economics

You've read Lee Siegel, the New York-based critic who writes for Harpers, The Nation, The Atlantic Monthly, and The New Republic (again). He writes erudite, prickly prose on the subject of American culture – or what counts for it. At one point the New York Times referred to him as "one of the most eloquent and acid-tongued critics in the country." In a nation that enjoys a bit of battering of our neighbor -- and which lives by the adage if you're so smart why ain't you rich? -- even the most liberal-minded of us get both an intellectual thrill and an ignoble shiver reading his work.

Though I highly recommend him for his wit and range, his personal story is a cautionary tale. In 2006 he was suspended from his role at The New Republic for, well, what? Misleading comments, I believe it was. Siegel didn't break any rules, nor certainly any laws. But he had established an alter-ego that attacked negative commentators on his blog. This alter-ego, known as sprezzatura, was an ardent defender of Siegel, Siegel's wit, and Siegel's shining intelligence. OK, so what, right? He's a little insecure.

The situation was disturbing, but not for the reasons most people pointed to. Most commonly, people expressed their disgust at how stupid it was, how egotistical it was, and ultimately, at what a baby Siegel was. The last comment approaches the reason it was appropriate that Siegel was temporarily suspended.

So what if the critic can't take criticism -- that's a weakness that hounds far too many people to make it interesting. The problem was that he was hypocritical at a level that was a betrayal of his true audience. The role of critic suggests intellectual rigor and standards. Critical thinking is the careful analysis of whatever it is we are evaluating, getting past emotions, reactions, historical baggage, psychology, bias, enculturation -- all of the muck that clouds our thinking and prevents us from seeing reality in the clearest possible light. Not that most modern critics actually perform that role for us, but we wish they would. We need them to. And Siegel is capable of operating at the highest levels of intellectual criticism.

Why do I care about something that that is, by American standards, ancient history? Because of something a friend of mine said tonight. My friend Mark and I were talking about billboards in the UK, and how much we appreciate them. In the United States, billboard writers obviously go through a process that, if you were a fly on the wall, would sound something like this:

Ad guy 1: Dude, we need another billboard for our very difficult client.

Ad guy 2: Damn. Didn't we just finish a bunch of billboards for them?

Ad guy 1: Yeah. I hate doing billboards.

Important advertising note. Billboards must be able to deliver a message in less than 3 seconds at roughly 55 mph. Ad guys hate to be responsible for traffic deaths. Well, we assume so anyway.

Ad guy 1: OK, what's the simplest way we can say "get your new muffler at Dan's Auto Haus?"

Ad guy 2: Can't just we say that?

Ad guy 1: No. People don't read that fast. We still have to have room for their website and maybe a phone number.

Ad guy 2: OK, how about, "Mufflers. Dans. www.dansautohaus.com."

Ad guy 1: They might think we're advertising, like, mittens or something.

Ad guy 2: It's summer.

Ad guy 1: Whatever. I don't think it will work.

Ad guy 2: OK, what about, "Noisy car? Dan's Mufflers."

Ad guy 1: They'll think it's just a muffler shop. Dan won't like that.

You get the picture. Eventually the ad guys consult a reference book for children's writing and choose three words from the kindergarten list, and that's what passes for advertising in this country.

In the UK, billboards are vexing. Not only are you trying not to wipe out the left side of your car every time you turn the corner and jumping when people pop out at you from the wrong side of the street, but your head is swimming with the last three billboards you read that you still haven't made sense of. UK billboards cater to the thinkers in their society, which they obviously assume are many, given how democratic they are with their puzzling advertising.

Are American advertising firms dumbing everything down because Americans are lazy thinkers, or are Americans lazy thinkers because we are confronted -- no, assaulted -- by a constant barrage of stupidity? Please, don't try to answer that – it's a chicken-and-egg thing.

It's important to read Lee Siegel because he's capable of – and for the most part, delivers – criticism filled with intellectual honesty. I'm pretty sure I never want him to take on one of my publications, because as thick-skinned as I am, I've probably not evolved to the point where I'm ready to read his take on my work without a therapist by my side. Still, he challenges his readers to intellectual debate. This is an experience to which we have become unaccustomed. Siegel doesn't cater to lazy thinkers. Indeed, he writes as if he expects us to be intelligent.

Lee Siegel should be completely forgiven for his past lapse (and yes, I realize that I am the one bringing it up again, but I couldn't figure out another way to make my point). Seriously. If we're being honest, we can all think of foolish things we have done that disgraced us but didn't add any further damage to the human condition.

But Siegel does have a responsibility that is very similar to that of any parent. We know that parents must set a good example for their children. Parental example is something children count on to feel confident. Parental example is the ballast each child needs while bobbing about in the wakes of peer pressure, demoralizing teachers, and Ad guys 1 and 2.

Those of us who seek a more intellectual discourse are dependent on cultural leaders - of all types – to maintain a certain quality of critical thought. This is a completely reciprocal responsibility (did you think you were off the hook?). The only way to create a rigorous intellectualism for ourselves is to give it first to others, and by doing so we are able to receive the thing we want. That's right – intellectualism is not a zero sum game. The only way we can have it is to give it away. That requires dialogue. Which requires risk. Which was Siegel's failure. Shared by the rest of us, though most of us don't have to fail in such a public forum.

Perhaps Ad guys 1 and 2 are not really ready for this. But I suggest we give them the benefit of the doubt. If enough of us gave intellectual discourse away – trusting everyone around us not to be lazy thinkers – perhaps we would discover ourselves, once again, a country that thinks. I'd wager it would do a lot more for our economy than another cut in the Fed Funds Rate or a bunch of $300 rebates.

We didn’t always live in a 24-hour economy. In the not-so-distant past, work ended when the sun went down and resumed when it rose again. Technology made it possible to light and power workplaces around the clock. But to capitalize on that possibility, businesses had to find people willing to work those hours.

