Pricing for profit - are you Apple or Wal-Mart?

I read SHN's article about pricing strategy over the weekend. In three businesses now, I've spent a good deal of time studying pricing of different services and, with all due respect to Dana Wollschlager, the thesis of the article is all wrong.

Actually, the thesis is wrong if what you want to do is maximize profit. It's spot on if you want to be the low-cost, value option in your markets. The point Dana makes (or rather made at a speaking gig last week) is that you need to know your costs before you can set your prices. This is a rational and common pricing strategy: tabulate your costs and then add your desired profit margin to arrive at the price you quote to the market. At this point, the teaching goes, you can work to lower your costs or adjust your margins to offer more competitive pricing.

The problem is that when your focus is all on cost-plus-margin, you tend to view that margin or the underlying cost (in the case of senior housing, the staff and services you provide) as "levers" you can pull to control pricing. This is exactly how Wal-Mart competes: they aggregate buying power and compensate employees in such a way as to deliver their goods at the lowest price to customers. Amazon wrings costs out of their business in the distribution and logistics of their business. But if you shop at Wal-Mart or use Amazon, you can feel that the experience is entirely unlike that of Whole Foods or Apple. 

Apple does not price their iPhone or Macbook as a multiple of the cost of the device. Rather, they convey to customers an experience or a lifestyle that conveys to you when you buy and use their products. No one "shops around" for a smartphone, looking for the best price. You are either interested in the features and social cache of an iPhone or you're not. Everyone knows, however, that if you want the lowest price on Tide detergent or paper towels, Wal-Mart is a good place to check. Apple's operating most recently reported operating margin: 28%. Wal-Mart's: 5%. Which would you prefer?

Here's an analogy about pricing I like: if I stopped by a local florist and bought a bouquet of flowers for my wife, I would pay an amount most likely set precisely as Dana outlines: the wholesale cost plus an allowance for overhead and profit. But when my wife was planning our wedding, we almost certainly paid significantly more for the exact same variety of flowers that she carried as a processional bouquet. Why? It's because in the emotional context of a wedding, my wife wasn't shopping for the cheapest flowers. She was shopping for the flowers that fit the message and image she wanted for a once-in-a-lifetime event. It's the context of the purchase, not the cost of the florist's business that set our pricing mentality.

My point is that the cost-plus strategy is likely a race to the bottom, competing on the thinnest margin you can to win the marginal resident over a few dollars a month in rent. If you offer the market something other than low rent, maybe something aspirational or hard to price (lifelong learning, social purpose, meaningful friendships, better educated staff, a concierge service, customized care modeling....) you can sell something other than price. And probably charge a lot more for the same product.

Now affordability of senior care is a looming crisis that we have to deal with as an industry. Good work is being done but we aren't close to having that solved. There is absolutely a place for value-based, low-price senior housing. A huge place actually.

But the article is written broadly, presumably to promote the sponsor's software, and implies it is the best way to price your offering. It is one way, but a way that likely leads to be the cheapest option, but not the most profitable.

Doing more with more

I've been spending some late nights the last few days working on a financial model for an unusually large project in South Florida. At this very early stage almost nothing is known for certain, least of all the construction costs which amount to 60-70% of the overall costs. 

The way I begin to clarify this significant gray area is to build a program (basically a list of all the spaces in a building and their associated areas). On the scale of this particular project, there is room for a lot of amenity spaces. It's great fun to think about what interesting or fun spaces to put in a new community.

With all that space I could address dining options, physical fitness, art studios, education, quiet meditation, spiritual spaces, medical care, banking, a business center... all things that empirically enhance seniors's lives. But that all felt very routine. Not special.

What I want to do with 'more' is something that ensures these seniors will actually BE better, not just feel better. So this particular project is going to shift slightly to focus on one thing that even scientific journals say that the aging population lacks. This is going to be a community that focuses on putting social interactions - deliberate or casual - at the forefront of its model. We are going to make this project supportive of  health in all dimensions. I admit that until recently I had no idea of a) the prevalence of depression among otherwise healthy seniors and b) the gigantic impact social encounters have on that depression.

This big building could very easily become a cavern where seniors become reclusive and anonymous. But I want to see it - even at scale - become a place where senior, perhaps even seniors that don't live there can engage with one another. That's doing more with more.

When good incentives go bad

Last week saw one of America's premiere financial institutions get hit with a fine related to their sales practices. Wells Fargo was fined $184MM (a paltry sum compared to their $23B in profits) for allowing employees to open and fund accounts in their customers' names without the customers' knowledge.

In the senior living world that's pretty tough to correlate but it begs the question: do your sales practices encourage good numbers or do they encourage alignment with your customer? More than 5,300 employees were fired in the Wells event but it went on a long time and he CEO may lose his job.  

I happen to bank with Wells and it hurts knowing they may have had my money above my relationship.  Presumably the fine and the impact of the practices are proportional. So was it work $184MM (in the context of $23B) to jeopardize a relationship? Of course not. Ironically, Warren Buffet is a huge shareholder of Wells and famously says it can take 20 years to make a reputation and 5 minutes to lose it.

As developers, when we model fill-up and sales velocity we have conversations about incentives, rent rebates, commissions, etc. I'm not sure we've paid enough attention to the precise alignment of that with the ultimate resident. Maybe that's hard. But it's not as hard a rebuilding a ruined image.