Episode #83 - Interview with John Jantsch

Ed and Ron interviewed John Jantsch, a marketing consultant, speaker and best-selling author of Duct Tape Marketing, Duct Tape Selling, The Commitment Engine and The Referral Engine. He is the creator of the Duct Tape Marketing System and Duct Tape Marketing Consulting Network that trains and licenses small business marketing consultants around the world. He frequently consults with small and mid-sized businesses helping them create marketing plans and organized marketing systems that smooth the way for steady growth.

Questions Ed Asked John

You are the author of near 3500 blog posts in total. When did you start blogging?

Is the Blog still the “absolute starting point?”

What is marketing? Get someone who has a need to know, like and trust you?

How do you define marketing strategy? How does it differ from tactics? Objectives? Goals? Mission?

Your TedxKC talk is about purpose, how does that tie into marketing strategy?

How do you feel about the idea that strategy is more about what will you say “No” to?

Talk about the marketing hourglass and how it replaces the marketing funnel?

Why do so many businesses, especially professionals, believe the are in a commodity business?

Please expand upon you belief that, "Price is a function of value!”

Why is pricing so often take out of the hands of marketing?

What is “the perfect referral?”

Who are some of your major business heroes?

Who is a non-business hero of yours?

Questions Ron Asked John

John's reaction to Peter Drucker's statements:

“Because its purpose is to create a customer, the business enterprise has two––and only these two––basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.”

“If marketing were done perfectly, selling would be unnecessary. Marketing and selling are not complementary and might even be adversarial.”

Reaction to Tim William's statement: "The default purpose of marketing is not to increase sales but rather to increase profit."

Is there a correlation between market share and profitability?

What’s your advice with respect to business models?

How do you market risk?

How do you de-commodotize a product or service with marketing?

Why do you think most companies don’t offer a guarantee?

Which companies do you admire from a marketing perspective? John answered REI and Patagonia.

What’s your advice on RFPs? Don't do them!

Who are your business mentors/thinkers/authors? Peter Drucker, Michael Gerber, Seth Godin.

John also recommended the books Dealstorming and Love is the Killer App, both by Tim Sanders.

Episode #82 - Profiling Milton Friedman

Milton Friedman was born July 31, 1912 (Brooklyn, NY), and died November 16, 2006. He was married to Rose Friedman and economist in her own right. In 1976, Friedman won the  Nobel Prize and 1988 he won the Presidential Medal of Freedom. 

Books

Price Theory, 1962, 1976 - He didn’t think Frank Knights distinction between risk and uncertainty was valid. He believed in personal probability.

Monetary vs Fiscal Policy: A Dialogue, Milton Friedman, Walter W. Heller, 1969 - Money matters for nominal magnitudes, but not real output over the long-term. Money is not the only thing that matters! Technology, institutions, rule of law, etc. Interest rates are not the price of money, but the price of credit.

Why Government Is the Problem, 1993, Essays in Public Policy, Hoover Institution - If a private enterprise is a failure, it closes down—unless it can get a government subsidy to keep it going; if a government enterprise fails, it is expanded. I challenge you to find exceptions.

Reverse invisible hand: People who intend to serve only the public interest are led by an invisible hand to serve private interests which was no part of their intention.

TANSTAAFL (There ain’t no such thing as a free lunch), Robert Heinlein, The Moon Is a Harsh Mistress. Also, traced back to 19th century saloons: if you bought a beer, they gave you a free lunch. Dedication speech, Cato Building in DC: In the real economic world, there is a free lunch, an extraordinary free lunch, and that free lunch is free markets and private property.

On Liberty And Drugs: Essays on the Free Market and Prohibition, Milton Friedman and Thomas S. Szasz, 1992 - It is extraordinary that leaders of medicine should proclaim publicly that they and their colleagues must be paid to be ethical. And if it were so, I doubt that the price would have any limit. There seems little correlation between poverty and honesty.

As I once said to a Republican Club of students at Stanford, I am a libertarian with a small l and a Republican with a capital R. And I am a Republican with a capital R on grounds of expediency, not on principle.

Prohibition (1920-1933) passed during World War I because men were in France and the majority of women voted for it.

From the Founding until 1914, trade in drugs was free. George Washington grew “hemp.”

We don’t say legalize, implies that the government gives us a permission to do these things. Are rights are inalienable.

Milton Friedman on Economics: Selected Papers, 1976 - Contains his Nobel lecture. Rejected that economics was a branch of philosophy. Thought of it as a social science, with tentative hypotheses that can never be proved but can only fail to be rejected. Falsified the Phillips curve—tradeoff between inflation and unemployment.

Friedman didn’t draw distinction between micro and macro economics. He    started with individual choice. First major publication, Income from Independent Professional Practice (NBER, 1945), with Simon Kuznets, his Columbia dissertation:

  • Introduced concept of permanent income

  • An early human capital analysis of returns to education

  • First quantitative study of union restrictions on entry into occupations and of the effect of unions on earnings

  • Publication was held up five years, so was Friedman’s PhD, because a board member of the bureau (a Pharma Exec, C. Reinhold Noyes) objected to this conclusion and analysis of the American Medical Association’s behavior. Friedman didn’t budge, finally published with irrelevant comment by the objecting board member.

  • Explained 1/3 by which average income of doctors exceeded dentists. Only ½ due to natural supply/demand, the rest was ease of entry to dentistry back then

Friedman in China, 1990 - Visited in 1980 and 1988. China invented paper money.

The Essence of Friedman, edited by Kurt R. Leube, 1987 - More lives lost because of Das Kapital, so why no warning label on it such as with cigarettes?

“The Social Responsibility of Business is to Increase its Profits,” The New York Times Magazine, September 13, 1970 - Road to hell paved with good intentions. He often quoted Pierre S. du Pont, to the French National Assembly:

Gentlemen, it’s a disagreeable custom to which one is too easily led by the harshness of the discussions, to assume evil intentions. It’s necessary to be gracious as to intentions; one should believe them good, and apparently they are; but we do not have to be gracious at all to inconsistent logic or to absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally.

He did favor a “real gold standard” but not a “pseudo gold standard,” whereby government fixes the price of gold. He did think the gold standard was consistent with liberty.

Bright Promises, Dismal Performance: An Economist’s Protest, 1983 - 70 Essays from Newsweek, 1972-1982. He wrote 300+ columns over 18 years. Contains Playboy interview from 1973. “The preservation of liberty, not the promotion of efficiency, is the primary justification for private property.”

Milton Friedman: A Biography, Lanny Ebenstein, 2007 - Fanatically religious phase until 12yrs old, by time of his bar mitzvah at 13, complete agnosticism. Received his introduction to libertarian thought at Rutgers from John Stuart Mill’s On Liberty, which he read as freshman or sophomore.

Teacher Henry Simons (U. Chicago) taught that an objective, critical examination of a man’s ideas is a truer tribute than slavish repetition of his formulas. Thinks he voted for FDR in 1936, went to Chicago as a Norman Thomas-type socialist. Rose dated others, Milton didn’t. “He couldn’t afford it,” says Rose.

From Fall 1941 – March 1943, was one of the top 10 aides to Secretary of the Treasury, Henry Morgenthau; he helped devise income tax withholding. Indirectly involved with the Manhattan project, designed a statistical procedure to ensure that the detonator for the atom bomb worked, though he didn’t know it. Helped designed the trigger for the atom bomb!

He believed that “almost all important contributions of a scientist are made in the first ten years after he enters the discipline.” Only one valid criterion for acceptance or rejection of a theory: its capacity to predict. He joked: “so happily blessed with critics that I have been forced to adopt the general rule of not replying to them.”

A Monetary History of the US and A Theory of the Consumption Function constitutes his critiques of Keynes. The Great Depression caused by inappropriate monetary policy, 1/3 contraction of money supply between 1929-1933. Thought the New Deal with a the wrong cure for the wrong disease

He thought Capitalism and Freedom was his best work for a popular audience, and better than Free to Choose, more philosophical and abstract, and hence more fundamental. Great arguer, and people said they loved to argue with Milton—when he wasn’t there! His two most terrifying questions: How do you know? So What?

I would rather government spend one trillion dollars with a deficit of half a trillion that have government spend two trillion dollars with no deficit. Government spending is the price of government, not deficits! Advantage of flat tax get rid of all the unpaid bookkeeping we are forced to engage in, and free up human talent of accountants and lawyers for more productive work.

Congressional testimony, All-Volunteer Commission, Nixon, General William Westmoreland, commander of American troops in Vietnam said, “he did not want to command an army of mercenaries.”

Friedman: General, would you rather command an army of slaves?

Westmoreland: I don’t like to hear our patriotic draftees referred to as slaves.

Friedman: I don’t like to hear our patriotic volunteers referred to as mercenaries.

Was protested for visiting Chile in March 1975, but not for visiting China, certainly an evil government?  “There is nothing so permanent as a temporary government program."

As so often is the case, what everyone knows is not so. Anyone who is converted in an evening isn’t worth converting. The next person of opposite views… will unconvert him.

He saw past two and quarter centuries by three intellectual tides:

  • The rise of Laissez-Faire (the Adam Smith Tide)

  • The Rise of the Welfare State (the Fabian Tide)

  • The Resurgence of the Free Market (the Hayek Tide)

“Ideas are important, but they take a long time and are not important in and of themselves. Something else has to come along that provides fertile ground for those ideas.”

He was pro-abortion, but thought government shouldn’t pay for it. He Opposed Gulf War 1991 and Iraq in 2003. Epitaph: Inflation is always and everywhere a monetary phenomenon (too much money chasing too few goods).

Arnold Schwarzenegger: “I have often said that the two people who have most profoundly impacted my thinking on economics are Milton Friedman and Adam Smith.” [As a resident of California who lived through the Schwarzenegger administration, this is nonsense!].

Lawrence Summers: As for Milton Friedman, he was the devil figure in my youth. Only with time have I come to have large amounts of grudging respect. And with time, increasingly ungrudging respect.”

