter.  Overall, the course was well received.  But the number one area where students would have liked to go deeper was in how to set pricing.

So for those of my former students who may be reading this blog,  I've decided to do a series of in-depth posts that I hope will be helpful in this area. The first few posts will deal with an overview and frameworks.  The last with tactics and practical tips.

Pricing Overview
As anyone who has studied Marketing 101 knows, Price is one of the classic "4Ps" of the marketing mix (the others being Product, Promotion, and Place).  In setting prices, three major elements need to be considered:

1. Pricing Strategy
2. Business Revenue Model
3. Pricing Mechanisms

Setting prices can be a fairly technical marketing specialty, particularly in well established consumer product categories like packaged goods, the travel industries, and commodities.  For the purposes of this discussion, I will focus on the less scientific and more "seat-of-the-pants" situations encountered by entrepreneurs in less well defined B2B and B2C markets.

Pricing Objectives
There are three main objectives to be considered in setting prices:

1. Cost/profit - Pricing must be set sufficient to cover costs and generate a sufficient profit to support and grow the business.   What complicates this is the nature of the revenue model and time frame over which profits are generated.
2. Market positioning - Prices are a key signal to prospective buyers of a product or businesses market position.  In known product categories, they can establish buyer expectations for the product.  For example, if a car sells for $90,000 and another sells for $15,000 a buyer will have a certain image of what one car is versus the other.  Where a product category is new to the buyer, pricing can establish a reference point for comparative expectation versus competitive substitutes.  The main thing to remember is that pricing should be set consistent with a company's brand and market positioning.
3. Market share - Pricing can affect the rate at which a product penetrates a market.  In general, cheaper pricing creates less buyer resistance during the sale process and promotes faster product adoption and share growth.  But not always.  When Mercedes first released the C-Class with pricing in the low $30,000s, because the price was so counter to the company's luxury brand image, it actually impeded consumer acceptance.  The other factor here is what competitors are charging.  Depending on the nature of competition within an industry, this may limit what prices can be set.  For example, in commodity businesses, it is almost impossible to establish premium pricing due the existence of interchangeable competitive substitutes.  And price decreases are matched almost instantly by competitors.  But in luxury goods, where the value of the products are more intangible, a wide variation in pricing can exist.

Ideally, prices should be set to maximize business profitability over time.  Profit over time is a function of unit price, unit volume (i.e. share), and time.

Pricing Strategies
A company's price strategy is the way in which it decides how to blend the tradeoffs between the various objectives above.  It must be set as part of a company's overall competitive strategy.  For example, if the company is in a new technology sector with low barriers to entry (i.e. social media) where much of its value is based on its network, it may need to pursue a first to market, fast growth approach. In this case, it may want to pursue a loss leader price strategy in order to facilitate this.

While the variations are endless, the most common generic price strategies are:

• Predatory - This is where a company prices its product at very low margin, or even at cost* in order to gain entry into a new market. Over time, as the company establishes a more dominant share position, it increases prices to be more in line with its target brand position.  This often used where a new entrant is seeking entry into an existing market with established competition.  Predatory pricing is not without its pitfalls including:
• Sending the wrong positioning signal to the market
• Difficulty in raising prices due to customer backlash
• Sacrificing negotiating room
• Leaving money on the table
• Difficulty in covering costs
• Skimming - At the opposite end of the spectrum, this is where a company prices at a premium to capture the high end segments first.  Then as it saturates a buyer segment, it drops prices to appeal to new buyer segments.  This strategy requires that some meaningful differentiation exists to support a premium price segment.  Skimming also has its pitfalls including:
• Increases sales resistance, lowers demand, and slows sales adoption
• Creates an umbrella for competitive entry
• Creates customer "ill will"
• Gives customers an incentive to search for alternatives
• Bundling - This is an intermediate strategy where a company groups together different products and features in such a way that it can offer variations at different prices.  This gives the company great flexibility to offer a combination of features that appeals most to different buyer segments while maximizing the profitability of the various offerings.  An example of this is the automobile industry where the variety of packages can be overwhelming.  By bundling together desirable but costly features (e.g. automotive transmission) with less desirable but more profitable features (e.g. "all weather" package), the overall profitability of the car can be optimized.
• Multi-tier  - This is another intermediate strategy where the company offers distinct product categories at different price segments to appeal to different buyers.  Again, an example from the auto industry is Toyota used to offer a mainstream (Toyota) and luxury (Lexus) model under different brands for substantially the same car (Camry vs. ES300).  Another example would be the freemium model practiced by the SaaS industry where it is common to offer both a basic free version and a premium paid version.

