Paying for the Right to Work

President-elect Donald Trump made a deal with the CEO of United Technologies to keep some US jobs from moving to Mexico. At stake were 2000 jobs moving from a Carrier plant in Indianapolis, Indiana that manufactures air conditioners down to Mexico where labor is 80% cheaper. The nuts and bolts of the deal where that Indiana Governor and Vice President-elect Mike Pence promised $7 million dollars in tax benefits to Carrier. Carrier promised to keep approximately 800 jobs in the US. Moreover, Carrier also plans to invest $16 million in automation which would eventually eviscerate the remaining jobs at the plant. Additionally, this deal left hundreds of workers at a nearby Carrier plant in Huntington out in the cold.

United Technologies CEO admitted in an interview with Jim Cramer that 10% of his company’s revenue comes from government contracts. Hence, President-elect Trump actually had huge leverage. Yet, this was a sweetheart deal for Carrier including tax breaks , positive press, and increased profits for shareholders..

What about the workers?

The union leader at the plant, Chuck Jones, was not even consulted or invited to the bargaining table. Moreover, Chuck Jones called Donald Trump out for “lying his ass off” regarding the number of jobs saved. President-elect Trump has taken to Twitter to call Chuck Jones out by name and criticize him. Mr. Jones is receiving death threats  – for telling the truth about the deal and expressing concern for the workers who will still be laid off. I think that Mr. Trump has taken union-bashing to a presidential level. Trump’s next tweets went on to claim that unions are the reason why American jobs are being shipped overseas – a blatant lie.

This Deal Doesn’t Scale

Critics like (surprise, surprise) Sarah Palin have come out and said this deal is just “crony capitalism”. Will Trump starting picking up the phone and calling CEOs to offer more deals? Does this deal create a perverse incentive for CEOs to announce moves overseas in search of tax breaks and other government goodies? This deal simply doesn’t scale. Globalization encourages companies to seek out more favorable regulations and low-cost labor. Innovation, cost-cutting initiatives and automation exacerbate the job-crunch from globalization.

Moreover, Trump is promising more benefits to corporations including eliminating environmental regulations, allowing corporations to repatriate money overseas, and lowering the top marginal corporate tax rate from 35% to 15%. The funny thing is that the effective corporate tax rate was 19.4% between 2008 to 2012 and some corporations little or no tax at all.

chart

Source: White House Historical Tables

The reality is that the burden of paying taxes has shifted dramatically  from corporations to individuals. The Revenue Act of 1916 established annual income taxes in the United States. Between the inception of the annual tax to the 1960s, individuals and corporations contributed roughly the same amount in U.S. Federal taxes. The 1:1 ratio of individual and corporate tax burdens ran away in the 70s and 80s. The ratio as of 2014 is 6:1. Yes, individuals contribute 6 times the amount that corporations contribute in U.S. Federal taxes. This does not take into account Social Security, Medicare and Medicaid, state taxes, property taxes, or sales and use taxes. Moreover, this data does not account for the fact that some S Corporations, Limited Liability Companies, and Sole Proprietors allow profits and losses to flow through their personal income taxes. The raw deal for the American people is that we must engage in a race to the bottom with weakened environmental regulations, lower pay, reduced benefits and greater tax benefits to “enable” corporations to compete with globalization and automation. Americans must literally pay for the right to work.

Pricing Physical Products

A lot of focus has been placed on pricing software and services in tech startup and entrepreneurship blogs, magazines, and forums. I had an idea for a physical product, Z Hook – a quick-drying bath towel hook, that I wanted to design, prototype and launch within 3-6 months at a minimum cost. I was going to leverage lean startup methodology to build a prototype. How would I price the resulting product?

 

Designing the Minimum Viable Product

My goal was to build a prototype for around $100, get feedback from potential customers, build and sell my first minimum viable quantity and then grow organically. I detailed the design process in the following Slideshare preso:

 

Essential Market Research

Getting out of the building is paramount. I had conversations with strangers about the concept. The consensus was that I struck a note. Drying wet towels was big problem that people initially didn’t realize they had. I did want more data. So, I set up a Google Adwords search campaign to test the interest in “quick drying bath towel hooks”. Check. There was some interest. Yet, I had more questions about who my customer was and the key features and benefits that they needed. I commissioned a market research study via Survey Monkey. I provided survey participants with a used a website with product photos and information.

 

Key Product Features

 

In economics, there are several types of goods: Necessary, inferior, and superior. The definition of the goods is tied to the demand curve as income levels change. Luxury goods have increased demand as income increases. I wanted to know how customers perceived the product. The chart below is a snapshot of all the responses. The interesting point was that Survey Monkey enabled me to look at consumer demand across different household income levels. I did see a substantial increase in the perception of the product as a luxury for higher household incomes.

 

Product Type - Survey Money Study

I looked at competing towel racks and hooks from Walmart, Target, and Bed, Bath, and Beyond. I noticed that metal towel hooks and racks prices ranged from $15 – $30 for products that could not do what the Z Hook did. On the higher end, there were much more expensive products $50+ (and even $200+). I started to get some boundaries on what I could charge based on customer perception and competitive price analysis. However, I had to determine my unit cost to ensure that I could produce the Z Hook and make a profit.

 

Determining the Minimum Viable Quantity

I worked with an Industrial Fabrication and Welding company in Falls Church, Virginia to develop and improve a working prototype for around $100. I honestly had no idea what initial demand for this product would be. I started getting more quotes from similar companies to fabricate various quantities of this product: 10, 20, 50, 100, 500. I was looking for a unit cost that could enable me to sell the Z Hook for somewhere between $20 – $50. There was another concern. Product labeling, shipping and handling materials, marketing costs, etc. Moreover, how was I going to get the product to the customer? This was a very important question. I had to think about arbitrage – there can’t be more than one “price” for the product.

 

If I wanted to eventually sell the Z Hook to a Big Box store I would need to do so at wholesale and then that company would sell at retail. Hence, I would need to figure out a unit cost that could work, a wholesale price for retailers, and then a retail price. Economics of scale turned out to be my friend. At a higher quantities, the unit cost of the Z Hook went down. After getting several quotes, I found that I could get 125 units of the Z Hook produced for between $16 – $23. The price range depended on the size and scale of the supplier. Moreover, the lower prices came with longer lead times and stricter payment terms. I had found my Minimum Viable Quantity (MVQ) to be 125. My wholesale price was set at $26 and the retail price is $33. I am currently applying to become a vendor at several Big Box stores. The Z Hook is being sold online directly to consumers. 

Spendology CEO Declares That the Z Hook Will Be Made in America

WASHINGTON, DC, April 18, 2014 (GLOBE NEWSWIRE) – “We can make things in America. From the start, I was committed to teaming up with American manufacturers to make the Z Hook. We currently have suppliers in Maryland, Virginia and Pennsylvania. Spendology will continue to manufacture the Z Hook in America.”

Keith Alexander Ashe

Z Hook Inventor

Spendology CEO & Founder

 

Z Hook – The Quick-Drying Bath Towel Hook

Video: Introducing the Z Hook

 

 

About Spendology

Spendology LLC is a technology company based in Washington, DC that uses science to improve financial and ecological decision outcomes. Spendology was founded by Keith Alexander Ashe. Mr. Ashe is a graduate of Florida A&M University and Columbia University. He previously worked as a management consultant at Booz Allen Hamilton and the Corporate Executive Board.

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