The broadcasting day used to end shortly after midnight, and night-owls often wakened to the sound of static and a view of gray horizontal bands on the tv screen. When the networks decided to broadcast around the clock, they had to find enough content to fill all those hours.

At one time, news was delivered once daily in a newspaper, and on the evening news, which ran for 30 minutes at supper time and was repeated – with some new content – just before bed. When the news media decided to run 24 hours, they had to find content to fill all those hours.

And that is a problem.

No doubt our current economic problems are real. By the time the indexes settle this will likely be the worst recession since the depression. But even if I’m wrong; even if the economy settles now at levels more positive than the recessions of the 1970s and 1980s, neither of those recessions will hold a candle to this recession in one respect: Hype and drama.

I hold the 24-hour news cycle largely responsible for this problem and they share the blame equally. If your preferred flavor of 24-hour news is Fox or MSNBC or anything in between, every time you turn on the TV or fire up a website you are assaulted with economy hype. Add to this problem the facts that a) at best, TV journalists have a populist understanding of economics and b) TV journalists are paid relative to their viewership and ratings, and you are not only assaulted with economy hype, but you are also assaulted with information that has been spun, misunderstood, misrepresented, or all three.

Have you considered who the news media rely on most for ideas and stories? Each other. They monitor one another with the rabid fascination born of cutthroat competition, producing results that sometimes look like a child’s game of telephone. The sheer number of news outlets, bloggers, financial company public relations departments and special interests produce so much news that the media has little or no time to fully evaluate or validate stories before throwing them out to the insatiable news public.

That’s us.

What’s an insatiable news consumer to do? It depends on your motivation. If your motivation is to be entertained by news, just keep watching what you’re watching and don’t worry about quality. If you’re consuming the news for knowledge, you’ll need to be more discriminating.

A good example is Warren Buffett’s 2/27/09 annual letter to Berkshire Hathaway shareholders. All news outlets reported on the message, and the spin you received depends on which flavor of news you favor. I noticed that few media outlets linked Warren Buffett’s actual letter to their news reporting, which is rather strange considering that links are free. A curious person would pull the letter and read it for him or herself.

That curious person would discover that Warren Buffett refuses to do something we seem to want our news media to do. He refuses to draw conclusions that cannot be drawn. Buffett educates by providing interesting facts interspersed with his analysis, which is clearly identified as his own potentially flawed analysis. By communicating with us in this manner, Buffett demonstrates that he respects our intelligence far more than the news outlets do.

Let’s consider another good example of your need to be discriminating when consuming economic news. Economists espouse contradictory opinions about the current economic situation. Depending on which flavor of news you favor, you are likely hearing from one school of economists or another, and the school of thought your news outlet is subscribing to has probably been selected to be supportive of their philosophical bias.

I know a fellow who constantly travels the world, and everywhere he goes he eats at McDonald’s. When he’s not traveling, he eats at home or he eats at . . . McDonald’s. Clearly he has limited his gastronomic experience.

But this is how most people consume their news.

So. The 24-hour news cycle requires 24-hour news content. The news world looks to itself for reportage. The competition to produce stories leads to little – or rushed – thought and analysis. News consumers dislike ambiguity and crave comfort, so the news media spoon-feeds us certainty and pre-approved bias. The result? Very few people understand the current economy, economic history, or the potential pitfalls and promise of various solutions.

Do yourself a huge favor. Pull the source of news whenever it’s available. Better yet, stop getting your economics information from news outlets, and rely on these highly respected sources instead (note: I have a strong preference for centrist, non-partisan, private think tanks. I have indicated institutes which have a distinguishable bias, but which are still providing excellent research. I have avoided think tanks which exist to advance liberal and conservative agendas):
• The National Bureau of Economic Research
• Institute for International Economics
• Brookings Institute
• The Century Foundation
• The Jerome Levy Economics Institute of Bard College
• Public Agenda
• The Cato Institute (libertarian)
• The Economic Policy Institute (center left)
• The Committee for Economic Development (center right)

Does this seem like extra work? It is. And as I said earlier, if you simply watch news for entertainment, it’s not work that would be valuable to you. But if you’re losing sleep over the economy, considering the best route to take with your business, deciding whether or not to switch jobs right now, or weighing the benefits of hitting the interview circuit versus starting your own business, you deserve to be informed.

Informed is significantly different than instructed. Instructed will provide answers, but unless you’ve selected an incredibly intelligent, unbiased teacher who is respected by even those who disagree with him or her, you can’t count on receiving useful answers. The result of informed is messy, ambiguous, and producing of more questions than answers. But it is informed that will empower you to actually think about the economy and make better decisions about your life.

Perhaps most valuable of all, every minute you spend conducting valid research on the economy is a minute you haven’t wasted being frightened by the 24-hour news cycle’s latest bogeyman.

© 2009. Andrea M. Hill

Ask the average management consultant about organizational change, and he’ll tell you that more organizations need to do a better job of embracing more change. Ask the average CFO about organizational change, and she’ll likely tell you that organizations need to do a better job of maintaining and improving the things they are already doing.

The change/don’t change conflict has existed as long as fathers have had sons, children have taken over family businesses, and marriages have reached 25^th anniversaries. If you had to choose one option over the other, the only option that would carry you into the future would be to choose change. But change is always disruptive, and it can be quite dangerous if not applied with deep knowledge and finesse.

Some elements of a business should be fairly unchanging. The core values of a business should change very little over time, though they may evolve a bit as the business owners and participants deepen their understanding of them. One of the primary reasons for merger and acquisition disasters is the failure to consider differences in core values governing the cultures and brands of the organizations involved. Reconciling conflicting value systems is much more difficult than integrating computer systems (though systems migration is a bear). Business culture and business proposition are related to values, and should be similarly unchanging. 

Other elements of a business should be reviewed annually but changed far less often. Strategy is an example. Any business that adopts a new strategy each year has not embraced strategy at all – they are just pursuing serial tactics. Effective strategic planning looks out 7-10 years and creates ambitious multi-year plans and goals to achieve the strategy. Strategy should be monitored monthly and reviewed annually – but it should not be changed unless compelling market reasons to do so are present.