Next post:  Revenue Models and Price Mechanisms

*  Note:  Setting prices below direct costs is illegal in many countries. While often difficult to prove given the creativity in cost accounting allocations, the practice of "dumping" or predatory share pricing has been the subject of several WTC actions in the past.  One such high-profile case involved the sale of Korean DRAM memory chips to the U.S. in the 1990s.

Switching Costs

A short post today because this weekend, I finally changed over from a six year old IBM Thinkpad T43 laptop to a new Lenovo Thinkpad T410.  No more Windows XP and Microsoft Office 2003.  Yep, now I'm on Windows 7 and Microsoft Office 2010!  Excitement!  Thrills!  Once again, I'm state-of-the-art.  No more having to run out for coffee and bagels while I wait for my laptop to boot up.

So why did I wait so long to change?  Because I hate the switching cost.

I'm not referring to the dollars spent paying for the new hardware.  In fact, I spent less on my new laptop than the unit I'm replacing.  And with all the "free" software and SaaS stuff out there, my software costs are cheaper too.

Rather, what I'm talking about is all the time and effort spent doing the following:

• Migrating files and restoring preferences - In spite of the auto-migration software that comes with the new laptop, this never seems to work right.
• Deleting unwanted pre-loaded software - Mercifully minimal with Lenovo.  See below.
• Re-installing new software
• Re-establishing all the background stuff like Wi-Fi connections, network mappings, and print drivers that I did once before, promptly forgot, but now need to do again to make the laptop useful
• Testing it all out
• Tinkering with the new stuff on the machine that wasn't on my old one - Hey is that a new version of Minesweeper?
• Learning where to find everything now! -  The interfaces for Windows 7 are different from the XP I'm familiar with and Office 2010 is almost a foreign interface from Office 2003. After using the same machine for six years, I had everything fine tuned for maximum ease of use, Ed style.  

It's interesting to see how different companies that rely on regular product upgrades deal with the switching cost issue.

First there's Lenovo.  As most people know, despite the different badges, Lenovo built both my old T43 and my new T410.  Knowing they have a good hardware interface, the tinkering was minimal.  The keyboard layouts are almost identical and the software utility programs are similar and familiar.  And Lenovo whether by design or not, kept the pre-loaded junkware to a minimum.  The result:  minimal distraction and quick ramp up on the hardware.  It was one of the main reasons I decided to stick with the same manufacturer.

Then there's Microsoft.  This is my fifth Office upgrade since I started using it in 1995, and except for the user interface upgrade from 95 to 98, I have yet to derive any benefit from Microsoft moving all the commands and menus around other than to confuse me for the next two months until I finally get back down the learning curve.  Now, while I'm not wasting time waiting for hardware to boot up, I get to waste it looking for where Microsoft stuck the Pivot Table command in Excel 2010!  Yes, I'll eventually adapt, but it made me think twice before springing for MS Office 2010.  I seriously considered making the switch to OpenOffice, the freeware competitive equivalent offered by SUN (now Oracle), but my Early Majority mindset won out...this time.

Something to think about the next time you decide to "improve" your interface.

Shameless Pitch: Stanford Marketing Course, BUS213

Starting January 11, 2011 I'll be teaching a six week evening course called "Monetizing Marketing Models" (Course Code: BUS213) as part of Stanford University's Continuing Studies program.  The course is designed to teach strategic marketing concepts and frameworks that can be used to evaluate the money making potential of a new business idea, whether as a startup, a new venture inside a corporation, or as an investment.

We'll be covering product/market fit and exploring different ways to analyze business models.  The course assumes no previous experience in marketing. We'll be using Customer Development as the backbone methodology, focusing primarily on the Customer Discovery phase.  Our course text will be a great little book called The Entrepreneur's Guide to Customer Development, by Brant Cooper and Patrick Vlaskovits, both of whom will be speaking at the final course session on February 16th.

If you're interested, you can register online starting November 29, 2010 at the Stanford Continuing Studies website.  Here is the direct link to the course.

Hope to see you there!

