May 3, 2012
With all of this excitement about the Oscar-nominated Moneyball, could this story of the statistician who beats the experts play out in other contexts? It turns out it can, as the book “Supercrunchers” explains, in the world of wine recommendations. Imagine that you are trying to determine if 2012 will be a good year for cabernet. This might be because you want to invest in wine futures, or you want to place an early order for a few cases of the good stuff from your wine merchant. The usual approach is to ask a wine connoisseur who has decades of personal experience and is well-respected. This expert uses “swish & spit” to expose the complex flavours and, let’s be frank, has a livelihood dependent on being the expert.
Orley Ashenfelter, an economist by day, decided a superior approach would be to “Run the Numbers”, and found that all that expertise can be beaten by a simple linear equation:
Wine quality = 12.145 / 0.00117 * Winter Rainfall + 0.0614 average growing season temp – 0.00386 harvest rainfall
It turns out that the Mathematical approach was superior by correctly predicting the “Wines of the Century” in 1989 and 1990. The reaction of the traditional experts was the same as the old scouts around the table in Moneyball, the highly influential Robert Parker laughed off the approach with the comment “I’d hate to be invited to his house to drink wine.” But Ashenfelter had the last laugh because he made lots of money for his advocates in wine futures by betting “against the house”.
A neat story, but what does this have to do with B2B pricing? Consider a neophyte sales rep who is trying to find a price. He can ask a sales manager who has decades of personal experience and is well respected, can “smell” a good deal, and has prestige dependent on being the expert. Or he can also “run the numbers:” the Mathematical approach is superior, it correctly predicts market price in dozens of B2B companies and has made lots of money for its advocates : increase in Gross Margin of 5-15% .
Now I’m going to open a bottle of Corbière and study the weather data from the Languedoc. After all, the subtitle of “Supercrunchers” is “Why Thinking-by-Numbers Is the New Way to Be Smart”.
– James Marland