Did you just break the value contract?

I thought I'd take a few moments to discuss something I call the 'value contract'. It's the implicit agreement that a business has with it's customers and it's usually an unspoken agreement tied into the customer relationship.

An example is Costco - the value contract in my mind for Costco is that I will get good quality and a fair price and can return anything in a reasonable time frame. In return for those things, I have adjusted my behavior to go to Costco in spite of the long lines. I've traded quality, prices, and customer service for a little time. That's the Costco brand in my mind, and I would guess that it's somewhat similar for millions of it's customers.

I regularly go to an electronics store, and to me, the brand means "low prices, pretty good selection, random service levels, with value oriented food". The food was cheap and decent enough that I went out of my way to go there just in case there was a good electronics deal to be found. Value-priced food was my rationalization for going since I wouldn't otherwise have driven there. I suspected others felt the same, as there was a decent lunch crowd. In marketing and business terms, it seemed like a loss leader - something with negative or lower than normal margins to draw in buyers.

Last summer, for some unknown reason, this store increased the price of their combo meal by 17% and started using obviously cheaper sandwich ingredients. I was bothered by it, and vowed to give up my habit of eating there. I failed. It took three more meals of bad food and higher prices to finally break that habit, but during that time, I noticed that the deli crowd dropped dramatically as did overall traffic to that store during lunch. Other people appeared to be bothered by the change in price and quality. Finally, I took my lunch buying and lunch-time electronic shopping to a competitor.

Three months later on a random weekend visit to my original lunch spot/electronics store, I noticed that the price dropped back down to the original level. I promptly adjusted my schedule and used the same excuse to go back. To my surprise, both the price and food quality had be adjusted to the original levels. As I continued to return week after week, I noticed that the lunch crowd was building back as well.

So someone figured out that the deli was indeed a loss leader, bringing in shoppers who otherwise might spend their time and money elsewhere, right? Maybe, or their memory only lasts 9 months. At a recent visit, they upped the price by 17% again and changed their side dish/chips vendor to one with portions nearly 1/2 of what they gave a year ago. I looks like they are breaking that value contract again.

I'll be breaking that lunch habit faster this time. Did someone break a value contract with you in a bonehead way? Please comment or click the ThankThis button if you like this article.

Smarter Executive Hiring for Startups

Fellow executive Michael Stewart once told me that his ideal position was to be head of sales for 5 startups, pulling in 25%+ salary from each with a percentage of sales plus equity. I don’t know if he still feels that way, but his statement resonated with me on several levels as it made alot of sense.

While Michael and other executives I know definitely earn their salaries, those same salaries are hard to justify for small or growing startups. Startups are then faced with a dilemma - hire an expensive senior exec who brings the strategy, planning, and wisdom you likely need, or hire a cheaper, more junior exec with some of what you likely need, but fits in your budget. Of course, the real answer lies in what you need, but there’s the rub. Do startups really know what they need? Early stage startups are almost always defined by a market vision that a group of customers want a product or service. They have an idea or early prototype, and they’re trying to make sure the product fits their intended customer or they are working to really define the customer that will buy and use that product. Sure, field research of 5 to 20 people may have helped, but does that really scale into the enterprise, retail, or massively deployed Internet presence?

Change that around a bit. If you think you really needed a seasoned executive, but your marketing or sales staff budget was $12k/month, would you hire one senior executive at $12k/month? A seasoned mid-level exec at $10k/month with change left over, or one senior executive, at 25% for $4k, plus another mid-level marketer for $7k/month. You would probably need to provide an equity incentive as well, but that’s par for the startup game.

While a number of executives in Silicon Valley have the strategy and implementation skills and experience to plan and execute, it’s not uncommon to find senior executives who dismiss implementation as ‘work that marketing staff does.’ Hiring the seasoned mid-level exec might get the job done, but there’s almost certainly going to be gaps where he/she will lack the experience or skills. Going with a part-time senior exec and full-time mid-level marketer would provide both the experience and implementation skills with the best odds for success. 

Now the part-time senior executive model might only be a short-lived solution, as success could require more management time, more executive team integration, and additional implementers, but this is also the beauty of that approach. Success has pushed off the full salary load of the full-time exec until there has been some success allowing for a cost-effective and cost-justified conversion to full-time.

The problems of this model are not insignificant and will come from both the executive and the hiring company. The executive will naturally want to be paid contractor rates to guarantee the perceived value for his/her services and will likely require equity even in a part-time role.  The hiring company will likely require board approval for all VP level candidates, possibly dragging out a 3k or 4k/month hire into the same hiring process for a $15k/month salary load. If the benefits outweigh the risks or complications, both parties will come to a mutually agreeable solution.

From a progress-minded view of things, I have no problem seeing that it could work, where I, as one of these executives, could find a way to make it work. On the other hand, I would like feedback from others on ‘Should it be done?’ I look forward to your opinion.