The Essence of the Message

The other day, my daughter Mina presented me with this drawing that I really love:

To understand the context, for the past many mornings on the way to her school, we've passed a flock of hummingbirds zipping in and out among the flowers.  I love these walks with my daughter because no matter how chaotic the "get-the-kids-to-school" morning rush has been, by the time we reach the hummingbirds she's happy.  This picture captures beautifully the essence of our walks.

I particularly liked this drawing because I've always been fascinated by Japanese "sumi-e" inkbrush painting.  Sumi-e is a style of art that seeks to capture the essence of a scene with the minimum number of brushstroke.

The pictures can convey the essence of simple things...

...or more complex things.

And what I find fascinating is how the essence is often conveyed less by the actual strokes you see as by the  strokes that were never made.

In marketing, when developing positioning or crafting a message, we face the same challenge as the sumi-e artist, namely how to communicate the essence of our message with the fewest possible elements.

But, this is harder to do than it looks.  When faced with the task of developing a slogan, positioning statement, or the ubiquitous elevator pitch, we often take the direct approach which is to describe it in more detail. The problem with this is that in our zeal to describe things completely, we lose the essence in the complexity.

Whether we're creating a marketing message, a position statement, a strategy, a product, we only learn what's the core essence by continually removing the extraneous and by imposing restrictions.  This is one of the keys behind the concept of Minimum Viable Product in Customer Development.  This is the purpose of the "60/60" rule (i.e. 60 seconds or less in 60 words or less) in elevator pitch development.  This is why any business strategy that requires more than a single page to describe becomes dead paper.

When know too far? Not connecting.

Still with me?

How about now?

The Homework Matters

On October 13, 2010 I had the opportunity to listen to Mark Suster (Both Sides of the Table blog) present at the Stanford Entrepreneurial Thought Leaders series.  I like Mark's blog because having been an entrepreneur and a VC, he brings both the inside and outside view to the startup world.

The purpose of his talk was to "joust with some dragons" the dragons being Silicon Valley conventional wisdom.  He then proceeded to take jabs at the Lean Startup movement ("lean does not mean fast, fast means fast, rapid means fast..."), super angels, and most of all the notion of "fail fast."

But I thought his most interesting comment was this:   

"Silicon Valley is lazy."

Now before you get out the pitch forks, heat up the tar and feathers, and conjure up a flash mob in Los Angeles, it's important to understand the context of the statement.  He was not saying that people in Silicon Valley don't work hard or long hours in general.  He was saying this in the context of doing market research, i.e. doing the homework.  Unfortunately, market research has become an almost scatological term in Silicon Valley signifying "analysis paralysis", spreadsheet slight of hand, and navel gazing.  Instead, "launch and learn" usually shouted from beneath the banner of Customer Development, has become the new rallying cry as the substitute for market research.  And for many entrepreneurs with borderline ADHD and strong bias towards action, it feels so much better.

But since when did market research and Customer Development become mutually exclusive?  One definition of  market research is "the collection and analysis of information about consumers, market niches, and the effectiveness of marketing programs." Customer Development, as outlined in Four Steps to the Epiphany, calls for the statement and validation of multiple hypotheses including:

1. Product hypothesis
2. Customer & Problem hypothesis
3. Distribution & Pricing hypothesis
4. Demand Creation hypothesis
5. Market Type hypothesis
6. Competitive hypothesis

Hypotheses 2, 3, 5, and 6 fit squarely into the definition of market research.  In fact, what many people lose sight of is that Customer Development is a market research methodology.  Getting out of the building and A/B split testing are just the tools used to validate hypotheses to be added to other tools in the kit like customer surveys and conjoint analysis, each with its strengths and weaknesses.

Suster's point was that for some in Silicon Valley, "launch and learn" has become an excuse for laziness, for not doing the hard, sometimes boring, grunt work of market research.  Who are the players?  When and how did they get started?  What's been tried before?  How did the channels evolve, etc.?  But "launch and learn" does not eliminate the need to do market research, to know the industry, to do the homework.  Which led him to make another interesting statement that as a VC, "I'll pass if someone doesn't know the history of their industry." 

Thanks Mark, for a thought provoking presentation.

Service Not Surveys

Lately it seems like you can't shop anywhere without being asked to fill out some survey.  The ones that drive me crazy are "Customer Satisfaction" surveys.  Maybe I'm cynical, but I swear there is an inverse correlation between the length of the survey versus the quality of service delivered.