Money Mischief, 1992

Famous story of the island of stone money.

Hugh Rockoff (1990) paper argues Frank Baum’s The Wonderful Wizard of Oz was actually a sophisticated commentary on the political and economic debates of the Populist Era. The Land of OZ is the East, where the gold standard reigns supreme. Wicked Witch of the East, Grover Cleveland, the gold Democrat who, as president, led the successful repeal of the Sherman Silver Purchase Act of 1893

Capitalism & Freedom, 1962 - Abolish corporate tax, but undistributed earnings should be assigned to individual shareholder returns, so corporation only keeps when it can earn higher ROI than shareholder

Free to Choose: A Personal Statement, 1980 - Dedicated to Ricki and Patri. See videos below. 

Tyranny of the Status Quo, 1984 - Points out that harder to make good changes in our system than in parliamentary system, also harder to make bad changes. UK moved much quicker to welfare state because of this structure. IRS was chief obstacle to implementation of withholding tax. Government since 1897 has Board of Tea-Tasters, $125,000/year, still existed in 1984! It was finally shut down on March 25, 1996.

Two Lucky People: Milton and Rose Friedman Memoirs, 1998 - 2 children, 4 grandchildren, 59 years married. Second child, David Director Friedman, born Feb 12, 1945, degree in physics. Milton’s natural father died when Milton was 15. Intended major in mathematics, only work was as an actuary; took some exams, passed some, failed others—most difficult exams ever taken! Milton met Rose in Economics 301, Price and Distribution Theory, Univ. Chicago, taught by Jacob Viner.

First law of bureaucracy: the only feasible way of doing anything is the way it is being done. Established the Milton and Rose D. Friedman Foundation, vouchers, etc. Says calling for a state conventional would be most effective way to get Congress to act on balanced-budget, tax-limitation amendments. “Barking Cats” (2/19/73) one of his best columns ever written: page 362-3.

Decided testifying before congressional committees was a waste of time. Thought Nobel prize may do more harm than good, gives people importance utterly unjustified. Wanted his work judged 25-50 years after his death. “Judged by practice, we have been, despite some successes, mostly on the losing side. Judged by ideas, we have been on the winning side. We are in the mainstream of thought, not, as we were fifty years ago, members of a derided minority.”

The Making of Modern Economics, Mark Skousen

To keep the fish that they carried on long journeys lively and fresh, sea captains used to introduce an eel into the barrel. In the economics profession, Milton Friedman is that eel. —Paul Samuelson

Karl Marx, the phrenologist; then came Stanley Jevons, the astrologer, who was followed by Maynard Keynes, the palm reader. Now we have Milton Friedman, the handwriting analyst!

In the late 1960s, Friedman was invited to debate strident Keynesian Leon Keyserling at the University of Wisconsin. Keyserling read the list of fourteen items Friedman highlighted as “unjustified” government activities in Capitalism and Freedom. Protesters made fun of the points as he read them, hoping to win the debate. Point 11 called for the elimination of military conscription during peacetime. Friedman’s opposition to the draft brought ardent applause and won him the debate.

Thomas Sowell said Friedman was a tough grader—he got one of only two B’s in his price-theory class. He gave no A’s.

Friedman’s Big Ideas

  • Education vouchers

  • Negative Income Tax

  • Flexible exchange rates (1940, adopted in 1970s)

  • Repealing the Draft

  • Natural rate of unemployment, 1967 AEA address, so goal of 0% unemployment is not realizable

Friedman Videos

Episode #81 - Free-Rider Friday - February 2016

Ed’s Topics

Frank Kless, Ed’s Dad, would have turned 73 today. He taught Latin part-time and instilled in Ed a fascination with etymologies. Ed shared a story about the word - mortgage.

Ed and Ron will be at the Libertarian Party Presidential Debate in San Antonio, April 8th, which will air on VoiceAmerica’s Live channel. Follow along on Twitter at #LPDEBATE.

Article by Steven Landsburg on how Republican party faces a classic prisoners dilemma with Donald Trump.

Economist Donald Bordreaux asks the following: How much money would it take for you to live back in 1916?

The Apple vs. FBI imbroglio was discussed. Should Apple be forced to create a back door to access its iPhones? Both Ed and Ron say no, but don’t dispute the government’s ability to get what it wants.

Speaking of iPhones, the first person to hack an iPhone, George Hotz, is now working on a driverless car, as explained in this article from Bloomberg, and be sure to watch the accompanying video, it’s truly amazing.

Ron’s Topics

Is Twitter flat lining? From The Economist, “Clunky Dorsey,” February 13, 2014.

From an article in The Economist’s The World in 2016, they are predicting a backlash over fees charged by law firms, and more accounting scandals, possibly in the tech industry.

From The Economist, January 2, 2016, “Prediction 2016.” Prediction markets go back to 1820s, when punters made public wagers on candidates. The losers who couldn’t pay were subject to public humiliation, such as rolling peanuts up and down streets with toothpicks, eating crow, etc. 11 of 12 elections between 1884 and 1940 were correctly predicted.

PredictIt.org, sponsored by Victoria University of Wellington, NZ, has an $850 wager cap, authorized by America’s Commodity Futures Trading Commission, as does Iowa’s Electronic Markets.

Are the Chinese becoming supply-side economists? Check out “Reagan’s Chinese echo” from the January 2, 2016 issue of The Economist.

Episode #80 - The Future of the Legal Profession

Ed and Ron were honored to interview three Australian lawyers, two who practice, and one consultant to the profession. The topic was the future of the legal profession, as set forth in the Richard and Daniel Susskind book, The Future of the Professions.

David Wells is Managing Principal of Moores. David is an Accredited Specialist of the Law Institute of Victoria in Commercial Litigation and is a Law Institute of Victoria Approved Mediator. He has acted in commercial dispute resolution in all Court jurisdictions for over 20 years. David’s expertise is in resolving major commercial disputes and managing complex legal issues for medium to large sized corporations, local government and industry bodies.

As a director of View Legal, Matthew Burgess specializes in trusts, tax, superannuation, asset protection, estate and succession planning and related areas, and has been recognized in the ‘Best Lawyers’ list since 2014 in relation to trusts and estates. He has enjoyed developing a number of innovative legal products for advisers and their clients, including establishing what is generally regarded as Australia's first virtual law firm. He speaks for many industry associations, accounting firms, financial advisers and commercial businesses, on a variety of specialist legal topics. Since 2010, he has increasingly provided assistance to other professional service firms in re-engineering their business models. In early 2006 he gave away the family television (effectively replicating for his 4 daughters the TV free upbringing he had). He’s published a collection of illustrated children’s stories in addition to his multiple published law related books and business book “The Dream Enabler.”

John Chisholm is a third generation lawyer who prior to establishing John Chisholm Consulting in 2005, has held senior executive positions in leading Australian legal and accounting firms for more than 17 years, transforming them into market leaders in their fields. He is recognized for his management, leadership and visionary skills, as well as his ability to think outside the square. As part of his consultancy practice John was part-time Executive Chairman of the Melbourne practice of PKF Chartered Accountants & Business Advisors (Now BDO Australia) from 2006-2008, guiding them through a full financial integration with PKF Sydney and Brisbane. John was admitted to practice as a Barrister & Solicitor in 1979, and practiced principally in commercial and property law. He is a member of the Law Council of Australia, the Law Institute of Victoria, the Australian Legal Practice Management Association and also a senior fellow of the VeraSage Institute, an international think tank devoted to professional firm pricing, leadership and strategy.

We discussed the following questions: 

  • Do you agree with the book’s overall premise of entering a post-professional society?

  • What struck you most about the book, or convinced you of its premise?

  • How are you advising your professional customers?

  • How are your firms adapting to these changes?

  • In our interview with Daniel Susskind he discussed the concept of Latent demand. When John and I spoke with Chief Justice Wayne Martin (Perth, WA), he was also concerned about access and the increasingly cost of justice? Lawyers have offered a Rolls Royce and everyone else is walking.

  • What did you disagree with in the book?

  • What do you think about judges being replaced by an IBM Watson-type system?

  • Are you optimistic or pessimistic about the future of the legal profession?


Episode #78: Why Is Movie Theater Popcorn So Expensive? Economic Puzzles and Paradoxes

. . . [M]en are fond of paradoxes, and of appearing to understand what surpasses the comprehension of ordinary people . . .

—Adam Smith 

Why is movie theater popcorn so expensive?

Why don’t we observe movie popcorn price wars, similar to what other industries engage in from time to time? When asked this question, the overwhelming majority of businesspeople will answer, Because there is no competition—the movie theater has a captive audience. Other common explanations include:

  • Limited selling time

  • High fixed cost of operating concession stand

  • It is how the theater owner makes a profit

  • Higher clean-up costs imposed by snack eaters

  • Tastes and smells better than you can make at home

  • Part of the experience of seeing a movie

  • Because people will pay for it

At first glance, all of these answers appear reasonable, except to an economist. The most popular response—captive audience—leads to the question of why there are no pay toilets in the theater? You are certainly a captive audience in that regard, but perhaps theater owners understand that if they installed pay toilets they would lose at the box office what they made from the bathrooms.

The high fixed costs, in terms of scarce square footage, equipment, fixtures, clean-up costs, and required employees, is certainly a plausible reason, but does not really account for the large premium price of popcorn. To say it is where the theater owners make their profits is definitely true, but begs the question of why they do not make the profits from ticket sales and sell more popcorn at closer to cost?

Eating popcorn is certainly part of the experience of going to the movies, and people will pay for it, yet this explanation is still incomplete.

Assuming theater owners want to maximize their profits, what do the theater owners know the rest of us, perhaps, do not. The consummate economist Steven Landsburg provides the answer in his book The Armchair Economist:

I believe he knows this: some moviegoers like popcorn more than others. Cheap popcorn attracts popcorn lovers and makes them willing to pay a high price at the door. But to take advantage of that willingness, the owner must raise ticket prices so high that he drives away those who come only to see the movie. If there are enough nonsnackers, the strategy of cheap popcorn can backfire.

