The Price is Right?

December 31, 2011

It will be difficult to apply ‘probe-sense-respond’ in business because the environment subconsciously prohibits experimentation. That would be my conclusion based on fifteen years of encouraging clients to practice safe-to-fail problem-solving. We have work ahead of us to apply it successfully.

At Market Edge we run a business simulation, EdgeSim, in which six teams compete against each other, the winner having the highest closing cash balance. The task of is each team is to develop and market a new product, the use of which will automate certain activities in a fictional customers manufacturing process. At the commencement of the simulation, the size of the potential market is only known approximately, and early market research, based on a conceptual offering, gives a range of possible prices.

Each team is provided the same amount of working capital, and no additional funding is allowed. All investment in capacity expansion, product and process research, and marketing communication is self-funded.

Based on the early market research, it is clear that there will be a shortage of product, thereby giving teams the opportunity to raise prices due to product scarcity. The simulation is played over five rounds, and in each round the teams can target four market segments and thus have four opportunities to test pricing.

My colleagues and I have run this simulation at least two hundred times in over thirty countries during the past fifteen years and one clear pattern has emerged. With the exception of two cohorts, every group has been reluctant to follow safe-to-fail experimentation (probe-sense-respond) with pricing.

The market research report sets a guide price of $10,000 but most teams drop prices below this despite the market growing and there being a supply/demand imbalance.

The reluctance to experiment and then learn from pricing failure is not overtly due to fear of corporate retribution nor ignorance of a conceptual framework for appropriate problem-solving. At the beginning of the simulation I inform participants that no reports are being sent back to head office. The group is informed that this is a safe environment in which to experiment, and thus they are provided with a place to safely build confidence in the concept of experimentation and adaptation. In recent years I have also commenced the simulation with the introduction of the Cynefin framework, and the group has wholeheartedly (but only intellectually it seems) endorsed the concept that the market dynamics, and specifically pricing, reside firmly in the Complex domain.

Yet, and the consistency is impressive, the application of safe-to-fail experimentation fails to be demonstrated. Any upward pricing probing that succeeds in one round is immediately reduced in the next; teams who see competitors selling at higher prices (and some times with higher volume) always seek some kind of convoluted complicated cause-and-effect relationship despite having agreed less than two hours prior that this is a Complex problem where no cause-and-effect is decipherable. They attribute their competitors successful higher pricing to some spurious piece of good fortune or magic (with supporting fantastical cause-and-effect) but seldom interpret the pricing signal as option to upwardly test pricing themselves.

Even when I introduce the Rowe Pricing Model, there is intellectual acceptance of probe-sense-respond but no emotional application. The Rowe Pricing Model suggests a link between pricing and profit, and that scarcity often provides the opportunity to increase prices. After two rounds I ask the group to place the current market dynamics on the pricing triangle, and the collective agreement always places the current situation at the top of the triangle—but at no time do groups proactively price to failure despite the availability of these tools and much supportive coaching.

Interestingly, only when teams replay the simulation do they practice safe-to-fail. It seems they need to go through the whole experience once before they have the confidence to apply their intellectual understanding of the problem.

Two cohorts do buck this trend; undergraduates and a number of research scientists. It seems that undergraduates have limited fear of failure—unless they are majoring in finance and accounting. Some groups of research scientists will see the anomaly of competitors selling at higher prices and will probe to failure. The record for the highest closing cash balance is held by the research group of a pharmaceutical company. You can draw your own conclusions.

There are implications for corporate application of probe-sense-respond, particularly as it relates to strategy generation;
1.A sound intellectual framework aids communication of this is approach but by itself will not modify all the necessary activities:
2.There has to be an emotional acceptance before it can be applied, and emotional acceptance is generated exclusively through experience and at an individual level:
3.Safe-to-fail experimentation may need to be practiced many times and with low exposure before confidence is in place for the method to be scaled.

As with most things of significance, if you capture the heart, the head will justify the decision.

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About the Cynefin Company

The Cynefin Company (formerly known as Cognitive Edge) was founded in 2005 by Dave Snowden. We believe in praxis and focus on building methods, tools and capability that apply the wisdom from Complex Adaptive Systems theory and other scientific disciplines in social systems. We are the world leader in developing management approaches (in society, government and industry) that empower organisations to absorb uncertainty, detect weak signals to enable sense-making in complex systems, act on the rich data, create resilience and, ultimately, thrive in a complex world.

Cognitive Edge Ltd. & Cognitive Edge Pte. trading as The Cynefin Company and The Cynefin Centre.


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