A case in point: I own a Subaru SUV and overall I'm pretty happy with both the car and the the dealer.  In fact, this is my second Subaru from this dealer.  They had a nice no nonsense sales process.  No "I have to get approval from the sales manager" baloney.  But happy as I am with the sales side, I'm less than impressed by their service department.

A few weeks ago, I was driving down Highway 101 when my "check engine" light flashed on.  Normally, I ignore these as it usually turn out to be something minor, like a malfunctioning knock sensor.  But in this case, Subaru tied it to several other idiot lights. The end result was my dashboard flashing like a Macy's Christmas display.

Fortunately (or so I thought), I was only two exits from the dealer.  What luck!  They should be able to figure out quickly whether or not this is a real issue or the usual trivia. For those of you familiar with the "check engine" light problem, you know that it takes a mechanic about a minute to plug a handheld device into the car and diagnose what the potential causes are.

I pulled into the dealer service department.  Now this is the same group that advertises its concierge type service, white glove treatment, free car wash after every service etc. to justify their premium prices.  This is also the dealership that routinely sends out an annual "customer satisfaction" survey.

The service representative was busy so it took several minutes to get his attention.  No big deal;  after all I'm a drop in.  But once I finally got his attention and described the problem, instead of just plugging a handheld device into the car and figuring out whether I was going to need real service or not, I got some sob story about how busy they were and did I want to be scheduled for an appointment next week? "Maybe, " I replied but first I wanted to know if it was potentially something for which is was worth scheduling an appointment.  The dealer is ten miles from my house; an appointment involves dropping the car off for the day and arranging for a ride to and from work.  I also have to find a day when I don't have any off-site meetings.  This is not something I want to do if it turns out to be a faulty knock sensor or some other triviality.

No luck.  The guy wouldn't budge.  So I didn't schedule an appointment and drove off.

Later that day, I decided to visit the Jiffy Lube four blocks from my house, where I get most of my routine (and substantially cheaper) service done, on the off chance they might be able to diagnose the "check engine" light.  Again, all the mechanics were busy, but the manager took the time to stop what he was doing and talk to me.  Thirty seconds later, he has a handheld plugged into my car.  A minute later he asks me to pop the gas cap cover.  He twists the gas cap into the fully locked position and resets the light.  Problem solved.  He then explains how a missing or loose gas cap is a common cause of a false "check engine" lights without once even implying that I'm idiot for leaving the gas cap loose.

Talk about two totally different ten minute interactions.

Being in the service business myself, it once again reminded me that customers are PEOPLE, not an abstract marketing profile, how important it is to treat people as you with to be treated and how important these little interactions are to keeping customers (i.e. PEOPLE) happy. In Subaru's case, while I love the cars, you can bet I'll continue to look for alternatives to their very expensive service department.  In the case of Jiffy Lube, that manager once again cemented a 15+ year customer relationship.  I should mention, that this is not the first time this group has done some little extra for me that keeps me coming back (on top of their quality work and fair prices).

And its not just in service businesses where this is important.  It is the rare product that requires zero support.  If you analyze your product from a whole product standpoint, you'll see lots of places where a support person at your company needs to interact with a real live human being that is a customer.  SaaS ("software as a service") has been touted as one area where everything is customer self service, but I've found that nothing is further from the truth.  The good SaaS companies understand this.  For example, one of the reasons I like Intuit Payroll (formerly Paycycle) is that their chat help line is great (and I hate chat and instant messaging).  It's convenient, timely, and so far, they've always been able to solve my issues. Think about that if you're a SaaS company striving to reach that magic +90-95% renewal rate that seems to be a threshold for survival.  And in addition to being critical to retaining customers, good service can be a formidable barrier to entry for smaller companies, difficult to replicate by a larger, more bureaucratic competitor.

Now in this case, both Jiffy Lube and Subaru have customer satisfaction surveys.  Jiffy Lube's was a quick online thing which I was happy to fill out.  Subaru's is an annual booklet and bubble chart questionnaire that I expect will arrive in the next few months.

I've scheduled it for an appointment  with my round file.

Sources of Economic Value

Lately, my kids have gotten more interested in how they can earn money to supplement their allowances.  My son, in particular, is also trying to understand why certain jobs pay more than others.  Answering their questions has forced me to go back to basics.