Brand is another element that should be constantly monitored but which should change rarely, and brand change should be subtle and incremental. Customers do not like the shock of adapting to new brand messages. Brand loyalty is based on trust, and trust is shaken when a friend you thought you knew suddenly changes.

Everything a company does to fulfill the promise of its brand and to achieve its strategy should be considered as viable candidates for change. But change should be considered carefully. For instance, if a company decides to implement a new sales strategy to achieve their long-term revenue and margin goals, they should conduct research to find out how long it typically takes for a business to benefit from such a change. If they expect to see immediate benefits, but case studies show that results typically require 18 months, it would be good to know that in advance. Too many companies abandon viable change efforts because they do not have realistic expectations.

Why am I speaking of change when the only news anyone wants to talk about is the economy? That’s why.

Too many companies are abandoning their values, their brands, and their strategies in an attempt to weather the storm – a storm which by all comparisons is bad but not tragic and is certainly precedented and survivable.

Too many companies are cutting loose important (strategic) talent, eliminating their advertising budgets, changing their marketing strategies, and reducing their operations to customer-unfriendly shells in an effort to survive a bad tornado season that’s been billed as an earth-bound meteor. 

If your business values, strategy, and brand were sound before the recession, they probably still are. Evaluate them, yes – particularly to see if the irrational reaction of your competitors is creating market opportunity for you. In a recessionary economy the tactics you deploy to achieve your strategy and brand may need to be tweaked, adjusted, and redirected. If you keep your eye on your established strategy and brand, you can modify your approach to take current market conditions into account, and find success. 

The types of changes you should – and should not – make during a recession are the same types of change you should consider during a strong economy. Don’t let the economy dictate how you will run your business. To do so would be the last type of change you want to make. A terrible change in leadership.

© 2009. Andrea M. Hill

And so it begins. Preparation for a recession that was generally considered “highly unlikely” last summer, 25% possible by September, 40% possible by November, and forecast as “more than likely” by the beginning of January. Of course, a recession was always likely, because recession and growth are two fundamental components of the economic cycle. The word recession carries a huge emotional burden, much like the words cancer and bankruptcy. We don't quite understand it, so we fear it. In fact, the word recession can be used in the same paragraph as the words optimism and health. The latest round of government responses are likely to push the recession out by another 18-24 months, and we are likely to see another run-up of growth in the meantime. Let's talk about what this could mean to us as individuals and business owners.

Our young country and economy have done a generally admirable job of learning how to understand and ultimately manage the economic cycle, particularly when you consider how much the economic world has changed in less than 250 years. Yes, we failed to mitigate the economic meltdown that led to the Great Depression in the early 20th century, and if it hadn’t been for World War II we wouldn’t have recovered when we did. Until that time corrections had been allowed to go deep enough to rid the system of all the excesses of the prior growth period, and that had been a successful formula. The increasingly global nature of economics by the 1920s introduced new risk, and global poverty was the result. Our economic and financial management skills improved dramatically as a result of those lessons, and we can be reasonably sure that history will not repeat itself (mass exodus from the US dollar could cause that, but it's unlikely, and we can talk about that another time).

Since the end of World War II we have been in an era of economic management that allows the economy to experience the necessary booms and busts (i.e., growth and correction), but with controls. Each upswing of the economic cycle is associated with some form of speculation that eventually builds to excess. In the 1980s it was junk bonds, in the 1990s it was tech stocks, and in the 2000s it’s been real estate. What will it be next? Watch emerging market equities and resources like alternative energy, oil and uranium – all good candidates for our next phase of excessive growth. But though the roots of the next phase of excess are being planted now, first we have to deal with the necessary correction phase, which given the recent rounds of government intervention, will likely be preceded by one more uptick in growth.

I’m not going to discuss preparation for recession today, because I covered that topic thoroughly last autumn in the articles Somebody Always Makes Money During a Recession, There's Still Time to Prepare for a Recession, Time to Switch Gears, and Old Advice New. What I do want to discuss is how our personal responsibilities and our economic responsibilities come into potential conflict during this time of recession preparation.

Our government has launched a program of recession avoidance. From one perspective, the tax rebate and spending program is very intelligent. Theoretical debates aside (Democrats want more unemployment benefits, Republicans want to lock in Bush's tax cuts beyond 2010), the response is sound. Getting consumers to spend more freely will have a positive impact on the contracting economy, which will delay and soften the oncoming recession. But from another perspective, the individual responsibility to save and prepare for the future, this approach smacks of immoderation. Which one is correct? Both perspectives are correct.

In an ideal world we would all have paid off our credit card debt, increased our home equity, and put money into our retirement savings and short-term liquidity accounts during the past six years of economic growth. Indeed, that type of fiscal prudence at the individual level would have reduced the economic growth we were experiencing, and it would have mitigated some (though certainly not all) of the need to bleed excess out of the system in the first place.

Now the US government will provide incentives for all of us to spend more money, starting in May when US taxpayers receive their rebates. The mere anticipation of the rebates will motivate many people to spend now, so the benefits of economic stimulation will begin almost immediately. The government response is good on a number of fronts. Stimulating the economy will delay and soften the upcoming recession. The stimulation package pleases the rest of the world economy, which needs a strong US economy to remain healthy.

How do we as individuals reconcile our need to demonstrate individual fiscal responsibility with the overall economy's need for us to spend? Depending on your perspective, this may seem like a moot point. Those of us who have been preparing for recession for years now are savings minded. Those who have not started taking savings seriously are not likely to begin now. But this is a serious personal philosophical question with which serious people should grapple.

