Entrepreneurial gaps and value pricing

A post has been making the rounds, by Ellen Chisa, on the things taught at Harvard Business School that were particularly helpful.

Ellen highlights a lot of things, but two stood out to me.

1) The entrepreneurial gap

We also learned a lot about motivation and compensation.

My favorite was the idea of “span of accountability” — what an employee is responsible for vs. “span of control” — what the employee can dictate based on their job. For instance, a PM has a lot of accountability (shipping the product), but relatively little control (no direct reports).

When an employee has more accountability than control, this is considered an “entrepreneurial gap.” It’s typically created via an incentive system that encourages the employee to go beyond their span of control. The key thing is to get the incentive system right. What behaviors will it encourage? What levers can employees pull to move the metric?

Before I wanted to hire smart people and pay them “fairly.” Now I want to hire smart people, and give them an entrepreneurial gap with an incentive system that works well for them and for the company. It’s more fair that way.

2) On value pricing

There are two primary types of pricing: Cost-Based and Value-Based. In Cost Based pricing, you figure out how much it costs you to provide a service. Then you add a mark up and use that price to sell to the customer.

The idea behind value pricing is that there’s actually a much wider wedge between the two things:

First, there’s the amount your Product costs to make.

Then, there’s the amount your Product saves the other company (or how much more it allows them to sell — but basically the financial impact giving your product has).

You should charge somewhere between those two points.

As much as I’m never going to charge to the very top of that spectrum, I know that I need to write down both pieces to make sure I’m not undercharging.

The case on this was a Coca-Cola vending machine, but my favorite case in the pricing module was about <ahref=”http://www.hbs.edu/faculty/Pages/item.aspx?num=37854″>pricing the London Olympics.

The entire article is well worth the read, but I enjoyed these two the most. On the value pricing one, mostly because I liked the case studies linked, and the note that, “I know that I need to write down both pieces to make sure I’m not undercharging.” Simple but effective.

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