The purpose of expensive popcorn is not to extract a lot of money from customers. That purpose would be better served by cheap popcorn and expensive movie tickets. Instead, the purpose of expensive popcorn is to extract different sums from different customers. Popcorn lovers, who have more fun at the movies, pay more for their additional pleasure.

This answer is more precise, since the important point is that “some moviegoers like popcorn more than others,” and the theater owner cannot separate these customers when they are outside queuing up for the movie. A method was needed to separate the snack eaters from those who just want to watch the movie, which the concession stand provides since it allows customers to divide and self-identify themselves.

This may seem a subtle point, but it is highly profitable, since segmenting different types of customers allows the theater owners to charge them varying prices depending on the value received.

Students, children, and people with large families are usually more price sensitive, and not likely candidates to spend money on snacks. The theater owner does not want to turn these customers away, and hence keeps the box office price lower by charging higher prices to snack eaters.

What you are really buying when you purchase a movie ticket is an opportunity set—a chance to enjoy the movie, or to enjoy it with popcorn. Economists call this a two-part tariff, defined as a pricing strategy in which the customer must pay a fee in exchange for the right to purchase the product. Examples abound of this strategy: country clubs charging membership fees and monthly dues; Gilette charging for the razor then the blades; amusement parks charging an entrance price followed by a price for each ride.

Some people recoil at the thought of price discrimination—charging different prices to different customers—claiming the practice is blatantly unfair and should be illegal. But what would happen if the practice were outlawed? Theater owners, airlines, restaurants, and myriad other businesses would have to increase prices for the very customers who are least able to afford a higher price—children, students, large families, senior citizens, and so on.

By engaging in price discrimination, businesses are actually increasing social welfare and making more products and services available to the poorest members of society. This is not to imply that price discrimination is based on race, gender, religion, or ethnicity, but rather is based on ability and willingness to pay.

If you found this answer for why movie theater popcorn is so expensive thought provoking, welcome to price theory. The German poet Goethe thought double entry bookkeeping “among the loveliest inventions of the human mind.” One should say the same about price theory, as it truly is “one of the great products of the human mind,” as economist Donald (now Deirdre) McCloskey explains in his textbook, The Applied Theory of Price:

The theory of price is one among the larger intellectual achievements of the nineteenth century, such as the theory of heat engines, the decipherment of hieroglyphics, the professionalization of history, the invention of abstract algebras, and the theory of evolution. Price theory explains much human behavior.

Since price theory offers tremendous insight into human behavior, it is worth the time and effort to study it in greater depth. It is sometimes said that economics is nothing but refined common sense, which is certainly true. Yet many myths about this crown jewel of the social sciences persist, even among businesspeople.

Therefore, when trying to answer some of the puzzles and paradoxes Ed and I will present in this series, it’s useful to use the economists’ toolbox in thinking about the issue at a deep level, including:

  • Price Theory

  • The assumption of rationality

  • The subjective theory of value

  • Behavioral economics, and irrationality

Here are some of the other questions we posited on the show.

Why do laundries charge less for men’s shirts than for women’s?

For example, $4.00 for men; $9.00 for women. Is it because when you move the buttons from right to left it costs more?

Is it because women’s blouses are made of more delicate fabrics? But then why not just charge different prices for different fabrics?

Is it because women demand higher-quality work, and require more re-works?

Is it because men’s shirts are machine pressed, whereas women’s are hand pressed? Then why not different prices for different types of pressing?

Why discriminate against women, not men? Men care less, and thus more likely togo without clean shirts? Women could as easily do their own laundry.

Dry cleaners next to each other, if all earning high profits from women, why none specialize in just women (e.g., charge $8 across board to get all womens business, and none of the mens). Yet none have done this? Hence, women’s clothes can’t be much more profitable

Could be due to customer loyalty? To a dry cleaner?

The more competitive an industry, the less price discrimination usually seen (farmers don’t give senior citizen discounts); likewise gas stations—sell at one price to everyone.

Either there is price discrimination, or women’s clothes are more expensive to clean and press, and it’s a cost explanation.

Do companies really plan for obsolescence?

Ed's Light Bulb stash

Ed's Light Bulb stash

Ann Landers use to rail against pantyhose and light bulbs, arguing that companies deliberately made them subject to ruin so they could charge more.

But this is ridiculous. If you have to spend $5 twice a month for pantyhose (or approximately $120 per year for pantyhose), any company would want to engage in only transaction for $120, or even a bit less, then 24 transactions generating the same revenue. It’s the same with light bulbs.

Because most women don’t want to spend $120 for hose they might lose in the laundry, or don’t have $120 in cash now. Thus, the company is actually insuring your risk and/or providing a loan.

If your odds of winning the lottery are approximately the same if you purchase a ticket and if you don’t, why is it rational for people to play the lottery?

Well, it might not be rational. But a lottery ticket is a cheap price to pay for a fantasy.

There’s something to the Endowment Effect here, too. When the lottery was up to $75 million years ago, I asked audience members who had purchased tickets to sell me theirs at 50 times what they paid. There were no takers.

Why do men spend less on medical care than women?

Probably because men are more likely to die violently, and die sooner. Also, women tend to be sick more and more likely to seek medical care. Giving birth is also a factor.

 

Why is milk sold in rectangular containers, while soft drinks are sold in round ones?

Another excellent book that contains puzzles and paradoxes is Robert Frank’s The Natural Economist: In Search of Explanations for Everyday Enigmas.

The book is a summary of questions posed by his economic students, and then the essays they wrote to answer the enigmas using economics. This question is from the book.

Rectangular containers use less shelf space, which is more valuable and costly since it’s refrigerated for milk, whereas Coke can be sold on open shelves.

Also, Coke is easier to hold, since its often consumed from the container.

Economist Russ Roberts interviewed Robert Frank on his podcast EconTalk, where they discussed some more of these economic puzzles.

One of the others they discussed was why the Nigerian Prince email scandal continues to this day, even with all the spelling mistakes.

It’s essentially a targeting device: only the naïve are going to fall for it at this point. It still traps some, so this weeding out is effective.

Episode #77 - Free-Rider Friday - January 2016

Ron’s Topics

Value Pricing in Tanzania

From Kenneth Morrison, CPA, CA, at Provision Accounting Group in Richmond, British Columbia, an excellent example of culturally-adjusted Value Pricing from Tanzania.

Here’s some excerpts from his letter to us:

Value pricing lessons from Africa

Nancy and I just returned from a three-week trip to Tanzania and I saw two pricing options that should make Ron proud. 

Value Pricing lesson 1 - Dodoma Dental Clinic

The dental clinic in Dodoma caters to all income levels but the real objective is provide low or no cost dental care to those most in need and least able to pay. However the dentist in charge, quite a remarkable man, is also required as best he can to bring the clinic to a cash flow breakeven position.

He has three-pronged pricing option available as there are three prices available for the same procedure. The strategy is also brilliant in that it has not only three pricing options, his strategy also takes into account the different high value points during the process.

The prices are very differing amounts for exactly the same procedure:

Premium (or fast track as he calls it)                                    $1,000

Regular                                                                                   $500

Free, based on financial capability (Tip Clause)                    $000

Premium is double the price of regular service and is available 24/ 7 because of the “importance” and “busy schedule” of the patients. These patients are ushered directly into the chair through a side entrance, not only is there no waiting there is no need to be seen as taking advantage of their status. The high value point, either because of pain or ego is at this point, price is almost no object. This is of course very profitable for the clinic.

Regular is in most cases for the insurance based client who is not troubled by waiting a reasonable time and wants to take full advantage of a health insurance policy so rarely will they select the premium service. This regular price is based on the maximum price of most insurance schedules. This price is also profitable for the clinic.

Free, after a financial resources review, is for those the clinic really wishes to help who otherwise would have no access to dental care. (One dentist for 170,000 people in East Africa according to the World Health Organization). However upon leaving the clinic after the “free” treatment, problem solved and pain free, the patient encounters a donation box on the wall and is encouraged to make a contribution (an extremely high value point, pain free and happy). For returning patients they are aware of the “tip” box and regular contributions are made.

The multilevel pricing allows an individual choice and the patients with the ability to pay almost always taking the most expensive option and which is presented to them at the high value point.

The clinic is presently in a positive cash flow and serving a significant needy population. The premium service is a tax on the rich happily paid to subsidize dental care for the poor.        

Pricing Lesson 2 - College Dorm Rooms

Education is very prized in Tanzania and many students and their families struggle to pay the costs of tuition, materials and room board.

One university has a very creative structure in place for accommodation. This pricing structure, as with the first example, has been done taking into account the culture in the country, as crowded accommodation is the norm.

Each room contains two bunk beds, (sleeping room for four) two fairly large tables and two closets

The accommodation is priced as follows:

One person per room                                                             $1,000 per person

Two people per room                                                               $600 per person

Four people per room                                                               $480 per person

This is perfectly priced to maximize the return for the university while keeping the parents who are writing the checks also happy.

Firstly no parent (in this culture or any other, I would hope) will agree to $1,000.00 amount

Some parents may agree to the second choice of $600.00 however now the total revenue for the university is $1,200.00 so everyone is still happy. 

Most parents will insist on the third option which maximizes the return for the university at $1,920.00, almost double option one and yet all stakeholders are pleased except the student, although in this culture the student likely has more space than at home and is probably ecstatic to be away.   The costs for the university are virtually the same in any of the three options as the fee is for accommodation only.

The interesting point is that both these pricing strategies work because of the cultural context. I suspect for a variety of reasons, including spoiling our children, they might not work as well for our culture.

Our firm formed a charitable foundation, Provision Charitable Foundation, and since 2009 have been involved in projects in Tanzania. We are very proud of having graduated our first three medical doctors this year and have a variety of other projects underway. However we have also begun the process of out sourcing basic accounting work to an office that we have opened in Kampala, Uganda. As a result we are providing well-paying white collar jobs that are desperately needed while increasing our own profitability.   

If you have are curious about what we do in Tanzania please visit our website or call and we would be pleased to discuss.