Start by understanding that all debt is not bad. The savings-minded have a tendency to be extremely debt averse. Debt aversion is what prolonged the Great Depression long past the point when the economy could have recovered. As long as the debt you incur will provide a greater return than savings alone would have gained, debt is an intelligent choice. Debt is bad when it fuels consumption that has no long-term benefit. Even with the housing market continuing its correction, housing remains an intelligent debt. This correction will end, the next growth cycle will begin, and smart investments in real estate will continue to pay off.

As I mentioned earlier, recent government intervention makes it likely that we will experience another short burst of growth prior to experiencing a recession. Job growth hasn't increased because it can't - the labor market is too tight. But an interesting trifecta – the government's new financial incentives for business to invest in infrastructure, the weak dollar creating export growth, and the emerging baby-boomer retirement wave – should contribute to earnings growth for American workers over the next few years.

All this adds up to one more opportunity to improve our individual financial positions without the cumulative effect of short-term contraction of the economy. If individuals were not spending so much money servicing existing credit card debt, those dollars would be available for consumption that has no long-term economic benefit, giving individuals rewards such as vacations while providing the economy with cash flow. So now is a great time to invest in our homes and commercial real estate, invest in reasonable-return infrastructure for our businesses, pay down short-term debt, and put ourselves in a position to be financially healthy when the correction does occur. If increased wages pan out, we will have money to both spend and save. The discipline is to ensure that saving is a well-considered part of that equation.

(c) 2008. Andrea M. Hill

Certainly we are all entitled to our own opinions. Even the most radicalized communist government can't take away the ideas in someone's head without collusion by that someone (though they can certainly deny them of access to information, but that's a different sort of discussion).

And yes, the 1st Amendment prohibits anything that abridges the freedom of speech, with the understanding that subsequent Supreme Court rulings have recognized several categories of speech that are excluded from freedom of speech, as well as recognized that governments may enact reasonable time, place, or manner restrictions on speech (also another different, and interesting, discussion).

So, personal opinions + freedom of speech = ???

Ideally it would result in a fully informed discourse. But people are forgetting something. We are entitled to our own opinions, but we aren't entitled to our own facts. While some things may be up to interpretation, others simply are not. So I will be bringing up Factoids as they punch me in the nose and insult my intelligence.

Here we go with Factiod 1: Obama let the people of Janesville, Wisconsin down by . . . what exactly?

Initially (at a speech in Ohio on August 16) Paul Ryan criticized Obama for the closing of the GM Plant in Janesville, WI. by suggesting that it was somehow Obama's doing. Well, that factoid won't fly. The Janesville plant was closed in December, 2008, and Obama wasn't inaugurated until January 19, 2009.

Upon reflection (also known as a major bashing by all intelligent folks including many in Janesville who remembered when the plant closed), Paul Ryan tried a little mis-correction. He said, "Right there at that plant, candidate Obama said, 'I believe that if our government is there to support you . . . this plant will be here for another hundred years.' That's what he said in 2008. Well, as it turned out, that plant didn't last another year. It is locked up and empty to this day."

Good grief, an elipsis is a powerful thing isn't it?

The actual quote was this:

"I know that General Motors received some bad news yesterday (they had announced a $38.7 billion net loss), and I know how hard your governor has fought to keep jobs in this plant. But I also know how much progress you've made -- how many hybrids and fuel-efficient vehicles you're churning out," Obama said. "And I believe that if our government is there to support you, and give you the assistance you need to re-tool and make this transition, that this plant will be here for another hundred years."

So, that's my GM Plant rant for the day. I'm sure I'll have another Factoid Rant soon. . . or sooner.

Like you, I am ready to wrap up my work week and begin my weekend. And if I’m not in the mood to write a pertinent business insight or share a particular business philosophy, that’s fine, because you’re probably not in the mood to read those things either. But we all have a lot on our minds, don’t we. 

What kind of weekend will it be? If today’s news headlines are any indication, it will be a weekend of families worrying about job security, staying home or engaging in otherwise free activities. The Sunday papers will likely be filled with gloomy analysis.

I invite you to ponder two thoughts over the weekend. I’d like you to think about the effects of fear, and the benefits of action.

Let’s start with fear. If you are running from a wild carnivore or a burglar with a blunt instrument, fear will serve you well. It will send adrenaline surging through your body, and assuming you don’t have the reflexes of a rabbit, it will help you outrun – or at least provide a respectable chase for – your adversary. Beyond that initial reaction fear is damaging. Prolonged exposure to stress hormones dulls the senses and leads to exhaustion and paranoia.

So do yourself a favor. Go have some fun this weekend. The human body cannot be simultaneously stressed and relaxed. If you are completely engaged in having fun you won’t be stressing, and your body and mind will benefit from the break. If you are tired enough when you go to bed, you’ll fall asleep and likely stay that way. And if you’re busy all day Sunday, tackling the honey-do list, going on a hike, swimming at the health club or the Y – whatever it is you do – you won’t have time to read the Sunday paper or sit around watching the news.

Some of the benefits of action have been outlined above. But there’s more to productive action than just being physically busy to reduce stress. You may actually be facing a sharp business slow-down, worries over your current financial commitments, or the loss of a job. 

If you are facing those concerns now, you will benefit from taking creative action to address them. Business owners need to do more than austerity measures to get by right now – they must analyze their entire business premise and identify opportunities for renewal and growth. We are experiencing a financial crisis on top of a cyclical recession. What does that mean? Historically, that means that when the fear lifts and the financial markets settle, the economy will return to where it was before the fear and craziness of the crisis set in. For us, that means we’ll be staring, not at a full recovery, but at the recession we were gearing up for in the middle of 2007. Layoffs and cutbacks in capital spending are temporary – and fairly damaging – reactions. It’s time to take a more creative approach to ensuring your business viability.

People worried about their ability to meet financial commitments need to put a financial work-out plan on paper. Making a plan won’t solve the problem, but there’s no solving the problem without a plan. Most people in financial trouble are pleasantly surprised to discover that putting a plan on paper sends them running toward financial solvency. Plans work.

