March 18, 2020
We’re living in unprecedented times right now and no one can say with certainty what will happen next. Even Warren Buffett will tell you there’s a lot you can’t know – and he’s in the business of knowing plenty. Just this week, he shared his thoughts on ultra-low or even negative interest rates. Conceding that times are crazy, he also said he’s never been in the business of predicting rates. Instead, he focuses on what’s ‘knowable.’
On February 22, Berkshire Hathaway released its annual report and Buffett’s letter to shareholders. In it, he talks about what he does know. I read his letter every year and while his writing style is so clear, characterful and a joy to read, it’s also a learning moment. A few take-away’s from this year’s letter:
- It’s exciting to see organizations using pricing software called out for their superb financial performance.
- To anyone who has followed Buffett for any length of time, it isn’t a surprise to see his three criteria for business acquisition: earning good returns; able and honest managers; available at an appropriate price. We at Vendavo couldn’t agree more.
- Earnings are at the very heart of everything that is paramount to a commercially-excellent organization.
Hat-tip to Bill Murphy who ran a word cloud on the whole of Buffett’s annual letter. You can find the full image here.
Regarding able and honest leadership, I’ve seen genuinely impressive, above-and-beyond words and actions in my time at Vendavo. It’s best practice in motion and wow is it eye-opening. Appropriate safeguarding of customer confidentiality is a standard, it’s a minimum required that is taken seriously. But it’s more about ‘the extra.’
As a matter of course, I see Vendavo employees ensuring that customer data is ultra-secure, that processes remain secret, that no cross-pollination of thoughts and idea occurs. Employees at Vendavo are encouraged to voluntarily recuse themselves from conversations where they feel it is in the best interest of the customer.
I found it exciting that The Sage of Omaha put such emphasis on earnings – it’s the message we’ve been preaching for many years. Earnings are the lifeblood of commercial organizations; they’re the very thing that the organization exists to create. The linkage between earnings and cash flow ensures viability of the enterprise as a going concern. Earnings provide capital for expansion and investment – for acquisition, R&D, and everything else that improves a business over the short, medium and long-term horizons.
Simple mathematics tells us that pricing has the most impact on profitability, and so – by extension – Buffett is clear that companies with good pricing structures, policies, and behaviors are more attractive to him and the broader marketplace.
Looking back at the word cloud…Sometimes, when talking with people about improving their pricing, they ask about market share. My standard response is that you can’t see market share on a company’s financial statement – it’s not on the income statement, not on the cash flow statement, and not on the balance sheet. But now I have another answer. It’s not a word Warren Buffett uses often.
For more about commercial excellence, download the whitepaper, 5 Simple Best Practices to Take Back Control of Your Pricing.