Regards

Kenneth A Morrison CPA CA

Cuban Baseball Crisis

From The Economist, December 19, 2015. 

Of the number of Latin Americans playing Major League Baseball (MLB) before 1959, two-thirds were Cuban, even though many were black and banned from MLB, until the color barrier was broken in 1947.

In2007, ten Cubans played MLB, and 27 today, earning $100 million annual salary. This has created an elaborate infrastructure of smugglers to get athletes out of Cuba, and they take a 30% cut.

Raul Castro, president since 2013, wants a “normalized” system, whereby the players travel freely, and returns to Cuba in the off-season. He also wants to impose a 20% tax (at least it’s less than the smugglers!).

The problem is the trade embargo with Cuba can only be lifted by Congress, and it precludes a tax on foreign earnings. The Economist claims MLB has much in common with Cuban socialism in its $9 billion per year business—it levies a tax on teams with high payrolls, etc.

However, Cuban players over 23 years oldwith at least five years in the National Series are exempt from the salary cap and can auction to highest bidder, which of course reduces team owner profits.

So, MLB is likely advocate a tightly controlled system of acquiring Cuban players, rather than a free-for-all.

Seems to be there’s two bootleggers and no Baptists!

Ed adds: Coincidentally, this week the New York Mets reached a contract agreement with Cuban native and slugger Yoenis Cespedes. The contract has an innovative structure in that it is a $75 million deal, front loaded with $27.5 million in the first and includes an opt out clause after that first year. At first pass is seems a bit odd, but as it has been analyzed it is possible that this is a bit of an innovation in megabucks sports contracts. 

$400 to Eat at Olive Garden?

Article from Money.cnn.

The interesting thing to me about this article were some of the comments. They completely understood the logic behind this pricing, and didn’t complain about “gouging,” as people tend to do with Uber’s Surge Pricing.

Ed adds: You would have to pay me to eat at the Olive Garden. 

Corporate Social Responsibility and Tax Avoidance

From The Economist, January 2, 2016, Schumpeter, “Social saints, fiscal fiends.”

Pfizer prides itself of its corporate social responsibility, but that didn’t stop it from seeking a tax inversion $160 billion takeover of Allergan, and moving its headquarters to Ireland. It would have saved $1 billion in corporate tax had it done this Companies that do most in CSR also the biggest tax avoiders, and spend more on tax lobbying

Economists says both CSR and tax avoidance is done to maximize profits. CSR also helps attract talent.

Another theory is that taxes and CSR are substitutes; the less tax a company pays the more for CSR.

Here’s a thought: How about the USA lowering the corporate income tax, the highest in the world?

Ed’s Topics

David Bowie Bonds

David Bowie was not only an innovative musician, he was also a financial wiz. In 1997 he raised $55 million by selling bonds secured by the future revenues from his music catalogue. Turns out that with the advent of Napster and iTunes, this was pure genius. 

Here is my favorite Bowie song:

Koch Brothers’ Wealth Doubles During Obama Term

Premise A: During the Obama Administration the net worth of the Koch brothers went from $19 billion in 2008 to $41 billion today.

Premise B: The Koch brothers are money grubbing bastards who will stop at nothing to increase their fortune. 

Conclusion: The Koch brothers must be about to launch a campaign to repeals the XXIV Amendment to the US Constitution to help secure a third term for POTUS. 

This is not happening so one of the premises is wrong. Listen to the episode to find out which one and why?

Bitcoin’s Blockchain

Ed’s link/article:

Ron mentioned that the SEC approved Overstock.com CEO Patrick Byrne’s plan to issue stock using blockchain technology. Overstock did issue private bonds using blockchain previously (from the Mises Wire, December 16, 2015).

The Economist calls the blockchain technology a machine for creating trust, “The trust machine,” in its October 31, 2015 issue:

The spread of blockchains is bad for anyone in the trust business—the centralized institutions and bureaucracies, such as banks, clearing houses and government authorities…

The blockchain is essentially a public ledger (sometimes called a distributed ledger). It doesn’t sound sexy, but neither did double-entry bookkeeping.

NASDAQ will start using blockchain for trades of privately held companies. Everledger uses blockchain to protect and verify luxury goods: diamonds, rare art, etc.

Russ Roberts has an excellent interview on his EconTalk podcast with Nathaniel Popper, author of the acclaimed book, Digital Gold.

CIA OSS Manual

In January 1944 the Office of Strategic Service (forerunner of the CIA) published the Simple Sabotage Field Manual. In it they make suggestions on how ordinary citizens behind enemy lines can help in the war effort. To me, part of this reads like a advisory column to folks who fill out timesheets. See pages 28-30. 

Episode #76: Lessons from the Trading Game

Peter Drucker taught that “Business is society’s change agent. All other institutions are designed to conserve if not to prevent change.” Companies exist to create wealth, no other institution can do it.

By playing the Trading Game, participants in this session will learn the subjective nature of value, and how increasing the availability of goods and services your company offers leads to prosperity, happiness, and a higher standard of living for all.

Participants will come away with a deeper understanding of how business is a serious moral enterprise—not the simplistic idea it is based on greed—and that cooperation is far more prevalent than competition.

The game begins when the participants randomly draw a card from a deck, each one containing an item they will now own (each card will contain an electrical item you’d find at Best Buy, of approximate equal price, such as an electronic gadget, Coffee Maker, memory stick, cell phone, DVDs, etc.).

The group is then divided into, say, ten groups of five participants each. They are instructed to rate how much they like their gift, using a scale of one to ten. The total score for each group is then summed.

Then the instructor allows the participants to trade only within their group of five, allowing them to exchange for a gift they value more. The gifts are then scored again, and the total score increases.

Then the instructor allows the entire class to trade, expanding the number of potential trading partners from four to forty-nine. With many more options, the complex trades that take place would make an economist proud.

We have discovered some people don’t trade after discovering their gift is very popular, but they do increase its score (the Bandwagon and Endowment Effects). Other scores may actually decrease after an exchange, as Buyer’s Remorse sets in. Overall, though, the total score goes up again.

This may be a simple game, but it does a wonderful job illustrating complex economic principles in a way that a child can understand. There are at least seven lessons to take away from this game:

  1. Trading freely can add value even though the traded items remain physically unchanged.

  2. The more trading partners there are, the better—wealth and happiness are increased.

  3. A free exchange is a win-win game, not zero-sum.

  4. The game is win-win because of the rules set up beforehand—theft and coercion are not allowed, nor does anyone have to trade if they don’t want to.

  5. Scarcity is almost always real. You can’t have everything, so have to make tradeoffs.

  6. Opportunity costs—that is, economics does not ask “What do you want?,” but rather “How much do you want it?” which involves making tradeoffs, not having final solutions.

  7. Economic value is in the eye of the beholder.

  8. People trade, not governments. The Trade Deficit is an accounting fiction that doesn’t describe the economic fact that individuals are made better off from trading.

If China invented a vaccine against cancer would you not buy it because it would increase our trade deficit?

By operating a company, you are expanding the choices available to the consumer. This is the real source of wealth in an economy—the variety of goods and services available. If it were otherwise, any country could achieve wealth simply by printing more pieces of paper money.

Perhaps this is better understood if we think of Nathan Mayer Rothschild, one of the founders of the international Rothschild banking dynasty, probably the richest man in the world at the time of his premature death in 1836 at the age of 58 from an infected abscess. Despite having the best medical care money could buy, he did not have access to antibiotics that today could be purchased from any pharmacy for a few dollars.

Would you rather have Bill Gate’s income in today’s world—with its abundance of goods and services—or during the time of Rothschild? Another way of articulating this is that the wealth of nations resides in consumer well-being, not profits.

That said, your company has to understand what customers truly value, since all economic value is in the eye of the beholder. How your firm monetizes the value it creates for customers is your business model.

Ed and Ron learned about the trading game from Jay Richard’s excellent book, Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem.

You can download sample cards here.

Episode #75: Interview with Mark Koziel

Ed and I had the honor of interviewing Mark Koziel from the American Institute of Certified Public Accountants. He VP of Firm Services & Global Alliances at the AICPA.  He oversees the development, ongoing improvement and delivery of services to members in PCPS/Firm Practice Management as well as International relations with various CPA related groups. He frequently speaks on CPA issues around the country. Prior to joining the AICPA, Mark Koziel served as Director of Media Planning for a political consulting firm in East Aurora, NY serving Presidential, Senate, Congressional and Governor races around the country. 

Mark was one of the founding members of the Young CPAs committee and served as Chair for two years before being appointed to the Buffalo Chapter Board and serving as President for the 2003-2004 Fiscal Year, one of the youngest President’s in the history of the Buffalo Chapter. Mark earned a BS in Accounting from Canisius College. Mark has been named one to the Top 100 Most Influential People in Accounting by Accounting Today annually from 2008-2014.

Macro Issues in the Accounting Profession

  • What are some of the major trends happening in the accounting profession?

  • How about trends around the world?

  • Rules vs. Principles debate?

  • Big 4 Consulting revenue projected to be greater than the Big 3 (Bain, McKinsey, BCG) consulting firms.

  • Auditor reform rotation in the EU.

Micro Issues

  • What’s happening in firms with Value Pricing? Is it diffusing?

  • What about timesheets?

  • What about firm innovation?

  • What about profession’s innovation?

  • PWC’s HALO audit software—runs algorithms through entire data sets—no more sampling (100% of customer transactions)

We also discussed the book, The Future of the Professions: How Technology Will Transform the Work of Human Experts, and how it will impact the accounting profession.

What advice would Mark give to a young aspiring professional?

Thanks to Mark for a thought-provoking discussion, as always!

Episode #74: Interview with Daniel Susskind

Daniel Susskind is a Lecturer in Economics at Balliol College, Oxford, where he teaches and researches, and from where he has two degrees in economics. Previously, he worked for the British Government - in the Prime Minister's Strategy Unit, in the Policy Unit in 10 Downing Street, and as a Senior Policy Adviser at the Cabinet Office. He was a Kennedy Scholar at Harvard University.