People facing the threat of a layoff – or who have already lost a job – need to do three things immediately. First, they need an updated resume, and they should have that resume reviewed by someone knowledgeable about the difference between a strong resume and a weak resume. Second, they must conduct thorough job-market research. Most people are unaware of the job opportunities right in their community. Conversely, if there is no job opportunity in their field, they need to know that quickly so they can either look where the jobs are or figure out how to qualify for the jobs that exist. This leads us to consider job training. 

Thirty years ago this country spent 3.5 times more on job training per year than we spend today. Before you say, “great – we need less government,” consider this: We are in the process of a massive restructuring of our economy. The jobs in retail, manufacturing, and financial services are not going to recover. What are those workers going to do?

Competitive folks will be figuring out job retraining for themselves, ideally before their jobs are gone. Even if the markets settled on Monday (which they won’t), this economic restructuring is going to march on. Each person must take a good hard look at their skills and figure out which skills will translate to other jobs and which skills they must develop to be more successful in the job they have or to be more competitive for a job they need.

I know, I started off by telling you to have fun this weekend. I don’t think this information undermines that. Any time we do something meaningful to advance our lot in life, we feel better. So getting outdoors, out of the house, out of your head this weekend will do you a world of good, whether your worries are right here right now or just out there on the horizon. Getting to work on solving problems – rather than just worrying about them – will make you feel better too. When we don’t do the things we need to do – the things that add value to our lives – it’s usually because we’re scared. Tackling your problems – with a business workout, with a financial plan, or with a job change plan – may feel daunting (check out the MentorWerx post today, which addresses why we avoid doing the important things), but once you dive in you’ll discover you feel better just for taking charge.

So, this is my way of telling you to go have a great weekend. Go, take charge of your life. You might as well pursue optimism and self-empowerment. After all, the fear is killing us.

© 2009. Andrea M. Hill

As the jewelry industry heads into its biggest American show of the year, designers are questioning the best way to price their lines. What follows is a reflection on some important considerations when establishing a pricing strategy for a designer jewelry label.

Designer and brand jewelry lines must be very careful to avoid commoditization. Whereas non-differentiated manufacturing concerns price based on the current precious metal market, to do so as a brand or designer will reduce the design aspect of the jewelry to the equivalent of ‘labor’, which can only precipitate a race to the bottom. This is tantamount to saying that two paintings that required 22 hours, oil paints, and 17 brushes to produce hold the same value, though one was painted by Gustav Klimt and the other by a technically competent reproducer of others’ original works.

Designer and brand jewelry executives must consider a number of concerns – some of them conflicting – when establishing pricing strategy. This topic can hardly be covered in the space of a blog, but I will address the high points in the hopes of launching a meaningful discussion within the jewelry design community.

On Avoiding Commoditization

The only defense against price competition is differentiation. Though it is difficult to differentiate on design – and I strongly encourage designers to include elements of differentiation in addition to design – differentiate you must. Let Cindy Edelstein’s be the voice in your head on this point: Cindy preaches that all the designers in an aisle at a tradeshow should be able to commingle their jewelry in the aisle, and she should be able to tell from design characteristics alone to which designer each item belongs. Without a distinctive voice the buyer will ultimately force you to differentiate on price because you will have given them nothing else to work with.

At the risk of seeming like I am downplaying the difficulty of finding good retail accounts, remember that you don’t need all the customers, you need the right customers. A retailer who only focuses on the price of your product based on the metal and gemstone content is not an ideal target. If he can’t see the design value for himself, what is the likelihood he has trained store staff to see and sell design to jewelry consumers? But once you are pulled into the retailer’s non-design-focused pricing strategy, it is nearly impossible to charge the right price when you encounter the right sort of retailer. You will do better working your tail off to find designer-focused retailers than to try to convince generic jewelry retailers to pay the right price. Sound difficult? It most certainly is. But that is the challenge of going into a designer business. If you had decided to be a high-volume producing manufacturing business, your big need would be the capital to invest in the production techniques and technologies necessary to produce in volume. The challenge for a designer business is the creative strategy, brand identity, intensive marketing research and analysis, promotion, and sales activities necessary to find the right customers.

On Variable Costs

You must know your variable costs to protect your margins. Variable costs include the raw materials and labor to produce each piece. Obviously, the first time you produce an item will take longer than subsequent production efforts, so you want base the labor on standard production. Estimating variable costs is, well, a big no-no. If your estimates are off and you negotiate a large order at the wrong price, you may run completely out of cash before you discover your error. Know your exact variable costs.

Metals are the big worry right now. Should you price gold at a $1300 market or $1500? Everyone has heard a horror story of $2000 or worse. Here are a few thoughts to consider when deciding what market to base your pricing strategy on:

• Investment demand for gold continues to hold at fairly high levels, bolstered by concerns about inflation and investor worries about the European economy. On 5/17/10 Kitco projected that gold could go up to $1700 this year, and most forecasts are eyeing the $1350 - $1500 range.
• Johnson Matthey is projecting platinum prices in the $1600 - $2000 range for the balance of the year.
• Silver has been experiencing market resistance in the $19 range, but if it manages to break through that resistance it could track up sharply and take many people by surprise.
• You must be aware of how other designers are pricing their lines. If you are at an $1800 gold market and everyone else is at $1300, you’ll likely be priced out of the market. Watch Cindy Edelstein’s blog this week for her report regarding current designer market bets.

Some will argue that it is better to be safe than sorry, and will price their lines at a specific market and tell retailers that orders will ship at the actual metal market the day of shipment. This may be fine for commodity-level manufacturers and distributors, but I advise against it for designers. As I said before, once you train the retailer to think about your line as a commodity + labor offering, you have thrown your design value out the window. I recommend a harder – but ultimately more sustainable – road for brands and designer lines.

