The right performance output measure at Alaska Airlines

In the previous post, I wrote about using meaningful performance output measures to trump biases.  In the Weekend Interview in the Wall Street Journal, Alaska Airlines CEO, Bill Ayer provides some good examples of this from the business world.

The Journal frames the discussion with Alaska Airline’s success:

Alaska shares rose 30% last year, making it the only major airline to show a full-year gain. The industry was down 25% on average.

Here Ayer mentions the common status quo bias:

It’s easy to justify the status quo. We fell into that trap. We always had a quick answer. Just that sometimes it was wrong.

It’s like an overweight person who has done the same exercise and diet routine for years. It obviously isn’t working.  Why aren’t they willing to try something new?  Because that’s the way they’ve always done it.  And, they rationalize things could be worse.

Here, Ayer talks about the right performance output metric for a business:

“[At] airlines that are profitable,” he says, “the business model is there to grow. If you’re not profitable you shouldn’t be growing. You don’t want to grow for growth’s sake. You don’t want to just grab market share from other people.” Note the implied dig at competitors like Delta and JetBlue that borrowed to expand. Mr. Ayer suggests that airline executives need to change their mindset. “If lack of profitability is the core problem, then the central metric ought to be about profitability.”

That’s a common mistake I see in business.  Managers desire to change some metric without bothering to understand if that will drive meaningful results.  They want to grow market share or client counts or they want to improve client retention or sales through ratio and they either assume profitability will take of itself or don’t consider profitability at all.

Often they succeed at improving whatever metric they’re measuring, but lose their job because it turns out that metric had an opportunity cost to profitability that they had not considered.  For example, they may improve client retention by 1% using the old business myth “it’s cheaper to keep a client than get a new one“, but hurt new client acquisition by 3% in the process and come out behind on profits.

This is another quote from Ayer that I enjoyed:

“Hope is not a strategy. We don’t spend a lot of time counting on things we can’t control.”

Surprisingly, all to often hope is the strategy and all too often we do try to control things that can’t be controlled.

Pizza Hut: Price to Value

It’s been fun watching promotions in the food industry over the past few years.

Subway kicked it off a price promotion with their $5 foot long promotion, which seemed to work for awhile.  It was a black swan that was happened upon by a Subway franchisee in Miami.  He put out a sign for $5 foot long sandwiches and earned more money.  Others followed suit and eventually the corporate headquarters picked it up.

But, price is rarely a source of a sustainable advantage.  It may work for awhile, but price promotions is something that is easily copied by competitors and eventually they too will find compelling offers.

The most important thing is the value proposition.

Early KFC began offering $5 meals.  Pizza Hut went to $10 for Any Pizza.  Both seemed to work for awhile.  The $10 Pizza got the mother of my Papa John’s-loyal nephew to try Pizza Hut and he liked it.

Then he came to our house and wanted pizza.  I started to call Papa John’s, but he said he’d rather have Pizza Hut.  It had been 10 years since I tried Pizza Hut because the last pizza I got from there was a grease ball.  I tried some of his Pizza and I liked it. It tasted good.

That’s value proposition.  In the beginning the $10 pizza got my nephew to come in, but it was the good quality pizza that kept him coming back.  Since then, I’ve ordered Pizza Hut several more times, likewise because of the quality of the pizza, not the price.

Pizza Hut advertising seems to reflect this.  Several months ago the advertising focused on the $10 Any pizza message.  A few weeks ago they changed their pricing to $8, $10 and $12.  Still simpler than before, but a little more variation to better align the price and the value.

This past Sunday I saw it come full circle.  Pizza Hut’s ad didn’t mention price.  It explained the value prop:  Good pizza and convenience, in ways people can understand like “this means I can spend more time with my daughter.”