Great Employees at Rock Bottom Prices

August 2019

Hello Pricers!

We economists love to hedge our bets. It seems like we're always hiding behind couching phrases like all things being equal and ceteris paribus.

It's not that we're particularly timid, but, with so many variables in play, it can be difficult to speak about the future with absolute certainty.

That said, there are some predictions that can be made without the need for qualifiers. For instance, a firm that is unable to understand its customers and the market in which it competes is living on borrowed time.

How well do you understand your customers and your market?

Are you sure?

Pricing Question from a Reader

I can't afford to hire good employees like my competitors do. Yet without good employees, how can I compete?

According to traditional economics, you're facing an impossible challenge. The implications of the efficient-market hypothesis are quite clear: companies that pay more, all things being equal, will be able to hire the best employees.

Fortunately, such academic nonsense doesn't apply in your situation. Your business exists in the real world - a world full of market inefficiencies for you to exploit.

Four years ago I pointed out that big companies are often at a disadvantage when screening candidates, but I barely scratched the surface.

I recently finished reading Michael Lewis' book Moneyball. It followed the Oakland A's as the team dealt with the very problem that you now face. Its general manager had little money to work with but, nevertheless, built a clubhouse that could compete with those of the nation's best-funded teams.

I've adapted and generalized the model that worked so well for the A's. Let's take a look at each step of the framework:

  1. Admit that you won't be able to hire the most desirable candidates - It's a losing battle to try to hire candidates who are being actively recruited by your spendthrift competitors. Let's face it, there isn't a public school district on the planet that could reliably hire the types of programmers who receive offers from Facebook, Google, and Apple. If you aren't able to come to terms with this fact, you'll be guaranteed to find yourself sabotaging your efforts at a subconscious level.
  2. List the criteria that your competitors use for hiring - As a general rule, the more criteria you can identify, the better. Don't skip over seemingly silly or obvious measures. If a test is commonly used, write it down. For each, note the following:
    1. Its accuracy as an indicator of value
    2. Its reliability as an indicator of value
    3. Its weight in deliberations
  3. Apply these criteria to your own candidates and potential hires - Identify the subset of factors above that aren't important, accurate, or valuable. Use these criteria to screen out applicants. Candidates who meet these criteria should be considered undesirable for two reasons:
    • They'll enjoy the attention of many other employers and thus be able to demand high salaries
    • The very criteria that cause them to be desired by others will provide you with relatively little in the way of value
    Be ruthless in your assessments. As suggested in my book Premium, hiring managers often have a vested interest in maintaining the status quo, often for no other reason than the fact that they themselves have been judged positively by it. Opening up positions to broader audiences may decrease managers' sense of prestige and feelings of self-worth.
  4. Create a list of alternative criteria that better describe sources of value - When your screening criteria are calibrated differently than those used by others, your employees will be less likely to be pursued by other employers. As a result, they'll be cheaper and more likely to stick around (important facts to bear in mind, as you consider providing training to them). More importantly they will help you more accurately judge the potential contributions of your future hires.
  5. Create an automated feeder that sends people who match your criteria to you - Whether you're hiring from a non-traditional pool of candidates or screening for non-traditional criteria, you'll often find yourself with significant monopoly power throughout the duration of your hiring activities. As a result, many relevant groups and organizations will be willing to bend over backwards to provide their members as potential hires.
  6. Continuously revisit and improve your process - Keep detailed notes and metrics about your hiring system. It's unlikely that a radical approach will prove flawless on your first attempt. However, working to continuously understand a) how others hire and b) how well your own process is working will undoubtedly lead to long-term success.

With a bit of luck, you'll soon be able to identify excellent hires who appear exceedingly mediocre or even downright unthinkable to your competitors.

Critics might denounce this method as exploitative, but I wouldn't. You're literally hiring people that others don't want and recognizing great value where others see nothing of worth. Why shouldn't you be rewarded for it? More importantly, why would you want to use your competitors' tactics when such actions will only serve to put you at a disadvantage?

Questions come from readers like you. If you'd like your questions answered, send them my way.

♫This Q&A and many others are now available on the Pricing After Dark podcast.

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From the Blog Archives

Notable Pricing Quote

"When you can't compete on cost, compete on quality." -- James Dyson

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