Pricing for Margin and Value

So what’s a non-financial-analyst designer to do? Start by considering what price your target consumer is willing to pay for your line, and what margin your target (i.e., ideal) retailer wants to get. This involves market research. Trade shows are a terrible place to do consumer market research, because you can’t assume your competitors have done their consumer research. Pay attention to what your competitors are doing, but don’t fool yourself into thinking this is a replacement for consumer awareness. Listen to actual consumers, study what they are buying, find comparable items to your designer line, and learn what consumers are willing to support with their debit cards. This is where the real value of social media exists by the way. At any given moment hundreds of thousands of conversations are taking place, and many of those people are talking about what they buy, how much they spent, and where they bought it. These conversations are yours for the eavesdropping. Learn to listen in and you’ll begin to understand what consumers really think.

Once you have a sense of what consumers are willing to pay for jewelry like yours, subtract the target margin of the retailer. Now cost your line at a $1350, $1500, and $1700 gold market. Answer the following questions:

1. Can you meet your financial obligations and generate organic cash flow to cover your growth requirements at each of those margins?
2. If the answer to #1 is ‘no’, do you have outside financing available (already committed) to you?
3. If the answer to #2 is ‘no’, how will you fund the metal purchases, labor, and operational costs necessary to keep filling orders?

To generate organic cash flow, you must have margin. If you give up significant margin, you must generate so much additional volume that you can produce the number of dollars necessary to fund growth. If you can’t support the demand operationally once you get those additional orders – or if the number of dollars you need remains persistently out of reach - you’re out of business. Landing a few choice accounts won’t keep you in business. The key to remaining in business is producing more dollars. So giving up margin to snag a few choice accounts is rarely the road to success.

Look, if you’re going to put yourself out of business anyway, it’s probably worth your time and effort to get on the phone and call every retailer in the country yourself, just to find the 15 or 20 retailers who get it about designer jewelry and understand that it is not a commodity. There are more than 20,000 retail doors in this country, and most of them (sadly) are treating jewelry as a commodity these days. But not all.

Enlightened retailers exist. There are (dare I say it) more than 15 or 20 of them. There are at least several hundred retailers who understand that the key to turning consumers on about jewelry is being turned on about jewelry themselves, and training their sales and purchasing staff to be turned on about jewelry. They are using this advantage (yes, differentiation) to put their retail competition out of business, and because they understand love-of-margin, they are charging the right prices and doing the hard work necessary to find the right customers and encourage those customers to pay those prices.

Does this mean that when you find those retailers you will automatically solve your price problems? No, it doesn’t. You still must have tremendous control over your production, you need to know – not estimate – your variable costs, and you need to do everything in your control to keep your costs down so you can enjoy healthy margins after some reasonable negotiation with your retail partners.

You already know being in business for yourself is hard work. But working this hard for no money? That’s just not worth it. So don’t take your need for margin off the table. Differentiate. Do your variable cost homework. Do your consumer research. Price according to consumer demand and make sure you turn a profit. Strategize, brand, market, promote. Find the right retail partners. Sell your intrinsic value and differentiation (not your materials + labor!).

Make some money. You’re worth it.

(c) 2010. Andrea M. Hill

Buying or making one product and selling it at a good margin does not a business make. Well, that’s not entirely true. If you’re George Steinbrenner and you can sell the Yankees for $1.5 billion after buying it for $10 million – even if it was some 35 years ago – that’s not a bad deal. But for the rest of us mere mortals who don’t live on the back pages of the tabloids, velocity, multipliers and marginal utilities matter.

The rate at which cash moves through the system is called “throughput,” and it’s the single biggest driver for business profitability and cash flow (Goldratt, 1990). Evoking Ram Charan in my posting yesterday got me thinking about his favorite example. As I mentioned, he compares Harvard MBAs to third world street vendors and finds the MBAs lacking. In the example he uses, he describes how a street vendor intuitively knows not just how much they buy and sell their goods for, but how many times they must buy and sell those goods, and at what margins, to generate enough cash to feed their families.

The average uneducated third world street vendor can rapidly calculate not only the margin, but the velocity needed, to be a sufficiently profitable business. If they can buy and sell 10 baskets of apples 3 times per week and sell them at a 10% profit, they net $3.00. But if they can buy and sell 10 baskets of apples 7 times per week at a 5% profit, they net $3.50. That’s nearly a 17% increase over their higher margin “opportunity.”

OK, most Harvard grads understand this point. But what a lot of business people don’t get is the next idea, which doesn’t seem to elude third world street vendors one bit.

You see, the apple seller realizes that they can keep selling apples at the velocities and margins described above – after all, people always need apples. But say they recognize that what is really in demand a few times each year are oranges. The apple seller doesn’t have the capital to sell both oranges and apples. But the opportunity is in oranges, and even though the apple seller is called “The Apple Seller,” which is a pretty significant personal identity connection to one’s business, do they stick to apples out of emotion or devotion? Heck no. They have to face their hungry children at night. They switch to oranges (or Nike tennis shoes, or batteries, or chicken jerky) because the opportunity is better there and they recognize they do not have enough resources to invest in weaker opportunities when stronger opportunities are present.

This is the part the MBA students (and most owners of business) don’t get. It comes from marginalist theory, and it says that in an economy, the marginal utility of a quantity is related to the best good or service that can be purchased with available currency. Of course, if you have unlimited resources, it doesn’t matter, does it? You can splurge your resources on limited profitability and limited velocity (which is more often the culprit) goods because you have more than enough currency to invest in the rest of your business.

But as I said at the beginning of the article, back to the rest of us mere mortals. Say we have a good (or, in my case, a service) that we love to sell. It suits our identity, our personality, and it’s fun for us. We love it, so why wouldn’t everyone else? And besides, we make some money on it. And all profit dollars are the same, right?  Wrong!  Wrong wrong wrong wrong wrong! We don’t have unlimited resources. To be successful businesspeople we must honor the marginal utility of our currency and only invest our dollars in the items that will provide the sheer throughput to generate more wealth.

When we are George Steinbrenner and have, perhaps not as much money as Bill Gates, but way more than enough to never worry about money again, we can invest in personal pleasures and pretend it’s business. But barring that level of liquidity and comfort, only constant attention to velocity and marginal utility will allow us to sleep well at night.

