Flipping Supply and Demand - Lemonade Version

Interesting story out of Spain, where a marketing company came up with the idea to install lemonade vending machines that actually decrease the price of the lemonade as the outside temperature rises, (and theoretically people will be thirstier and demand more lemonade), and increase the price as temperatures decline.

More details about the 'Let's go crazy and turn the immutable laws of supply and demand on their head' scheme can be found here.  The basic pricing plan goes like this:

Each machine displays both the temperature and the price, with three different price levels depending on just how hot it is. Up to 77 degrees Fahrenheit and the price is 2 euros or about $2.45. From 78 degrees F to slightly above 84, the price lowers to about 1.4 euros or $1.70. Anything over 86 degrees F and the drinks are 1 euro or $1.22. Special software allows the machine to automatically adjust.

Traditional economics and business logic of course suggest the exact opposite pricing strategy - as the temperature rises the merchant should increase prices to meet the anticipated elevated demand and maximize profits. Likewise, on cooler days, a lower price for the cold drinks seems to make more sense, as it should, according to everything we've ever learned in Econ 101 class, stimulate demand. 

So why would the lemonade vendor enact a pricing strategy so seemingly illogical?

Well it's only illogical if you don't consider the point of view of the customers, to them, their value is maximized, or at least greatly enhanced, by paying less for the cold drink on the hottest days when they are at their thirstiest, when they are in need of the product the most. 

Long term, this kind of strategy should engender greater customer loyalty and affinity - the customers should begin to see the lemonade vendor as more of a trusted ally in the fight against thirst, as someone who is there for them when they need it the most, and not as someone trying to take advantage of a situation to extract a few more cents of profit per can.

And forgetting the specifics of the lemonade vending machine, the broader lesson, making it easier and more convenient for your customers to buy, whomever they are, when they need you the most, (and not the other way around), is likely to separate you from just about every other supplier who has ever existed and that is holding fast to the Supply v. Demand chart they studied Freshman year.

Stay thirsty my friends.

It's hard to rally around a metric

About a thousand years ago I worked for a large, extremely well-known organization that for a myriad of reasons was going through some tough times. Sales were still good, but expenses were out of control, there were growing quality concerns with some of the most profitable products, and after decades of predictable and recognizable market conditions, changes in the regulatory environment had given rise to a new kind of competitor - smaller, faster, better able to adapt to a much more dynamic market than had previously existed.Got it?

Like many large companies that were entrenched and in some ways held captive by their size, history, amount of process and technical debt, there did not seem to be easy solutions, (or at least obvious ones), that the organization could pursue, and more importantly get everyone in the vast value creation ecosystem behind and pulling in the same direction towards, in order to improve results, better position the company for a much different looking future, while continuing to support thousands of customers and employees. As a low-level functionary at the time, I certainly was not privy to all the strategic options our company leaders were discussing to attempt to right the ship, reverse course, clear the anchor, (insert your favorite nautical metaphor here), but I remember well one of the major initiatives that did break free from the board room and impact all of us in the organization.

It was that from that point forward, everyone in the company was directed to be focused on a financial measurement called Economic Value Added, or EVA. EVA attempts to estimate a firm's profit, expressed as the value created in excess of the require return of the company investors. EVA is basically the profit earned by the firm less the cost of financing the firm's capital. Confused by what focusing on EVA might mean for the actual people in the organization? Perhaps a quick look at the EVA equation will clear things up:

Ok got it now?

I won't bother listing out what all the variables mean, (check Wikipedia if you are a glutton for punishment). The real point is not that folks in HR or in Talent management need to better understand the real economic drivers of the organization, and the real cause and effect cycles that keep the doors open, the payroll met, and the shareholders happy. There have been oceans of books, articles, blogs, presentations, etc. that all make that same (valid) point. There is general consensus that HR needs to understand the actual business. 

But here, and as the little EVA story seems to illustrate, (at least to me), is that in this example HR (and management) needed to understand a lot more than the business metrics. They needed to understand how to connect these metrics, business drivers, and silly-looking equations with what actually would resonate with people, and help them to see the value of the strategy, and help motivate them towards execution of these plans. No one I worked with, for, or near could even really understand at a personal level what focusing on EVA meant to us, or at least was supposed to mean. 

Was it cutting costs and expenses? Was it shaving a day or two off a process cycle time? Was it making sure we answered customer complaints in less than 24 hours? Because if those were the things we needed to think about, well, then just tell us that. We could have rallied around saving money, serving our customers better and faster, reducing the energy consumption in the building, or a million other things that were actually real and we could understand and impact.

What we could not do was get excited about an equation, or rally around a flag bearing a formula.

Even if it was the right formula.