Professor Richard Susskind OBE is an author, speaker, and independent adviser to international professional firms and national governments. He is President of the Society for Computers and Law, IT Adviser to the Lord Chief Justice of England, and Chair of the Advisory Board of the Oxford Internet Institute. His numerous books include the best-sellers, The End of Lawyers? (OUP, 2008) and Tomorrow's Lawyers (OUP, 2013), his work has been translated into more than 10 languages, and he has been invited to speak in over 40 countries.

We were honored to be able to interview Daniel Susskind about his book (co-authored with his father, Richard Susskind), The Future of the Professions: How Technology Will Transform the Work of Human Experts. 

The book is based on:

  • 8 Professions (Doctors, lawyers, accountants, auditors, architects, journalists, teachers, clergy)

  • 100 Interviews

  • 800+ sources

It lays out two futures for the professions:

  1. Technology streamlines the “print-based” industrial society

  2. Technology based internet society, with increasingly capable machines, displacing the work of professionals

They believe that gradually scenario #2 will dismantle scenario #1

How long will this take? Daniel says: "We say that we think that will happen in the 'long run' but we do not commit to timing. This is for an important reason -- the pace of change is not in our hands!

They write the professions are increasingly:

  • Unaffordable

  • Antiquated

  • Opaque

  • Underperforming

The future of the professions is too important to leave to professionals.

Folks, we can’t recommend this book highly enough. Without a doubt, it is the most important book written on the professions in decades.

Episode #73: Business Lessons from A Christmas Carol

On this episode, Ron and Ed explore the business lessons from one of the most recognized and beloved stories shared during the holidays, Charles Dickens’ novella, A Christmas Carol. While many of you know the story and seen one or more of the adaptations, many fewer of you have read the original work which, like most of Dickens, an absolute joy to read and has much to say about business practices.

“It is so good,” says Ron, “that you want to read it more slowly to savor it, like a fine wine.”

Ed is also a long time fan as is his daughter as you can see from this video clip.

Episode #72 - Free-Rider Friday - December 2015

Ed's Topics

Sent in from our listener, Hector Garcia: Netflix's paid maternity leave, along with a clip from John Oliver's show on the topic, and a TED talk that also makes the case for paid maternity leave.

Texas bans Teledoc App. Here's a Cato Institute podcast that discusses.

IBM Watson Trend App, which highlights tech, toys, and health.

"Netflix Should Ditch its Unlimited Vacation Policy," from the Huffington Post.

Manhattan DA Pushes for Lawful Backdoor Into Encrypted Phones, from NBC News.

Ron's Topics

Harvard Blog Post, "To Get More Creative, Become Less Productive."

From The Economist, "The heirs of Al Capone," discussing Meth labs v alcohol, and a classic "Bootleggers and Baptists" alliance whereby meth labs might argue for reinstating Prohibition!

The Wall Street Journal article, "Winning the Right to Save Your Own Life," by Darcy Olsen, President of the Goldwater Institute, on right-to-try laws passed by 24 states, giving terminally ill patients access to drugs.

From The Economist "Keep calm and click on: Google Books in court," discussing how a group of authors lost the case to prohibit Google Books from digitizing books because it violated copyright laws.

We also discussed Bitcoin's Blockchain technology, which some folks believe is revolutionary technology in the same way as double-entry bookkeeping. The Economist writes: "Simply put, it is a machine for creating trust."

See "The trust machine," and "The great chain of being sure about things," from The Economist, October 31, 2015,

Episode #71 - Best Business Books of 2015

Ed's Choice

Humans Are Underrated: What High Achievers Know That Brilliant Machines Never Will, by Geoff Colvin.

"Figuring out what computers will never do is an exceedingly perilous route to determining how humans can remain valuable."

Better strategy is to ask: "What are the activities that we humans, driven by our deepest nature or by the realities of daily life, will simply insist be performed by other humans, regardless of what computers can do.?"

Honorable Mentions

Uncontainable: How Passion, Commitment, and Conscious Capitalism Built a Business Where Everyone Thrives, by Kip Tindell.

A More Beautiful Question: The Power of Inquiry to Spark Breakthrough Ideas, by Warren Berger.

Uncommon Sense, Common Nonsense, by Jules Goddard and Tony Eccles.

We interviewed Jules Goddard on the January 16, 2015 show.

Ron' Choice

The Future of the Professions: How Technology Will Transform the Work of Human Experts, by Richard and Daniel Susskind.

"This book is about the professions and the systems and people that will replace them. Technology will be the main driver of this change. ...in the long run, we will neither need or want professionals to work in the way that they did in the twentieth century and before. We are advancing into a post-professional society."

We are interviewing Daniel Susskind on the show, which will run on January 8, 2016.

During the conversation Ed mentioned that his son's baseball team (10U) uses an application called GameChanger. In addition to scoring the game and tracking stats as well as performance trends, the system produces a story about each game which is Powered by Narrative Science, a company mention in the book. 

Here is a sample of one story:

Hudson Z's effort not enough to carry the Royals past the Cardinals, 4-3 

Hudson Z. held up his end of the bargain, but he couldn't guide the Royals past the Cardinals as the Royals lost 4-3 in four innings on Thursday. 

The Cardinals had no answer for Hudson, who kept runners off the basepaths in his appearance. The Cardinals managed just one hit off of Z, who allowed no earned runs, walked none and struck out none during his 1 1/3 innings of work. 

The Royals jumped out to an early 2-0 lead in the top of the first. The Royals attack began with a single from Ethan M. The Royals then tacked on more runs when Narit C scored on an RBI single by M. 

The Cardinals stayed on top until the final out after taking the lead in the second, scoring four runs on an error and three singles.

Honorable Mentions

The Great Ulcer War, by William S. Hughes, M.D.

13 Things Mentally Strong People Don't Do, by Amy Morin.

Leadership BS: Fixing Workplaces and Careers One Truth at a Time, by Jeffrey Pfeiffer.

The Forgotten Depression: 1921: The Crash That Cured Itself, James Grant.

Sage Contest Winner

The winner of the Sage Small Business of the Year Contest, in Canada, was David Cohen, Author, speaker, coach, lover of jazz, coffee bars, good conversation and baseball.

We interview David at the bottom of the hour.

Learn more about David at Theboomerbusinesscoach.com.

Episode #70 - Live from the VeraSage Symposium Boston

As you may know Ron Baker is a founder of the VeraSage Institute, a think tank for professional firms; and that Ed Kless is a senior fellow.

The Institute holds a biennial conference during which the fellows and some friends are invited to gather share their knowledge in a symposium atmosphere. 

The latest of these events took place in Boston in October 2015. This episode is a recording of a session during which Ron and Ed as well as VeraSage Fellows, Kirk Bowman and John Chisholm, had a conversation about the future of the professional firm. In addition, they took questions from other Fellows and Friends. 

We hope you enjoy this peak into the gathering.

Episode #68 - Proper Project Management

Defining the Word “Project”

Sometimes, we need to go back to the very basics. While facilitating a class on project management, I always take the opportunity to spend a few minutes defining some basic concepts, since as Plato said, “All knowledge begins with the definition of terms.” Of course, for a project management course, the first term would be project.

What is a project?

According to the Project Management Institute (PMI) a project is “a temporary endeavor undertaken to create a unique product, service, or result.”

In my experience, further refining two words in this definition provides tremendous insight into the topic of project management. They are: temporary and unique.

To understand a project as temporary is to understand that it must have a clearly defined end. Too many projects are allowed to continue on seemingly ad infinitum. More often, professionals struggle to obtain sign off from a customer to clearly end the project. These two situations are caused by a lack of, or poorly defined, project objectives. One metaphor that has helped me over the years is to think of a project as a temporary company—one that comes into existence for the sole purpose of obtaining the objectives of the project and then goes out of business.

To comprehend a project as unique is to know that while you have participated in many similar projects, each one in truly different. There is no such thing as the “plain vanilla” or standard project, especially in professional knowledge firms. Each project has a different set of goals, objectives, constraints, and of course, personalities. Customers who ask you for the “plain vanilla” project are ignorant of these facts. (Note that the same customer who asks for the “plain vanilla” project will likely state, often times only five minutes later, that their company does this “very differently” from others you many have encountered).

The Difference Between Goals and Objectives

There is clearly a difference, in good project management, between goals and objectives. Goals are what we hope to attain by undertaking the project; however, they are not always attained by project end because there may be other external influences that factor into their achievement or lack thereof. Objectives are, well, objective, in that they can clearly be checked off as having been attained by project end.

For example, “increase sales by 10 percent” would be a goal of the project not an objective. An objective would be the “installation of the new accounting system.” The acid test question to distinguish one versus the other is, “Can this (goal or objective) be clearly accomplished when we consider the project to be completed?”

I am not saying that we should not continue to track project goals, post completion; I am just noting that they need not be accomplished in order for us (and the customer) to consider the project done.

Lastly, if a customer wants you to guarantee the attainment of goals than I would have you consider contingency pricing. For example, if they do increase sales by 10 percent, you should be paid at least 30 percent of that number. In a sense, a customer asking you to guarantee goals, is like that customer asking a lawyer to guarantee winning a case and therefore subject to a contingency arrangement. I would, however, guarantee meeting all objectives.

Now that we have defined some basics of project management, let us put it all together into the Triangle of Truth.

The Triangle of Truth

One of the basic principles of project management is what is known as the triple constraint. Some call this the scope, resource, time triangle. I call it the Triangle of Truth.

The concept is simple. A project consists of three interrelated variables: scope, resource (some say cost), and time. These variables are like the angles of a triangle. If you recall from geometry class in high school, in order for a polygon (shape) to be considered a triangle the three angles must add to 180 degrees—i.e., Angle A (Scope) + Angle B (Resource/cost) + Angle C (Time) = 180. If these do not add to 180 you do not have a triangle. So, if you make a change to the value of one of the angles, one of the other two or both must also change to compensate or else the figure is broken.