The first thing I had to clarify is the difference between social value and economic value.  I define social value as what a person contributes to society as a whole, whether it is monetarily compensated or not.  Economic value, on the other hand, I define as that which a person contributes for which someone else is willing to pay some form of compensation.  The reason I want to clarify this to my kids is that I don't want them thinking that pay is the measure of social value.  Unfortunately, while capitalism has much to commend itself as an economic system, because of the problem of externalities, there is often a disconnect between social value and economic value.

For example, you'll have a hard time convincing me that the social value generated by a stock trader on Wall Street exceeds that of a registered nurse.  And there is no way you're going to get me to believe that the $1+ million/year salary earned by a stock trader vs. the ~$75K/year earned by the nurse can be justified on social value grounds.  However, it is without a doubt a fact that the salary differential exists.  And this is due to the way economic value is generated.

Incidentally, one of the exciting aspects of the growing social business movement is that it may offer a way to close the gap between social value and economic value.

So what have I been telling my kids are the sources of economic value?

• What you know - People pay for special knowledge, training, or your experience. This is where getting a good education is important.
• What you can do for someone or what product you can provide to them that enable them to do something - People pay for the services that you can provide them or for products that you provide that enable them to do something.  For example, if they want their lawn cut, you can either cut it for them, or sell them a lawnmower.  Often, what you can do, stems from what you know.
• What you control access to - If you control access to something someone wants, you can probably get paid for it.  Bridge tolls are an example of access control.  In most cases, unless you control some natural resource like oil or diamonds, access control is usually via some form of law.  For example, patents and trademarks are legal rights to control access to some intellectual property.  They are not inherent;  if they were, Gucci would not need to worry about knockoffs from China.  Interestingly, intellectual property usually has its roots in what you know and what you can do.  Other things where access can be controlled:  money and relationships.  These last two are major reasons why an investment banker can command a higher salary than a nurse.

These sources are then subject to the law of supply and demand.  The lower the supply vs. the demand for, the higher the resulting compensation.  It is this latter that tends to decouple economic value from social value.

So what I explain to my kids is that if they want to be paid well for something, they need to know things that most people don't but would like to know or be able to do something that a lot of people want but few people are able to provide.  This is why I don't pay my son much to cut the lawn (easy work that I'm quite willing to do myself) but why his grandfather pays him more to move large piles of dirt in his garden (hard work that no one else in the family wants to do).

This usually leads to another set of questions around where to find opportunities?  These stem from human needs and desires.  My simplified list:

• Safety
• Health which includes food, clothing, shelter
• Companionship
• Communication
• Entertainment
• Travel & Transport
• Artistic Expression
• To Know
• Respect

I'm trying to get them to see that often times, opportunity lurks in the intersection of these different areas.  For example, all restaurants provide food.  However, the more expensive restaurants go beyond food to provide an environment that makes people want to spend time with other people (companionship), may have a theme or reputation that allows a host to express their taste (artistic expression, respect), and is conducive to discussion (communication), or even provides singing waiters or wandering violinists (entertainment). Something to ponder the next time you're paying $38 per adult/$16 per child at Goofy's Kitchen in Disneyland.

But its one thing to know where opportunity might be found and another to actually find or create it.  This is where creativity kicks in.  In a Harvard Business Review article entitled "The Innovator's DNA" by Jeffrey Dyer, Hal Gregerson, and Clayton Christensen the authors list five discovery skills that innovative people practice:  associating, questioning, observing, experimenting, and networking.

One skill I know my kids have down:  "Dad, how do they get fireworks to be different colors? "Dad, when are you going to be done writing that blog post so we can watch the fireworks?"

One down, four to go.

The Difference Between Dog Food and Dogma

Part of successful marketing and sales is confidence in your product.  As any top sales person can tell you, it's tough to sell something that you don't believe in.  However, product confidence can easily cross over into dogma.  When that happens you end up with brand imagery that diverges from the reality experienced by their customers.  This creates a credibility gap that breeds customer cynicism.  We experience cognitive dissonance when we can't get a company selling CRM systems to call us back or see poor graphic layout on a web design company's site.  If they don't walk their own talk, how well will they serve us?

Rant:  For example, I use an iPhone which means AT&T is my carrier.  My blood pressure rises every time I see an AT&T ad touting that they have the nation's fastest 3G network and the best global coverage.  Really?  This is why they're phasing out their unlimited data plan?  This is why they want to sell me a 3G mini cell tower to fill in the gaps in their coverage that I'm already paying for?  And this is why every fifth call either won't connect or drops mid-call?  I can only conclude that someone at AT&T has been inhaling too much of their own marketing.