*Goldratt, E. M. (1990). What is this thing called theory of constraints and how should it be implemented? Croton-on-Hudson, NY: North River Press.

© Andrea M. Hill, 2007

It’s easy to blame the current economy for our business woes. After all, if nobody is buying, there’s nothing we can do, right?

Only, people are buying. They’re not buying as much as they were, or as often as they were, and perhaps they’re buying versions of things that are less expensive than they were. But they’re buying.

The big beneficiary of this, of course, is Wal-Mart – the only company to turn in a positive report on earnings and growth this week. But are they the only beneficiary? If we buy in to this notion, we risk buying in to the idea that our businesses cannot be helped. And if you buy in to that, you might as well get a job down at the local supermarket, because you’re already done.

I saw this lesson come to life today when visiting a liquidation store in the tiny town where I now live. I’ve been passing that store on a regular basis (there’s only one main street in the town) since we moved here last summer, and I’ve always wondered about it. So yesterday, in a bout of creative procrastination, I decided to go inside and take a look around. For business insight, you know.

As I mentioned, they are a liquidator, so they buy overstock inventory and close-out inventory from retail operations. As you walk through the store you see rack upon rack upon rack of inventory that other stores could not sell.

And you could see why.

The inventory seemed to fall into two categories. The first category was good inventory offered at the wrong price. The second category was inventory that should never have been offered in the first place. Let’s talk about the first category.

There’s a certain amount of educated guess here, but when I see the same products I could buy at Whole Foods on sale at the liquidation store for the same price or more than I would have paid at the store otherwise known as Whole Paycheck, I’m pretty sure that one of the casualties that contributed to the liquidator’s business was an organic market that was too small to buy products at prices that would be competitive with any nearby organic supermarket or the organic aisle at your local Kroger. Given the number of earth muffin markets that are being put out of business by the encroachment of organic supermarkets, it’s possible to assume that this is another mom & pop casualty. And if that’s the case, that’s sad. It’s hard for a small business to figure out what to do when a larger business starts taking away their market share with muscle marketing and better buying power.

So should they just give up? Well, it’s not an option once the market has drifted across town to the other store. Then you call the liquidator. But small retailers who are keeping their eye on the pulse of the market are reconsidering their business model, their product offering, and their options long before that happens. A lot of wholesale garden stores were put out of business by big box garden stores, but a smart friend of mine named Herb played his hand differently. When HomeBase (remember them?) came to town and Wal-Mart expanded their offering of garden supplies, Herb put his store on the market and took a nice profit from the sale of it . . . before it was too late to do so. It may have been his passion to own a wholesale garden store, but it was also his passion to have a tidy sum to show for his years of effort.

I was in the video store business in Chicago back in the early 80s when you still had a choice between VHS and Beta and the typical video recorder weighed about 45 pounds. I also participated in stocking the very first Blockbuster store. Over about a six year period mom & pop video stores had sprung up all over the country. Then Blockbuster started expanding and the mom & pops disappeared as fast as they had arrived, all the while complaining that Blockbuster was putting them out of business. Today, Chicago is home to a number of eclectic, well managed independent video stores that are thriving. They took careful note of the business model Blockbuster had to offer, and they all do something different. There’s no doubt that the arrival of Blockbuster was going to preclude the survival of many of the mom & pops. The point is, the creative businesses survived.

Mom & pop movie stores. Independent music retailers. Independent booksellers. Organic food markets. Garden stores. Independent jewelers. Each of these industries has a new landscape, carved out by the buying and marketing power of huge retailers. It’s a story that plays out again and again. The only sure thing is that business owners who are willing to change their business models, who do not become complacent, and who expect that part of the joy of remaining in business is the work of figuring out how to remain in business will . . . you got it. Remain in business.

The second type of inventory that I saw at the liquidator was overstocks. Sure, sometimes a forecaster blows it and buys too much of a good thing, or selects a dog now and then. But the dogs I saw in that liquidation store don’t look like an isolated mistake. They look like items bought by a person who has no clue that nobody in their right mind would ever wear that orange and white sweatsuit unless they were in prison, or that a critical mass of people just don’t put white lace doilies all over their living rooms any more.

Whether the economy is good or the economy is bad, business is always going to be bad for the business owner who fails to view their offering through the customers’ eyes, considering the customers’ tastes and collecting the customers’ input. As scientific as forecasting and merchandising have become, a frightening number of retail stores stock inventory that nobody wants to buy.

What this means is that the news isn’t all that bad. Sure the economy is in the crapper, most of us have lost anywhere from 20%-30% of our portfolios, and the only job with job security these days seems to be that of economist. The good news, though, is that there are still things you can do to make sure your business survives – and even thrives – during difficult times. The cynical view is that so many of your competitors are doing a bad job that you already have a leg up just by paying a little attention. A more constructive approach would be to pay attention to the independent video stores, music stores, booksellers, card shops, and jewelry stores that continue to do well. The key to their success in the face of major retailer competition will shed light on what the key to your success might be right now.

(c) 2009. Andrea M. Hill

Where costs + branding effort = margins

The zeitgeist issue of the week is pricing strategy, and how to price products for acceptance in the market. This is an issue all my clients confront. For software clients, pricing strategy differs depending on the platform of the offering (packaged software versus downloadable media). For publishing clients, digital publishing has turned all content delivery theory on its head. And for jewelry clients, there is a constant struggle between the inherent value of the materials (gold, diamonds) and the artistry with which those materials are assembled.

In fact, pricing strategy is the bane of most entrepreneurs. It's never just about how much things cost. It's much more about how much added value is perceived through your offering, and the values of the buyer/company perceiving your products' value.

Here are a few important concepts relative to pricing:

1. How you market and brand will largely determine how much you can get for your products. I know products that get 20X markup and others that struggle with 2X, and the only significant difference between the two extremes is the brand perception of the lines and the people to whom they market. Brand perception is in the presentation you make, the story it comes with, and the confidence with which you pitch the price.

