True Profit

Hermann Simon’s Confessions of a Pricing Man is easily the best book ever written on this topic. The author is the Chairman of the global strategy consulting firm Simon-Kucher. He’s also one of this generation’s most prolific business thinkers, whose writing parallels Peter Drucker’s. In this conversation, our topic is Hermann’s 2021 book, True Profit. Topics include profit maximization, why price increases trump volume increases or cost reductions, and profit elasticity.

Interview Highlights

• Our first Hermann Simon book was outstanding, Hidden Champions
• … and Confessions of the Pricing Man is the best in its category
• The ideal audience for True Profit
• The Grapes of Wrath and profit maximization
• The reason profits are so much higher in Switzerland than in any other country around the globe
• Waste minimization
• “The general and widespread lack of knowledge about actual profits is cause for concern.”
• Profit vs. free cash flow
• Profit elasticity
• The three profit drivers and the one that trumps them all
• The cure for Hermann’s 80% observation rule
• The reason CEOs focus on volume instead of price for revenue increases
• The biggest reason leadership teams are focused on cost when trying to increase profits
• The key to cost reduction is employee involvement

I would like to add that, strictly speaking, profit maximization is a theoretical concept. In practice, it is rare for someone to know which behavior will lead to the highest possible profits, or how high their profits could actually be.

Hermann Simon, True Profit

Ten Profitable Quotes in True Profit

1. “But in its essence, profit maximization is simply the antithesis of waste. One could also equate profit maximization with “waste minimization.” Critics claim that the maximization of profit and shareholder value is responsible for the exploitation of resources and workers, for disparities in income and assets, for the offshoring of jobs to low-wage countries, for the relocation of corporate headquarters to tax havens, and many other abuses.”
2. “Profit is the reward for undertaking business risks. Profit is what is left over after a company meets all of its contractual obligations to its employees, suppliers, banks, other creditors, and the various national, state, and local governments that levy taxes. Profit is thus a residual that belongs exclusively to the company’s owners.”
3. “Profit is the cost of survival.”
4. “But I leave you with one recommendation: in any discussion when the word “profit” comes up, you should ask, for the purpose of clarity, what that term includes and excludes.”
5. “One advantage of free cash flow is that, for all practical purposes, it cannot be manipulated by accounting tricks.”
6. “Ultimately, the long-term profit goals must take precedence. A long-term profit orientation is essentially identical with the concept of shareholder value, which we will discuss in detail later.”
7. “My experience over decades has taught me that there is hardly ever a crystal-clear set of actions or a definitive roadmap to make a long-term profit orientation successful.”
8. Robert Bosch once said: “I don’t pay good wages because I have a lot of money. Rather, I have a lot of money because I pay good wages.”
9. “I want us to be measured against the highest ethical standards. And there is no profit or revenue goal that is worth turning our backs on those standards.”
10. “I would like to add that, strictly speaking, profit maximization is a theoretical concept. In practice, it is rare for someone to know which behavior will lead to the highest possible profits, or how high their profits could actually be.”

Who Is Hermann Simon?

If David Letterman were to interview Hermann Simon, he’d say that this brilliant thinker and writer needs no introduction.

According to his website:

Hermann Simon is the Founder and Honorary Chairman of Simon-Kucher & Partners. He is an expert in strategy, marketing and pricing. He is the only German in the “Thinkers50 Hall of Fame” of the most important management thinkers in the world. In German-speaking countries he has been continuously voted the most influential living management thinker since 2005. The magazine Cicero ranks him in the top 100 of the 500 most important intellectuals.

Hermann is the author of numerous books on the topics of pricing, inflation, profits, and strategy. He’s also penned an autobiography. You can find his complete catalog on his website and Amazon author page.

All Professional and Social Media Links:

• Simon-Kucher
• Hermann Simon
• LinkedIn
• YouTube
• Twitter

Books Mentioned

• Adventures of a Bystander by Peter Drucker
• Elon Musk by Walter Isaacson
• The Price of Time by Edward Chancellor
• Freezing Order by Bill Browder
• In Search of Excellence by Peters and Waterman

Episode Pairings