So what's the cure for marketing dogma?  It's called eating your own dog food.  The expression stems from an apocryphal story well known in marketing circles that goes like this:

A pet food company created a new dog food.  To ensure that the launch was a success, the company hired a top advertising agency.  After conducting sophisticated market analysis, the agency put their best creative team on it, and launched a brilliant advertising campaign promoting the new dog food.  Sales went nowhere.  The agency was fired, a new one brought in, and a new campaign launched.  Sales still languished.


Fed up with spending millions of dollars with nothing to show, the CEO called together his sales and marketing team.  They met for hours, arguing back and forth over the reasons the two campaigns had failed.  The TV spots were too subtle and hadn't featured the product enough.  The co-marketing campaign with the supermarkets wasn't synchronized tightly enough with the print advertising.  The demographic targeting should have aimed a higher on the socioeconomic scale.  On and on it went until everyone was talked out.


Finally, the exhausted CEO looked around at his burned out staff and asked if anyone else had any possible theories to explain the poor sales of the new dog food.  After a long silence, a junior employee timidly raised her hand.  "Yes?"  asked the CEO.


"Well, I know this isn't exactly about marketing, but I noticed that the food tastes terrible and the dogs don't like it,"  she answered.

To eat your own dog food has become parlance for using your own products.  By doing so, a company avoids the trap of brainwashing.  Through use, they find out what works well, what doesn't, they gain a greater ability to empathize with their customers, and insights for future development.  It also creates credibility as customers see the company walking their talk.  Think Salesforce.com which has one of the most effective sales processes around enabled by their own CRM system.

As for AT&T, there is a serious need for less marketing dogma and more eating of dog food.  Instead of having telesales call me twice a week to sell me their U-Verse service, take those millions and  spend them on expanding their network capacity.  Or better yet, make every AT&T executive and all their family members rely exclusively on AT&T cell service.

In the meantime, I can only hope that Verizon will cut a deal with Apple.

My Top 25 (and counting) Business Book List

Periodically people ask me what business books I would recommend?  Or which books have most influenced my thinking?  Being a book junkie, I have a hard time whittling this down, but after much thought here is my short(!) list of 25...for now.

(Note:  Book title links will take you to an Amazon.com reference.)

Leadership, Management, and Entrepreneurship

• Intrapreneuring by Gifford Pinchot (1978).  As a student engineer at 3M, this is THE book that first awakened my interest in technology commercialization which eventually forced me off the pure path of engineering and into the dark side (i.e. marketing).  (My father only forgave me after I became a CEO!)
• Leadership and the Quest for Integrity by Joseph Badaracco (1993).  If you think values are soft and squishy, read this.  I can safely credit the success of my first turnaround to the lessons taught here.
• Hidden Value: How Great Companies Achieve Extraordinary Results with Ordinary People  by Charles O'Reilly, Jeffrey Pfeffer (2000). There are a lot of books that teach you how to hire and build a high performance team with "A" players.  This one has the refreshing approach of showing how a great company can be built with us regular folks.
• The Knowing-Doing Gap: How Smart Companies Turn Knowledge into Action by Jeffrey Pfeffer, Robert Sutton (2000). As an MBA student, I had the great fortune to take a class called Power & Politics taught by Jeffrey Pfeffer.  Case discussions were always somewhat terrifying; Pfeffer had a knack for shredding conventional wisdom and half-baked solutions with a keen understanding of how things really worked.  His books do the same.
• Hard Facts, Dangerous Half-Truths And Total Nonsense: Profiting From Evidence-Based Management by Jeffrey Pfeffer, Robert Sutton (2006).  Ditto the above.
• The Fifth Discipline: The Art & Practice of The Learning Organization by Peter Senge (2006). Senge approaches business as an organic entity.  Where others see functions, he sees dynamic human systems.
• Good to Great: Why Some Companies Make the Leap... and Others Don't by Jim Collins (2001). If you take nothing else away from this book, take away the concept of the "flywheel".
• The Goal: A Process of Ongoing Improvement by Eliyahu Goldratt (2004).  Reads like a novel and does a great job of conveying the implications of continuous improvement via Goldratt's Theory of Constraints.

