Back when I was a financial executive in the cable TV business, we joked about having “Born to Raise Rates” tattooed on our biceps. How many of us actually got the tat? I will never tell. Let’s just say we are grateful for the advances in tattoo removal technology that have enabled us to re-enter polite society without revealing our evil past.
Joking aside, my experiences with executing pricing strategies during cable TV’s glory days added depth to my perspective as a CFO.
Here are a few things I have learned along the way:
Pricing Power is Hyper-Efficient
The first-to-market cable TV companies enjoyed tremendous pricing power during our glory days when we were introducing HBO, ESPN, CNN and MTV to the world. Even an act of Congress could not stop us from exercising our power to raise prices.
Analysis of alternative growth strategies always reinforced our belief that price-driven growth was hyper-efficient compared to volume-driven growth. Top line growth from adding customers required capital, programming costs, operating expenses, and marketing, so only a small portion of the revenue increase would add to our net cash flow. Comparatively, price increases did not materially affect our market share so nearly all the revenue growth from a rate increase would boost our bottom line.
It is not surprising to cable TV veterans that Apple is the most highly valued business in the world. Apple has long established their ability to charge premium prices. Pricing power is a hyper-efficient creator of cash flow and the ultimate driver of business valuations.
Pricing Power is Temporary
Looking back though, we now know that cable TV’s over-reliance on rate increases eventually helped Netflix to become a FAANG stock. Netflix was able to enter the market with a competitive service at a very small fraction of the price changed by the cable companies. Cord cutters signed up for Netflix in droves.
The past four decades has produced plenty of evidence that pricing power is temporary. Look at how IBM, AOL, and more recently Peletron saw their ability to command premium prices dissipate as innovative alternatives entered their markets. Even Apple is experiencing a shrinking of their pricing power and is narrowing the gap between their prices and Samsung’s.
The pace of changes in the technological, economic, and competitive landscape within industries is accelerating. Successful businesses need strategies to regenerate their products and services in anticipation of the inevitable competitive threats.
Invest AND Innovate
Because Netflix’s “over-the-top” delivery technology required far less capital than cable TV’s fiber/coax infrastructure, they were able to invest instead in original programming. Netflix substantially outspent all the broadcast and cable TV programmers to gain their foothold.
The success of Netflix was not just due to the size of their investment in programming. It was creativity and innovation that propelled their growth. Netflix created binge-worthy hits like “House of Cards” and “Orange is the New Black” that became topics of conversations that people wanted to be in on.
The lesson for businesses is that it takes more than a solid financial plan that supports substantial investments toward future innovations. Businesses need to create their equivalent of an “Orange is the New Black” innovation. Get ahead of the curve by investing and innovating to create your future pricing power.
Experienced Financial Leadership
Business owners must run to stay ahead of competitors while not outrunning their available resources. Partnering with an experienced CFO can help with creating pricing strategies that can generate the resources. We can also help create the financial plans and metrics that will strategically allocate those resources.
To learn more about how a fractional CFO can partner with your business and provide insight into challenging situations, click here.