2. Buyers who perceive your product is a commodity will never step up to a higher price point. The person who buys gold jewelry after looking at the day's gold market, the car buyer who could care less about the model they purchase "as long as it runs," and the ambivalent software buyer who believes all software is created by $1/day Chinese programmers will simply not see value in a more expensive alternative. You simply can't change the mindset.  So unless you are equipped like Wal-Mart to strip all possible costs out of your production and pay yourself and your workers nothing or next-to-nothing, don't go after commodity buyers. It's not worth it.

3. Buyers often purchase goods not according to their desires but according to their risk tolerance. In the case of retailers (if you are wholesaling your product), this also translates into the type of clientele they have cultivated as a result. Whatever you do, do not let the cost-conscious, risk-averse clients influence your pricing strategy. They are not capable of perceiving the product at its ideal value. Make sure that your pricing strategy is related to the proper target customer and not to the convenient customer.

4. Only reduce your asking price if you firmly believe you have pursued the ideal customer as hard as you can and that dropping your price is your only option. It's not just a matter of whether or not you can make enough on a lower markup. The question is, do you want to run a business where you settle for just making enough. You can bring your prices down, but it is extremely different to bring them back up again. So be sure if you reduce your prices that it's for the right reasons.

5. Which competitive products are you comparing yourself to? Be sure to compare your offering to high end comparable producers to see the relative prices.  If you find you are priced higher than your high end competition, then the prices probably should be adjusted. If that is the case, then I suggest making a new price list/catalog rather than offering discounts to those who have complained you are high. This way you can explain your ability to do so by explaining that better volumes and efficiency are giving you margin benefits that you are passing along to them, but you hold your ability to sell off your price sheets without discounting. However, if you find you are priced comparably and you are experiencing price resistance, my guess is that you haven't pursued the right clients hard enough.

Ultimately, selling and promoting are the key to having high margins; selling to the right retailers who service the right consumers and promoting your brand in such a way that your perceived value is very high. If all is well on the selling and promotion front, pricing sort of falls in line (assuming your production/acquisition costs aren't out of control). There's no doubt that we live in a world where we can get much of what we want for practically nothing. But the consumers you are targeting are aware that they get what they pay for. So tell them that story, and help them make choices they feel good about.

In psychology, when a person avoids responsibility for his or her life and problems by investing heavily in the problems of another person, it is called codependence. 

We may be in the grip of a virulent form of mass business codependence. 

The current economy provides an excellent mask for bad business decisions and a protective balm for bruised egos when a business falters. After all, “everyone’s suffering.” But just as the codependent individual must ultimately break the control of the dysfunctional person dominating his or her life, so must business owners turn away from the excuses offered by a recessionary economy and take control of their business. If they do not, they cannot hope to have a business worth running when the economy improves.

The problem with things that are bad for us is that they don’t feel bad all the time, and when they feel good, they feel really good. If a business owner finds she can’t get inventory from primary suppliers because she is behind on her trade payments, there’s a good chance the problem isn’t just attributable to the bad economy, though sales decline and lack of cash flow may be the straw that broke the camel’s back. But it feels good to blame the economy, because dealing with the roots of the problem may be overwhelming to both existing resources and her ego.

Blaming the economy might shield her from facing uncomfortable truths about her vendor management or protect her from accepting responsibility for undisciplined financial behavior. But it won’t solve her problem.

A sales manager who is suddenly falling short of department goals might be excused for blaming the economy. But if he has failed to train his department for success during difficult times; if he has not communicated customer mood, concerns, and desires to the marketing department so they could adjust marketing and advertising strategy; if he has been relying on his own sales ability to achieve department goals at the expense of building a robust team, his problems are not attributable to the economy – they are just exacerbated by it. 

A company that sat back and depended on existing customers to produce sales during good times – saving money on marketing in the process – can’t lay all blame on the economy when sales and average order values drop precipitously.

A company that maintained money-losing business activities due to unwarranted optimism or ego shouldn’t blame the economy when excess cash to waste evaporates and profitable parts of the business are deprived of essential resources.

A depressed economy takes existing conditions and magnifies them. It’s like stop-action photography. Bad business decisions that would normally unfold over years, instead unravel in a year, a quarter, or even a month. This is how we explain some organizations in every industry thriving while their competitors contract and fail.

Recessions, like extreme weather events, natural disasters, and national emergencies, create pockets in time when nobody gets much done. We stand gaping at the scene and we remain there as long as possible, for comfort and camaraderie as much as for information. But unlike those types of national shared experience, the consequences of the event taking place directly affect us all and will roll out over a much longer period.

We cannot afford to be immobilized any longer. We cannot be codependents of the recession, hiding from our business shortcomings and responsibilities by pointing to the big bad economy.

Nor can we afford knee-jerk reactions. The boiler plate response to a reduction in demand involves layoffs, reductions in hours, slashing of marketing budgets (along with a Hail Mary bet that social media and internet marketing will replace more expensive channels), sale pricing, and putting the kibosh on capital investments and travel spending. If a business is in dire enough straits these measures may be necessary to survive, but they are the equivalent of putting a patient into an induced coma – a coma that is just as likely to kill as the disease itself.

Let us turn our attention to running our businesses with precision, eliminating time and money wasters that were camouflaged during better days, reconsidering ill-advised management behaviors and policies that sub-optimize growth, and ensuring that our organizations – from strategy through operations – are a clockworks of coordinated purpose and activity.

A codependent's issues will not go away if their dysfunctional mate becomes well, and the cure for the economy is not the cure for your business. Use this time wisely to restructure, redirect, repair, and refocus, and you can avoid the lasting damage that will be visited upon businesses that are now gutting themselves with reactionary hara-kiri. You may even emerge from difficulty before the economy at large manages to do the same.

© 2009. Andrea M. Hill