Knowing and Making

There's lots of Bryan Caplan I don't agree with, but I can't deny he has some interesting ideas and a good way of thinking about them. The connection between growth and ideas is not so much logical as psychological. It is not logical for people to embrace counter-productive ideas just because conditions are getting worse, but they seem to do it anyway. This is from a paper on idea traps which is the concept that a society can get stuck in a sub-optimal equilibrium where the economic ideas that it runs on are flawed, but do not self-correct. My own experience of this is a paradox based in the economic situation in the UK right now. Logically, when there is low demand in an economy companies with a fixed cost base should spend more on sales and marketing. (This might not apply to firms which can easily scale down their costs - you can argue that the marginal return on sales spending is lower and therefore the optimal spend is less. But most companies are retaining most of th...

The psychology and economics of pricing and value allow you to serve your client’s interests and your own by ensuring they perceive the highest possible value in what you offer. Want to have more people upgrade from your £5 to your £9 bottle of wine? Just put a £15 bottle on the same shelf and about half will switch to the £9 option. The best thing about this is that in tests, consumers reported that the same wine actually tasted better when they had spent more money on it. Behavioural economics research provides a range of around 20 such cognitive biases – ways that people can be guided to perceive more value in the products and services they buy. The big question is how to take advantage of this research to increase sales. Customer value management Customer value management (CVM) is the business process of analysing a client, understanding what they value most and designing your offer to match it. Most professional firms, consultancies and modern service-based businesses base their p...

Thanks to all Marginal Revolution readers who have stopped by in the last couple of days. I am looking forward to generating next week's economics word cloud on Sunday and will summarise whatever trends emerge in comparison to this week. Eric Mitchell at the Professional Pricing Society has an interesting article about pricing in a B2B environment . I broadly agree with the comments of John Burdass and Rick Robinson; pricing should, as far as the supplier can influence it, be driven by value and not by either cost or competitive comparisons. However they imply a focus on objectively demonstrable financial value. For me, value is highly subjective; and perceived value is driven by framing and other cognitive factors distinct from the objective attributes of a product. This is especially true in B2B service provision where direct comparison of a service - either against another supplier or against a similar service purchased in the past - is difficult. Much of our recent research at ...

I have been researching the concept of client value management (also known as customer value management). The idea has been around for a while, and is mentioned by lots of people as an evolution of CRM (customer relationship management). A number of marketing experts and consultancies discuss it as a business process but surprisingly it does not seem to be an established software category and few of the approaches have been implemented in software. Everyone has their own version of what CVM means. Some of the main distinct approaches are: maximising the value of a client over the lifetime of your relationship with them ( this report by BusinessObjects , and some research it cites from Bain and Company). This is approached by analysing value during acquisition, relationship management and retention. understanding customer value added and targeting your marketing and customer service improvements to where they achieve maximum benefit ( a consultancy called CVM from New Zealand ) finding ...

Dennis Howlett has a great post on his ZDNet blog: A fresh model for software maintenance . He targets a number of things that vendors should do to reduce the cost and burden of software maintenance - treating customers individually, training their resellers and partners better, and helping the customers to build their own centres of excellence so they can support themselves better. The ideas are based in part on C.K. Prahalad and M.S. Krishnan's book, The New Age of Innovation: Driving Cocreated Value Through Global Networks . Looks like something I should be reading soon. This is an issue close to my heart, since it is a very sore point for many clients. Software buyers are much more likely to query the maintenance charges than the initial build costs - and yet maintenance seems to be an area where most small software companies don't make any money. Oracle seems to be an exception (Dennis quotes their 30% margins and says that much of it is from maintenance revenues), while S...

All the recent news in software has been about putting established categories of application software online. Online CRM software - salesforce.com. Online project management software - Basecamp. Online accounting software - Xero, Freshbooks, FreeAgent. Online ERP software - SAP Business One and Netsuite. Office productivity software - Google Apps. Email software - GMail. Even Photoshop has online competitors - Picnik (among others). This will continue, and I think most observers agree that desktop and client-server software in these categories will gradually be overtaken by the online/SaaS alternatives - though Microsoft Office will probably hold out longer than most. But when was the last time a genuinely new category of software became prominent? Think of the main categories of software: - CRM - ERP - Office suites (which used to be several separate categories: word processors, spreadsheets, presentation software) - Project management - Drawing and graphics - Email clients - W...

Another area of theory I have been working on in the last few weeks is pricing. It's well-known that suppliers can use price discrimination to distinguish between those customers who can or will pay more, and those who can't. Here are some (edited) notes from a forthcoming report we are publishing about the concept of structured pricing. Economic theory relies on agents trading products and services in a way that makes all of them better off. Any two people entering into a transaction should both gain from it; whatever is traded must be worth more to the buyer than the money they pay; and the money must be worth more to the seller than the object they’re selling. Any trade therefore provides higher value to both parties than they currently have – or else it will not happen. In classical economics, the price of something is regarded as a signal to tell the buyer and seller how much other people (at the margin where the supply and demand curve intersect) value it, and therefore ...

A fair bit of the economic research I do is speculative and it's gratifying when it ends up in a useful commercial output. This is one good example. The work I've done on how people evaluate prospective utility and make decisions has led to the concept of structured value modelling. This in turn allows us to consider how people influence each other's models of value. And the outcome of that is that we have created a new category of software: Client Value Management or CVM software. Traditional CRM systems are good for high-volume marketing - especially to consumers. They are not very popular amongst business-to-business services providers - for instance professional services firms. The reason being that CRM is a reductionist tool - its concept is to allow the simultaneous management of large numbers of people by making simplifying assumptions. If we assume that people fall into one of four demographic groups then we can send them messages at a cost of 4p each and hit a mill...