The big problem with most professionals is that they are lousy and lazy about scope development. They prefer to concentrate on the second two elements, cost and time. In some cases, the professional feels pressure from the customer or prospect to give answers to the cost and time questions first. To me, this would be the equivalent of purchasing the lumber for a new house before going to an architect for plans; or a doctor writing a prescription before performing a diagnosis. Remember: prescription before diagnosis equals malpractice!

Why do we need a balanced triangle? If we go back to the analogy and take it one step farther, let us draw a circle inside this triangle, the size of the circle represents the quality of the work performed. The largest perfect circle can be drawn inside a triangle that is equilateral—that is, all sides the same—and, therefore all angles equal to 60 degrees.

This is an important point, because for a professional knowledge firm (PKF), quality is defined exclusively by the customer, not the professional. The professional cannot say that they do quality work. Rather, their customers say that about them.

Great Moments in Value Pricing History - Ed Kless

What happens in most firms is that scope is often poorly or not-at-all defined. I am sent an email a week from someone asking me to assist them with scope creep on a project. My first response is to ask them to send me a copy of their scope document. In almost all cases, I am sent back a proposal with a range of hours. In replying to this I tell the poor sap that I have some good news and some bad news. “The good news is you do not have scope creep; the bad news is you are over budget.” What I mean is that since they never defined scope to begin with they are not outside of scope. This leads us to the scope document.

Elements of a Scope Document

I submit the following as the required elements (consultants call them inclusions) of a scope document.

  • Scope statement

  • Objectives

  • Constraints

  • Project structure

  • Roles definition

  • Project team definition

  • Assumptions

  • Deliverables

  • Scope details or functional requirements

  • Project change control

  • Future projects list

  • Approval

Elements of a Change Request

In almost all of the small and medium business information technology projects that I have been associated with there have been usually dozens of change requests. In fact, I cannot think of a single project, however small, that there were none. I believe it would be Twilight Zone weird that any project would have no change requests. Any project worth scoping will be, by definition, one that lends itself to changes. If a customer expects that a project will not have any change requests, he is probably not a good customer to have. No one can predict the future.

Please note that the language that I use for these is change request, not Cchange Oorder. They are, by definition, requests and may be accepted or rejected by the project sponsor (steering committee, on a larger project). A change request is simply an acknowledgment that something that affects the Triangle of Truth needs to be adjusted. In some cases there may not be any budgetary or price change. For example, during an implementation of software the controller may leave the company. The resolution for this may be to push the “go-live” date of the project out, rather than adjust the financial resources. Even if there is no change to the budget, this is still a change request and needs to be approved by the project sponsor. Let us look at the elements of a change request with some commentary.

  • Project name

  • Change number

  • Project manager name

  • Requestor name—In my view on small projects anyone on the project (customer or consultant) can request a change. In many cases the project manager would assist in the creation of the change request document and would most certainly review it before presenting it to the executive sponsor.

  • Requested date

  • Resolution requested by date—“ASAP” is not an allowed date. ASAP means different things to the sender and receiver. To the sender it means now, emphasis on the word soon. To the receiver it means whenever, emphasis on the word possible.

  • Description of change

  • Business reason for change—This section must describe the economic benefit that the change will create. In short, if the economic benefit does not exceed the cost section below, it is unlikely the change will be accepted.

  • Impact on scope—In a sense a change request is a mini scope document. Please remember that when scope changes there must be a change to cost and/or time in the Triangle of Truth.

  • Impact on price—This would detail the pricing change needed to perform the change.

  • Impact on time

  • Impact on quality—Remember if quality is affected, all three of the other elements (scope, cost and time) must also be affected.

  • Change accepted or rejected

  • Reason for rejection, if rejected

  • Signatures and dates

  • Lastly, change requests should be listed in a separate change request log if the changes are great in number.

Customers do not care about the amount of time spent on their work—or effort. They do, however, care about the duration of that work. Duration is the number of days or weeks that a project will take to complete. It is the window of time in which the result must be achieved. 

Effort is the actual amount of work, usually expressed in resource hours. A task can have a duration of 8 hours; however the effort could only be 15 minutes. Alternatively, a task with duration of 8 hours could also have 24 hours of effort. Project management is more concerned about duration than effort.

Turnaround time would emphasize when a project or case will be done, not how many hours will go into its completion. It is similar to FedEx guaranteeing the package will arrive on your doorstep by 8:30 a.m. It is the result that counts. Hence, turnaround time is an example of a Key Predictive Indicator that measures what customers care about.

Episode #67 - Free-Rider Friday - October 2015

Ed's Topics

New Apple TV New Features, but still no Amazon Prime App. 

Visitors to Karl Marx's gravesite resent having to pay. Wall Street Journal article.

Would you allow auto insurance companies monitor your driving habits? For example, Allstate.

Adidas now offers 3-D printed shoes.

Inventor creates a beer cup that fills from the bottom potentially ending the beer line as we know it. 

Ron's Topics

VW's Market Share Myth

Volkswagen's emission testing scandal was reported in The Economist, September 26, 2015, "A mucky business." One of the reasons cited was VW's desire to overtake Toyota as the world's largest auto manufacture.

The market share myth on parade. See our shows, The Top 10 Business Myths, Parts I and II, from September 26, 2014 and October 3, 2014 for more on this.

Interesting to note that cars carrying the VW badge make up 60% of sales but the profit margin on them is just 2%. VW obviously makes its profits from its other brands, including Audi, Bentley, Porsche, Lamborghini, etc.

Right to Try Laws Sweep the Country

Right to Try laws allow doctors to prescribe medication being safely used in clinical trials for patients diagnosed as terminally ill. These laws goes beyond the FDA's current "Compassionate Use" policy, allowing patients access to drugs that have passed Phase I clinical trials, since that exemption requires 100 physician hours of paperwork, hence only about 1,000 applications are approved annually.

Right to Try laws have passed in AZ, AK, CO, IN, LA, MI, MS, MO, MT, ND, SD, UT, VA, WY, and CA has a bill on the Governor Brown's desk. The FDA, so far, has not challenged these laws, and it's believed if it did, they'd lose in court--and in the court of public opinion.

Prediction Markets on the US Presidential Race

Check out the Iowa Electronic Market and PredictIt websites for, usually, more accurate predictions with respect to political races than pollsters.

eBay No Long an Auction Site

The Economist reported in its August 29, 2015 issue that eBay reports only 20% of its sales are made in an auction. Sixty percent are now a flat price and the rest are best offer.

Sage Small Business Awards US Prize Winner Interviewed

Michelle James, founder of Forever Cakes, is an entrepreneur with an inspiring story. Here is a picture of the cake she mentioned as here favorite. We have to admit, it is pretty amazing! 

Michelle James' incredible cake. 

Michelle James' incredible cake. 

Episode #66 - The Death of Standard Cost Accounting

Andrew Carnegie’s favorite saying might have been, “Watch the costs and the profits will take care of themselves,” but in an intellectual capital company, it should be,  “Watch your value and price, and the profits will take care of themselves. Management accounting is a thoroughly inward-looking discipline, from cost accounting to the DuPont return on investment (ROI) formula. One of the century’s most influential accounting academics was William Paton, who in a 1922 treatise described what he believed to be the cost accountant’s chief activity:

“The essential basis for the work of the cost accountant—without it, there could be no costing—is the postulate that the value of any commodity, service, or condition, utilized in production, passes over into the object or product for which the original item was expended and attaches to the result, giving it its value.”

Fortunately, Paton later repudiated this notion that costs attached to a product as it moves through the factory in a speech he gave at a conference in 1970:

“The basic difficulty with the idea that cost dollars, as incurred, attach like barnacles to the physical flow of materials and stream of operating activity is that it is at odds with the actual process of valuation in a free competitive market. The customer does not buy a handful of classified and traced cost dollars; he buys a product, at prevailing market price. And the market price may be either above or below any calculated cost figure.”

In their outstanding book, The Strategy and Tactics of Pricing (third edition), Thomas T. Nagle and Reed K. Holden offer the following indictment of cost-plus pricing:

“The problem with cost-driven pricing is fundamental: In most industries it is impossible to determine a product’s unit cost before determining its price. Why? Because unit costs change with volume. This cost change occurs because a significant portion of costs are “fixed” and must somehow be “allocated” to determine the full unit cost. Unfortunately, since these allocations depend on volume, which changes with changes in price, unit cost is a moving target.”

Price is how the firm captures the results of its value proposition, and since a company is what it charges for, focusing on maximizing value is a better metric than maximizing profit, which is nothing but a lagging indicator, derived from value creation.

This debate between cost accounting and profitability is not over. Much work is being done in this area. In 1987, as mentioned before, H. Thomas Johnson and Robert S. Kaplan published Relevance Lost: The Rise and Fall of Management Accounting, which was named in 1997 one of the 14 most influential management books to appear in the first 75 years of Harvard Business Review’s history. The book is credited with launching the activity- based costing (ABC) revolution.

ABC always asks, “Does this process have to be done?” If so, what is the most effective way of doing it? This costing method has provided manufacturers with the information they need to cut costs substantially, but the real promise of ABC may rest with service industries. Peter Drucker makes this observation in his book Managing in a Time of Great Change:

Activity-based costing shows us why traditional cost accounting has not worked for service companies. It is not because the techniques are wrong.

It is because traditional cost accounting makes the wrong assumptions. Service companies cannot start with the cost of individual operations, as manufacturing companies have done with traditional cost accounting. They must start with the assumption that there is only one cost: that of the total system. And it is a fixed cost over any given time period. The famous distinction between fixed and variable costs, on which traditional cost accounting is based, does not make much sense in services.

But that all costs are fixed over a given time period and that resources cannot be substituted for one another, so that the total operation has to be costed—those are precisely the assumptions with which activity-based costing starts. By applying them to services, we are beginning for the first time to get cost information and yield control.

Toyota—No Cost Accounting?

Johnson’s later book, Profit Beyond Measure, is a seminal work, although not yet fully developed. Johnson profiles Toyota and Scania as two manufacturers that do not have a standard cost accounting system.

