The "Wash my Ferrari" Problem: A Meditation on Risk
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The "Wash my Ferrari" Problem: A Meditation on Risk
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Re: The "Wash my Ferrari" Problem: A Meditation on Risk
#2Wow, great discussion on risk. The only thing I would add to the discussion is that before you try to model risk, you should read 'The Flaw of Averages', by Sam Savage - http://flawofaverages.com/
Put simply, any real risk model should probably avoid being a 'single number', but a range of probabilities. This models the distribution of possibilities much better and helps you make better decisions.
Re: The "Wash my Ferrari" Problem: A Meditation on Risk
#3I have seen two predominant forms of risks factored in by the larger incumbents waiting to be disrupted. One is, like the author puts it, the risk due to breakage. Be very mindful of this risk and insure against it if possible or change something to avoid/lower the risk (sorry, we don't wash Luxury cars).
The other risk factor is pure CYA. Nobody wants to prepare a costing worksheet for a customer quote where your cost is too low because you didn't factor in the various overheads. Only after the annual financial statements are made will you find out if you lost money on the product or not. Do you want to be the guy who buys at $10 and sells for $20 only to find out before bonus-time that overhead was $90 per unit? So you factor in the cost of capital, inventory hold charges, shipping delays, warehouse pallet transfer cost, foreign exchange currency buffer, and tons of other charges. This makes it appear that your cost is high and so it is only natural to charge more for the product. Boeing isn't going to sell an Arduino + LED light for $100. It will be $500 because of risk of breakage and be $5000 by the time all the CYA risks have been tacked on by six levels of middle-managers.
The wonderful thing about CYA risk factors is that they help justify your high prices and if you are able to be lean, they give you a terrific margin. THIS is what you want to disrupt. You can charge less than the incumbents because they are playing it way too safe as nobody wants to lose their neck for selling a product at a loss. But don't charge so low that risk of breakage ends your business. The good thing is that the risk of breakage is not as large as the CYA risks in most every costing sheet that I have seen. YMMV depending on the industry/product.
Re: The "Wash my Ferrari" Problem: A Meditation on Risk
#4garbage article
Re: The "Wash my Ferrari" Problem: A Meditation on Risk
#5Just curious, how much of this risk can be mitigated by contracts (terms of service) between the buyer and seller?
Re: The "Wash my Ferrari" Problem: A Meditation on Risk
#6I have seen two predominant forms of risks factored in by the larger incumbents waiting to be disrupted. One is, like the author puts it, the risk due to breakage. Be very mindful of this risk and insure against it if possible or change something to avoid/lower the risk (sorry, we don't wash Luxury cars). The other risk factor is pure CYA. Nobody wants to prepare a costing worksheet for a customer quote where your co…
Another large factor is high overhead industrys is customer acquisition. In a world of CYA people often take multiple detailed bids, but that means you need to charge for not just that bid but all the failed bids. Say a bid is 2% of total costs, and 1/5 bids win now that's an extra 10% overhead.
Re: The "Wash my Ferrari" Problem: A Meditation on Risk
#7I realize that the post is making an analogy, but it's based on fact. I worked in a car shop for a few months, and we charged a premium for "exotic" cars - something like 2x the cost of normal service. The reason was entirely on the insurance costs for handling those customers' vehicles.
Re: The "Wash my Ferrari" Problem: A Meditation on Risk
#8I've seen this happen first hand. I joined a lean startup full of smart hackers building software in a fast-growing industry. It was great, and we made a load of money. Then problems started happening, and we blamed people: incompetent, tired, one-offs, whatever.
Then our customers started getting serious and regarded these events as unacceptable, just as they became statistically certain, and impossible to manage out. So costs have gone up, processes multiplies, checks increased. And now lean startups are nipping at our heels...
Think medicine.
Re: The "Wash my Ferrari" Problem: A Meditation on Risk
#9I have seen two predominant forms of risks factored in by the larger incumbents waiting to be disrupted. One is, like the author puts it, the risk due to breakage. Be very mindful of this risk and insure against it if possible or change something to avoid/lower the risk (sorry, we don't wash Luxury cars). The other risk factor is pure CYA. Nobody wants to prepare a costing worksheet for a customer quote where your co…
Just a side note for people like me: CYA is cover your ass.
Re: The "Wash my Ferrari" Problem: A Meditation on Risk
#10Just curious, how much of this risk can be mitigated by contracts (terms of service) between the buyer and seller?
Agreed. I would be interested to hear thoughts on this as well. As an example, if Coca-Cola uploaded its secret formula to a Dropbox, the damages resulting from a data breach would seem to be immeasurable. But I'm sure Dropbox's TOS limits damages to cost of the service (no extraordinary, consequential, etc.) Is this amount what's at issue here, or is there something I'm missing?