One of the hardest things for my students to learn is that there are no rules in the field of entrepreneurship. By that I don’t mean that you go outside the Law; I am not talking about those kinds of rules. You always obey the Law and protect your reputation; the latter is the most important thing you own BTW.
But how many times have you heard: ‘We don’t do it that way because it isn’t done like that and, anyway, no one else does it that way either’? Entrepreneurs are constantly asking BIG questions and thinking of ways to do things differently. It is usually this kind of creativity in EXECUTION that creates the most value for entrepreneurs. Fred Smith’s brilliant insight that he could develop an overnight package service (Fed/Ex) by reducing a 50 by 50 matrix of origins and destinations (with its impossible requirement for 2,500 overnight flights) to a handful of flights by developing a hub and spoke system was responsible for one of the great startup success stories of the late 20th Century.
Let me give you another example.
Gino Rossetti from Detroit asked the owners of the Detroit Pistons on a visit to Joe Louis Arena: ‘How come the people who pay the most (i.e., suite holders) are the furthest away from the floor?’ Joe Louis only has one ring of suites, which are located at the nosebleed level.
The answer was that all arenas are built that way; it’s just the way it’s done. Gino whipped out his sketch pad and said: ‘What if we had two lower rings of suites– the first one just 12 rows from the action on the court?’ That single insight revolutionized arena design and economics. It not only increased the number of suites in these buildings, but people also paid more (a lot more) for private suites close to the floor or ice surface. Plus it gave the ownership committed revenues (because they signed 5 and 10 year deals with leaseholders) and it gave them the ability to finance new arenas on a commercial basis. Additionally, it created the opportunity to bring all the seat holders closer to the action because the balconies created by the lower rings of suites could be stacked closer to the arena level much as in an Opera House with rings of private boxes.
Less volume in the building creates a less expensive but more intimate structure which beneifts not only the fans of major league sports but concert goers too. So Gino gave the world not only a much higher revenue-generating sports facility but there a qualitative improvement too.
Students often ask me how prices for new products or services are arrived at. They seem to feel that there is some form of government control or other, officially approved, algorithm that generates a price. I tell them the story of Butch Cassidy (in the film BUTCH CASSIDY AND THE SUNDANCE KID) when he was challenged for the leadership of the gang in a knife fight. Butch says: “Before we fight, I have to explain the rules.” His opponent, a giant of a man, says: ‘Rules, in a KNIFE FIGHT?’ Butch then walks up to him and kicks him in a vulnerable spot and then stomps him into the ground saying; “Rules? There are no rules in a knife fight.’
Pricing is a bit like that. In a competitive markplace, you can charge whatever you like. It may be above your cost (often way above, in, say, the marketplace for baseball players), at your cost or even below cost (these are called loss-leaders; e.g., selling below cost milk to get folks into your supermarket. Ever notice how the milk is always furthest from the door in every store– that’s to get you to impulse buy when you are walking through the facility.)
Rules? There are no rules in entrepreneurship; you get to make up your own. You just have to hope the set of rules you choose, works; i.e., they underpin a viable business model.
Dr. Bruce