As Glenn Uminger, a financial controller at Toyota Motor Manufacturing-Kentucky (TMM-K) since 1988, says, “TMM-K has never had a standard cost system to track operating costs, and we probably never will.”

 So how do they do it? How can a manufacturing company run without a standard cost accounting system? Toyota understands price justifies costs, not the other way around. Here is how Johnson explains it in his book, Profit Beyond Measure:

“None of these comments is meant to imply that Toyota does not have accounting and production planning information systems. Of course it does. Toyota has a comprehensive array of information systems, accounting and otherwise, with which to plan, in advance of operations, and to report results of operations after the fact. But information from such systems is not allowed to influence operational decisions.

Toyota management discharges its responsibility for costs not by taking arbitrary steps to manipulate operations, but largely in the vehicle planning stage. During the design stage, long before the first penny has been committed to making a vehicle, Toyota has always placed enormous importance on setting and achieving cost targets.

To do so, over the years Toyota has developed a famous technique for target costing. Simply stated, target cost is the maximum cost the company can afford to incur to produce and sell a vehicle and still earn a required profit at the price customers are expected to pay.”

He notes Dr. Edward Deming’s observation that over 97 percent of the events that affect a company’s results are not measurable, while less than 3 percent of what influences final results can be measured:

“Managers who adopt the new thinking offered here will accept as second nature the idea that what decides an organization’s long-term profitability is the way it organizes its work, not how well its members achieve financial targets.

Management accounting simply takes accounting revenue, cost, and profitability information, which is appropriate for measuring the overall financial results of a business, and inappropriately attempts to trace it to the particular activities and products of the business that gave rise to those results. Assigning such quantitative measures to parts of a mechanistic system makes sense. However, the parts of a natural living system cannot be so treated. Accounting measures are unable to penetrate the organic, multifaceted union between customer and company that ultimately is the source of a company’s financial results.

Because cost and profit are not objects, but are properties that emerge from relationships, quantitative measures can only describe them, they cannot explain them.”

Wisdom Is Timeless

Henry Ford’s understanding of this topic is truly prescient, as demonstrated in his autobiography, My Life and Work, published in 1922. It is worth quoting at length for the historical lessons it teaches. The notion that price justifies costs was not foreign to Ford:

“If the prices of goods are above the incomes of the people, then get the prices down to the incomes. Ordinarily, business is conceived as starting with a manufacturing process and ending with a consumer. If that consumer does not want to buy what the manufacturer has to sell him and has not the money to buy it, then the manufacturer blames the consumer and says that business is bad, and thus, hitching the cart before the horse, he goes on his way lamenting. Isn’t that nonsense? But what business ever started with the manufacturer and ended with the consumer? Where does the money to make the wheels go round come from? From the consumer, of course. And success in manufacturer is based solely upon an ability to serve that consumer to his liking.”

Keep in mind that Ford’s primary objective was the mass consumption of the automobile, so he focused more on driving the price down in order to increase volume. In a growing industry this is a viable strategy. In mature markets, it is probably better to increase value, thus allowing higher prices. Nevertheless, with Ford’s objective in mind, consider his views on the importance of cost accounting and prices, which are profound:

Our policy is to reduce the price, extend the operations, and improve the article. You will notice that the reduction of price comes first. We have never considered any costs as fixed. Therefore we first reduce the price to the point where we believe more sales will result. Then we go ahead and try to make the prices. We do not bother about the costs. The new price forces the costs down. The more usual way is to take the costs and then determine the price; and although that method may be scientific in the narrow sense, it is not scientific in the broad sense, because what earthly use is it to know the cost if it tells you that you cannot manufacture at a price at which the article can be sold?

Notice Ford “never considered any costs as fixed.” He understood, in the long run, that all costs are avoidable, and by subjecting every cost to the test, does it add value to the customer?, he was able to increase the efficiencies in the factory:

But more to the point is the fact that, although one may calculate what a cost is, and of course all of our costs are carefully calculated, no one knows what a cost ought to be. One of the ways of discovering what a cost ought to be is to name a price so low as to force everybody in the place to the highest point of efficiency. The low price makes everybody dig for profits. We make more discoveries concerning manufacturing and selling under this forced method than by any method of leisurely investigation.

Disney’s Brilliant Price Hike

Our VeraSage colleague Kirk Bowman, The Visionary of Value, does his own podcast, The Art of Value. He interviewed Joni Newkirk, who used to lead pricing for Walt Disney World.

We highly recommend you listen to this show, then read her whitepaper on the price hike story.

It’s a perfect illustration how pricers have to optimize profits overall, not for each silo or department.

Yet cost accounting tends to atomize a business, under the false believe that maximizing each part results in a more optimal whole. This runs counter to systems thinking, where sometimes certain departments need to be less efficient (or profitable) in order for the whole to be more effective.

The Price-led Costing Revolution

By its very nature, cost accounting is a historical function, but what is important for pricing are planned costs, not past costs. Furthermore, cost accountants usually pay far too much attention to sunk costs, which should have no influence over pricing or value considerations.

As Henry Ford pointed out, no one knows what a cost should be. Yet, cost accounting has held hegemony for far too long over the pricing strategies of businesses everywhere, embedding the conventional wisdom that costs determine price. Merely because a practice is widely adopted and utilized does not make it optimal, not to mention true. Check out the debate on Ron’s LinkedIn post on this topic in the comments.

One of Peter’s Principles is bureaucracy defends the status quo long past the time when the quo has lost its status. Cost accounting, and its more modern cousin activity-based costing, does not deserve to be the apotheosis of pricing, let alone running a business.

No doubt, it has its role in any organization, but that role is very specific and historical, not one that should have a major influence in production and pricing decisions.

Innovation requires builders not bean-counters, and the last person who should be running something is the man who controls the costs. Sure, you need that man in there somewhere to keep a rein on things, but he shouldn’t be at the top.

—James Dyson, Against the Odds: An Autobiography



 

Episode #65 - How to be a Price Searcher, not a Price Taker

We simply must get over the false idea that there is one optimal price for a customer. There is a range of optimal prices, commensurate with the value being created. Dutch economist Peter van Westendorp developed the van Westendorp Price Sensitivity Meter (PSM) by posing five questions, to which I have added two more:

  1. At what price would this service be so expensive the customer would not consider buying it?

  2. At what price would the service be expensive, but the customer would still buy it?

  3. At what price would the service be perceived as inexpensive?

  4. At what price does the service become so inexpensive the customer would question its value?

  5. What price would be the most acceptable price to pay?

  6. What costs can we afford to invest in at the target price and still earn an acceptable profit?

  7. At what price would the firm walk-away from this customer (Reservation price)? What is the firm’s Hope For price? Pump Fist price?

Commercial from IBM about achieving premium pricing at a hotel minibar. "Satisfying the right need at the right moment".

The Psychology of Price

There is strong empirical evidence—from both the rational and behavioral schools of economics—that offering customers different options can often times result in them purchasing more, at a higher price, than merely offering one take-it or leave-it option.

This simply recognizes that different customers have different value perceptions, and firms that engage in price searching are deploying a more optimal pricing model.

In his book, Predictably Irrational, MIT behavioral economist Dan Ariely illustrates the utility of offering options by illustrating The Economist magazine’s offerings. First, he presented the following two options to 100 students at MIT’s Sloan School of Management:

  1. Economist.com subscription $59: One-year subscription to Economist.com, including access to all articles from The Economist since 1997—68 students chose this option.

  2. Print & web subscriptions $125: One-year subscription to the print edition of The Economist and online access to all articles from The Economist since 1997—32 students.

Now compare those results to the actual ad that The Economist offered, which contained three options, not two:

  1. Economist.com subscription $59: One-year subscription to Economist.com, including access to all articles from The Economist since 1997—16 students chose this option.

  2. Print subscription $125: One-year subscription to the print edition of The Economist—0 students.

  3. Print & web subscriptions $125: One-year subscription to the print edition of The Economist and online access to all articles from The Economist since 1997—84 students.

Ariely concludes that there is nothing rational about this change in choices. The mere presence of an option that was not desired affected behavior, leading to a potential 42.8% increase in incremental revenue for The Economist, or $3,432. You simply will not get that level of return by improving efficiency.

Offering pricing options creates the anchoring effect, whereby the customer is now comparing prices to your highest offering. This is why Prada stores always display one incredibly high-priced article that acts as an anchor for all the other products.

All of these high priced items act as an anchor, even if the customer never buys them—throwing a halo effect over the other offerings, allowing for prices to be higher.

The first lesson from the above is if you do not offer a high-end premium package, how could you customers ever select one? Second, list your most expensive option first. The third lesson is that by offering three options, you almost always sell more of the middle option, and less of the cheapest offering.

Once again this confirms what most pricing experts know: people are not just price sensitive; they are value conscious.

A snippet from Dan Ariel's TED talk. This is a great illustration on the psychological effects of options pricing.

Seven Generic Customer Segmentation Strategies

According to Tom Nagle and Reed Holden in their book The Strategy and Tactics of Pricing, there are seven effective segmentation strategies to specifically identify different types of customers in order to capture the consumer surplus:

  1. Buyer identification. Senior discounts, children’s prices, college students, non-profits, and coupons are all examples of ways to identify different buyers with different price sensitivities.

  2. Purchase location. Dentists, opticians, and other professionals sometimes maintain separate offices, in different parts of the same city, or in different cities, which charge different prices based upon the economic and demographic makeup of each. Coca-Cola and other soft drinks sell at radically different prices depending upon where they are purchased, from discount retailers being the cheapest price per ounce and bars and vending machines being the most expensive. With the increasing use of the Internet to make purchases, being able to segment by location is becoming more difficult, but still feasible.

  3. Time of purchase. Theaters offering midday matinees, restaurants charging cheaper prices for lunch than dinner, and cellular and utility companies offering pricing based on peak and off-peak times are all examples of segmenting by time of purchase.