Marketing and Sales

• Influence: The Psychology of Persuasion (Collins Business Essentials) by Robert Cialdini (1984).  The first time I read this book, my blood ran cold.  If there is ever a course in sleazy marketing, this book could be the text. Cialdini exposes the psychological underpinnings of common marketing tactics.  I had to do a re-read of Badarraco afterwards to shake the willies.
• Crossing the Chasm by Geoffrey Moore (1991).  Since it's initial publication, this has become part of the canon for technology commercialization in Silicon Valley.  Moore focuses on the startup transition from early adopter to mainstream markets.
• The Four Steps to the Epiphany by Steve Blank (2005).  Blank is to Moore as the new testament is to the old in the canon of Silicon Valley technology commercialization.  Blank is father of the Customer Development methodology focused on helping startups gain first traction with early adopter customers.  Customer Development plus Agile Software Development are at the heart of today's Lean Startup movement.
• Why Business People Speak Like Idiots: A Bullfighter's Guide by Brian Fugere, Chelsea Hardaway, Jon Warshawsky (2005).  This should be required reading for everyone in marketing communications with violators subject to incremental immolation over a hyperthermal heat source.
• Different: Escaping the Competitive Herd by Youngme Moon (2010). Normally I would not put a current book on the list that has yet to withstand the test of time, but this one is the exception.  Moon goes beyond traditional branding.  Branding 2.0? Anti-branding?
• The New Strategic Selling: The Unique Sales System Proven Successful by the World's Best Companies by Robert Miller, Stephen Heiman, Tad Tuleja (1985).  This classic on selling to major accounts is still the best around.  And if you're ever offered a chance to participate in Miller-Heiman sales training, take it!

Strategy

• Competitive Advantage: Creating and Sustaining Superior Performance by Michael Porter (1998).  The bible of competitive strategy.  Porter's Five Forces analysis for industry dynamics is now a staple of MBA training.
• The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market by Michael Treacy, Fred Wiersema (1997). Goes to the heart of effective strategy:  you can't do it all and you don't need to.  One of the best texts on strategic alignment that I know.
• Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant by W.Chan Kim, Renee Mauborgne (2005).  Picks up where Porter leaves off.  Where Porter focuses on existing industry competition, Kim and Mauborgne focus on disruptive strategies.
• The Innovator's Dilemma by Clayton Christensen (1997).  Digs deeper than Kim and Mauborgne in discussing technology enabled disruptive strategies.

People & Organizations

• Please Understand Me II: Temperament, Character, Intelligence by David Keirsey (1998).  INTJ?  ESFP?  One of the most widely used frameworks for personality classification.  Highly recommended if you want to understand how motivations, worldviews, and communication styles differ for different people.
• Human Dynamics : A New Framework for Understanding People and Realizing the Potential in Our Organizations by Sandra Seagal (1997).  The textbook for the most effective interpersonal communications seminar I ever took.
• Self-Renewal: The Individual and the Innovative Society by John Gardner (1995).  While at Stanford, I also had the great fortune to take classes with John Gardner, former Secretary of Health, Education, and Welfare in President Lyndon Johnson's administration.  Gardner was an inspiration and a living example of someone who stayed vital through a process of continuous reinvention.  Read this if you don't want to end up the old curmudgeon in the corner railing against that new-fangled teleportation technology.

Sociological Environment

• Future Shock by Alvin Toffler (1971).  While he didn't predict everything right, forty years later, its impressive to see how much Toffler did get right.  And the major trends he spotlighted continue to roll through our lives today.
• Data Smog: Surviving the Information Glut Revised and Updated Edition by David Shenk (1998).  One of the earliest and still best essays outlining the differences between living in a world where finding information was the challenge vs. one where information glut is the issue.

The Numbers

• Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition by Howard Schilit (2010).  Just revised, this classic should be required reading for all investors or anyone involved with corporate oversight.  I think the Enron guys used this as their text book.
• How to Lie with Statistics by Darrell Huff (1993).  Should be required reading for anyone in market research and for anyone who has ever suffered through the "market opportunity" section of a business plan.

Finally, as a Christian, there is one other book that is significant to me from a business perspective (among others).  That book is the Bible.  I've found few books dispensing advice as hard nosed and pragmatic as the books of Proverbs and Ecclesiastes.

Happy reading!

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