Back when I was a financial executive in the cable TV business, we joked about having \u201cBorn to Raise Rates\u201d tattooed on our biceps. How many of us actually got the tat? I will never tell. Let\u2019s 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.<\/p>\r\n\r\n\r\n\r\n
Joking aside, my experiences with executing pricing strategies during cable TV\u2019s glory days added depth to my perspective as a CFO.<\/p>\r\n\r\n\r\n\r\n
Here are a few things I have learned along the way:<\/p>\r\n\r\n\r\n\r\n
Pricing Power is Hyper-Efficient<\/strong><\/p>\r\n\r\n\r\n\r\n 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.<\/p>\r\n\r\n\r\n\r\n 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.<\/p>\r\n\r\n\r\n\r\n 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.<\/p>\r\n\r\n\r\n\r\n Pricing Power is Temporary<\/strong><\/p>\r\n\r\n\r\n\r\n Looking back though, we now know that cable TV\u2019s 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.<\/p>\r\n\r\n\r\n\r\n 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\u2019s.<\/p>\r\n\r\n\r\n\r\n 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.<\/p>\r\n\r\n\r\n\r\n Invest AND Innovate<\/strong><\/p>\r\n\r\n\r\n\r\n Because Netflix\u2019s \u201cover-the-top\u201d delivery technology required far less capital than cable TV\u2019s 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.<\/p>\r\n\r\n\r\n\r\n 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 \u201cHouse of Cards\u201d and \u201cOrange is the New Black\u201d that became topics of conversations that people wanted to be in on.<\/p>\r\n\r\n\r\n\r\n 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 \u201cOrange is the New Black\u201d innovation. Get ahead of the curve by investing and innovating to create your future pricing power.<\/p>\r\n\r\n\r\n\r\n Experienced Financial Leadership<\/strong><\/p>\r\n\r\n\r\n\r\n 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.<\/p>\r\n\r\n\r\n\r\n