  4. Purchase quantity. Quantity discounts are usually based on volume, order size, step discounts, or two-part prices. Customers who buy in large volumes tend to be more price sensitive but less costly to service, and they have more incentive to shop for a cheaper price. Thus, they are offered volume discounts. Two-part pricing involves two separate charges to consume a single product. Night clubs charge a cover at the door as well as for drinks and food.

  5. Product design. Offering different versions of a product or service is a very effective way to segment customers, either by adding more features, or taking some away.  Premium gasoline, for instance, only costs the oil companies approximately 4 cents more per gallon to refine but sells at the pump for anywhere from 10 to 15 cents more. Pricers call low-end products a flanking product, a signal to competitors to not start a price war in the higher-value segment.

  6. Product bundling. Restaurants bundle food on the dinner menu as opposed to à la carte, usually at cheaper prices. Symphonies, theaters, and sports teams bundle a package of events into season tickets. IBM and Hewlett-Packard bundle hardware, software, and consulting services to increase the value of their respective offerings.

  7. Tie-ins and metering. Before the Clayton Antitrust Act of 1914, tie-in sales were common. American Can, for instance, leased its canning machines with the requirement they be used to close only American’s cans. Since the passage of the Clayton Act, the courts have refused to accept tying agreements, except for service contracts where it is essential to maintain the performance and/or the reputation of a new product. While using the tying method with a contract may be illegal, opportunities still exist to use this strategy without a contract. For example, Rrazor blade manufacturers design unique razors requiring customers to purchase its blades for refill, and a certain toner must be used on various leased copy machines.

In addition to the above seven generic strategies, other characteristics that can be used to offer different options to the customer include:

  • Guaranteed response time; start time; and turnaround time

  • Access to specific talent within the firm

  • Bundling education and training

  • Inclusion of the firm’s newsletter, special events, seminars, and so forth

  • Automatic upgrades or updates (relevant if changes in the law or technology are significant to your customer)

  • Offering older technology to achieve a lower price

  • Historical data conversion included or excluded

  • Prior tax or other government compliance requirements (e.g., bundling in five year’s worth of prior tax return filings)

  • A systems review, risk audit, or other Needs & Diagnostics your firm offers

  • Attendance at the customer’s board meetings

  • Intellectual Property ownership belongs to firm rather than customer (mostly for advertising agencies)

  • Different risk-sharing methods based upon the outcome the customer achieves

  • Offering warranties, guarantees, and other forms of insurance

  • Varying payment terms

  • Various financing options—purchase, lease, rent, etc.

Once again, the above is not an exhaustive list of criteria that a firm could use to offer different levels of options to its customers. The process of creating these options is one of creativity and innovation; there are literally an infinite number of combinations, limited only by a firm’s imagination. 

Listener Questions

On Twitter, BJ Lee asks about payment terms, e.g., half paid upfront and half on completion.

Payment terms are pricing, and must be considered upfront. The general rule is: the lower the price, the fast you get paid, including 100% pre-paid (similar to a hotel’s best internet rate being pre-paid, no cancellations).

Another question we received, via email, was from Bryce, a practicing CPA:

Ron and Ed,

Love the show. I have a situation that I'd love to hear your opinions on.

We work with many HVAC and Plumbing companies. Most of them do not do hourly pricing/billing. Instead, if you need a repair, they charge a flat diagnostic fee and, once they've found the source of the problem, give a flat price for fixing it upfront that the customer has to sign off on.

This seems to be a way of pricing you would advocate for.

However, many of them run into questions about 'fairness' when the job is shorter than the customer expected. The customer often looks up the price of the parts online, subtracts that from the price they paid and divides the remainder by how long it took the company to fix the problem, arriving at what they perceive as the hourly rate. This number seems too large to them and they complain of being overcharged. (I've attached a screenshot of a recent complaint like this.)

What are your thoughts on this? How would you go about responding to these complaints? How would you educate the customers ahead of time to avoid these complaints? Would you change how these companies are pricing?

This is partly an educational opportunity: we must simply reeducate the customers away from thinking time spent = value. The airlines, cellular companies, etc., have been able to reeducate customers, so we know it’s possible.

Also, managing customer expectations upfront could also be deployed. A great example (example to our VeraSage colleague, Dan Morris) is Waters Plumbing Heating and Air. The explanation of its Flat Rate Pricing plan is brilliant.

Notice how they discuss how the customer has choices: repair the item, replace the item, or upgrade the item. They also waive the diagnostic price if they are hired to do the job.

We believe another strategy is to offer the customer options on when the work will be done. We’ll do it today for $x, tomorrow for $X - $Y, or next week for $X - $Y - $Z.

Obviously, this will change with the nature of the job (emergency, etc.), but it’s another arrow in the quiver that could be used in the right circumstances.

Episode #64 - Famous Last Words

Clarence Darrow once said, "I have never killed anybody, but I have read many obituaries with delight!"

With that schadenfreude in mind, join us for a look at some of the funniest, poignant, and insightful last words spoken by famous, and infamous, people throughout history.

Last words allow us to catch a glimpse of the entire life that preceded it.

Hard to authenticate last words: witnesses distraught, or they are revised for posterity. For example:

“Tell them to go out and win one for the Gipper.”

This was never said on the death bed of “George Gip.” In fact, he was never known to his teammates as “the Gipper.”

Last Words—Famous People

“I’ve never felt better.” Douglas Fairbanks

“I wish I had drunk more champagne.” John Maynard Keynes

“Am I dying or is this my birthday?” Lady Astor (Churchill’s sparring partner).

“Don’t cut the ham too thin.” Fred Harvey, restaurateur, Harvey Houses across the west.

“That was a great game of golf, fellers.” Bing Crosby, just finished a round, fatal heart attack, 20 yards from the clubhouse

Berg, Morris (“Moe”) (1902-1972) American athlete, spy. Professional baseball player. Catcher for Boston Red Sox. Spied for U.S. during World War II. Died at age 70 of injuries sustained in a fall at his home. Last Words: “How did the Mets do today?” Spoken to his nurse.

“Goodbye, I’ll see you in heaven.” John D. Rockefeller, Sr. to Henry Ford, who replied, “You will if you get in.”

“I love your company, gentlemen, but I believe I must leave you to go to another world.” Adam Smith’s last words to his friends (on his gravesite in Edinburgh)

Hope, Leslie Townes (“Bob”) (1903-2003) British-born American comedian. Stage, screen, radio and television actor. Grew up in Cleveland, Ohio. Starred in popular radio and television programs. Won many awards including Emmy, Golden Globe, People’s Choice. Entertained American troops in World War II and subsequent conflicts. Died at age 100 at Toluca Lake, California.

Last Words: “Surprise me.” His response to his wife who asked where he wanted to be buried.

Last Words—Infamous People

“Well, folks, you’ll soon see a baked Appel.” George Appel, put to death, electric chair in 1928 for killing a NY policeman

Anastasia, Albert (1902-1957) American gangster. Executioner for Murder, Inc. Killed at age 55 in a gangland-style execution while sitting in a chair at the Park Sheraton Hotel barbershop in New York City.

Last Words: “A quick haircut.”

Burris, Gary (1956-1997) American murderer. Shot and killed a cab driver in Indianapolis in 1980. Executed at age 40 by lethal injection in Indiana.

Last Words: “Beam me up!”

Chubbuck, Christine (1944-1974) American television news reporter. Committed suicide by shooting herself in the head during a live telecast. Died 14 hours later at age 29 in a Sarasota, Florida, hospital.

Last Words: “In keeping with Channel 40’s policy of bringing you the latest in blood and guts, and in living color, we bring you another first, an attempted suicide.” Statement she read to viewers just before shooting herself.

Glass, Jimmy L. (1962?-1987) American murderer. Convicted of killing a couple in their home on Christmas Day. His case is notable in that he petitioned the U.S. Supreme Court claiming execution by electrocution is cruel and unusual punishment and a violation of the Eighth and Fourteenth Amendments to the U.S. Constitution. The Court ruled 5 to 4 that electrocution was an acceptable form of execution. Glass was executed by electric chair in Louisiana at age 25.

Last Words: “I’d rather be fishing.” Spoken while he was sitting in the electric chair waiting to die.

Grasso, Thomas J. (1962?-1995) American murderer. Convicted of double murder. Executed at age 32 by lethal injection in Oklahoma.

Last Words: “I did not get my Spaghetti-O’s; I got spaghetti. I want the press to know this.”

Harris, Robert Alton (1953-1992) American murderer. Convicted of the murder of two teenage boys. When he died in San Quentin’s gas chamber in 1992, he was the first person to be executed in California since 1967.

Last Words: “You can be a king or a street sweeper, but everyone dances with the grim reaper.” Recorded by Warden Daniel Vasquez.

French, James D. (1936?-1966) American Murderer. Claimed his constitutional rights were violated because he was forced to wear prison clothes and was surrounded by prison guards during his trial. Murdered his cellmate. Executed by electrocution in Oklahoma.

Last Words: “How about this for a headline? French fries.”

Last Words from the Titanic

“We have been together for 40 years, and we will not separate now.” Ida Straus, refusing lifeboat on Titanic to stay with husband Isidor, NY Dept store magnate.

Astor, John Jacob, IV (1864-1912) American businessman. Great-grandson of John Jacob Astor I. Served in the Spanish-American War. Victim ofTitanic disaster. His pregnant wife Madeline survived. Eyewitness reported that Astor grabbed onto the sides of a raft. When his feet and hands froze he let go and drowned at age 47. Different

Last Words: “The ladies have to go first—Get into the lifeboat to please me—Good-bye, dearie. I’ll see you later.” Spoken to his wife Madeline.

Harris, Henry B. (1866-1912) American theatrical producer, theater owner and operator. Victim of Titanic disaster. Produced more than 60 shows on Broadway. On the Titanic, Harris went to the side of his wife before the lifeboat was lowered away. Upon hearing “Women first” shouted to him by one of the ship’s officers, Harris made his last known statement.

Last Words: “All right. Good-bye, my dear.” He hugged and kissed his wife goodbye then climbed back to the deck of the Titanic where he drowned.