The Best Pricing Book I’ve Read in a Long Time

I’ve been meaning to write a post about Moneyball for some time now, but I can never find the time to give it the treatment it truly deserves. Finally, I decided that giving it the following treatment is better than no treatment at all.

For those of you unfamiliar with the book, Moneyball is about baseball. Mostly, it’s about how the Oakland A’s were competitive at a level far beyond their payroll, in a sport without a salary cap, dominated by rich teams like the Yankees. Oakland General Manager Billy Beane realized that the attributes in players that teams paid a lot for are not necessarily the factors that are important to winning. Slugging percentage, fielding percentage, ERA and games won are vastly overvalued when you compare salary to impact. Meanwhile, on-base percentage, home runs allowed by pitchers, and other factors are vastly undervalued. Using statistics, Beane’s team (of analysts, not players or the scouts traditionally intrusted to measure talent) determines which attributes are important, and how they can use them to acquire players on the cheap– players other teams may not care about, but who will help them win.

This is an activity much like pricing. The A’s, unlike Mr. Steinbrenner’s Yankees have a severly constrained budget. In other words, they are more like 99.99% of companies in the real world. They seek to measure value more accurately than their competition, so that they can achieve a competitive advantage in the market. Most of us are pricing like traditional baseball people– on our gut, combined with a number of metrics that have some unknown correlation with success. Beane uses numbers to derive the key metrics.

Not all of us have professions that are as smothered in statistics as baseball, and most us work in fields where the “playing field” is not governed by a stable set of rules that evolves very slowly over time. (Still, a lot of us do work in areas where millions –or more– are at stake, so if we lack the numbers to make good decisions, we have to ask why, and what we can do to fix that state. What are the key value drivers in your business? Where are competitors throwing money at the wrong thing?) Moneyball is insightful, and deserves a place on every pricing person’s bookshelf. Not a bad read, either.

(In a sidenote, Theo Epstein, the Beane protege who helped architect the Red Sox first World Series win since 1918, recently resigned as the Sox GM as contract negotiations failed.)

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