Remember that crazy guy who cut his own income to pay for a guaranteed $70K base pay for his employees? Remember how...

Remember that crazy guy who cut his own income to pay for a guaranteed $70K base pay for his employees? Remember how…

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Remember that crazy guy who cut his own income to pay for a guaranteed $70K base pay for his employees? Remember how everyone predicted the sky would fall?

Well, uh, nope. At least not yet. Here’s an update:

Is there a magic number that keeps workers focused while still generating a profit? Price calculated a figure but never imagined the publicity he’s gotten would boost new customer inquiries from 30 per month to 2,000 within two weeks. Customer acquisition costs are typically high, so in that sense, the strategy has paid off. And in this business, customer retention is key. Gravity’s 91 percent retention rate over the past three years — far above the industry average of about 68 percent — has been crucial to its success. Maria Harley, Gravity’s vice president of operations, looks at a different set of numbers. While the company had to hire 10 more people than anticipated to handle the new business, most nonlabor costs — rent, technology, etc. — have remained the same, thus improving operating ratios. “We don’t need our sales to double,” she says. “We only need them to increase marginally — by about 25 to 30 percent. When I started being more logical than emotional about this, I said, ‘This is totally possible.'”

Six months after Price’s announcement, Gravity has defied doubters. Revenue is growing at double the previous rate. Profits have also doubled. Gravity did lose a few customers: Some objected to what seemed like a political statement that put pressure on them to raise their own wages; others feared price hikes or service cutbacks. But media reports suggesting that panicked customers were fleeing have proved false. In fact, Gravity’s customer retention rate rose from 91 to 95 percent in the second quarter. Only two employees quit — a nonevent.

http://www.inc.com/magazine/201511/paul-keegan/does-more-pay-mean-more-growth.html

32 comments

  1. Greed is the root of all evil – Dan Price proved that it can be done different … and even better.

  2. Sadly he is being sued by his brother. That might turn out to be harder to survive than giving employees high salaries.

  3. Yes, an attitude of scarcity and fear can introduce challenges into this kind of work, Alexander Wait Zaranek​, but I love the way that Dan Price is keeping such an optimistic and loving perspective in the face of that. It’s quite remarkable actually.

  4. And he kinda looks like Jesus?

  5. I thought it was Dave Grohl.

  6. Highly commendable. Sad brother.

  7. I am pretty anti-socialism, Gideon Rosenblatt​ but I certainly didn’t predict the sky would fall, when i heard this, indeed this seems like a good idea. Treating employees like they matter makes them more loyal and work harder – makes good economic sense. Exposing them to leadership sacrifices, tying management more closely to success/failure of a company, again this just makes sense. It’s a way to counter-balance short term thinking. I’m all for altruism, personally, but I’m not so naïve as to expect it. Greed based economy isn’t broken by altruism, altruistic based economy is broken by greed. But it seems to me a good idea to find solutions like this that give companies a benefit to treat employees better, its just a win/win, and I don’t understand at all why other fiscally conservative people find it offensive. This doesn’t sound to me like socialism at all.

  8. Very well said, Chris Welty. I like your turn of phrase “Greed based economy isn’t broken by altruism, altruistic based economy is broken by greed.” I think it cuts to the heart of the issue here.

    Why are people who are really into free markets and freedom of choice in general so vociferous about denouncing this entrepreneurs decision about how to run the company he co-founded?

    It’s almost as though it’s touched a raw nerve. 

  9. Gideon Rosenblatt Why so vociferous (just wanted to type that word :)?  I would posit that it makes them feel guilty.  If they’re a business owner, they might get pressured one day to do the same and if not, they might get stuck with higher prices.

    What people fail to realize is the breakdown of a medium sized business budget.  Labor and materials are generally only 11% and 6% respectively.  Other costs include sales, marketing, legal, admin, accounts, management and some others.  The trick is that many of those ‘other’ costs vanish with very happy employees.  Another trick is that almost all the rest vanish with a happy local community.  It’s cheaper to pay employees even 5x (55% of retail) than to hire a sales and marketing team.  Word of mouth is a powerful thing.

  10. Chris Welty  connected with him recently on Twitter, sharing our activism for a living wage, which had argued the case for capitalism to be applied for community benefit: “Capitalism is the most powerful economic engine ever devised, yet it came up short with its classical, inherent profit-motive as being presumed to be the driving force. Under that presumption, all is good in the name of profit became the prevailing winds of international economies — thereby giving carte blanche to the notion that greed is good because it is what has driven capitalism. The 1996 paper merely took exception with the assumption that personal profit, greed, and the desire to amass as much money and property on a personal level as possible are inherent and therefore necessary aspects of any capitalist endeavour. While it is in fact very normal for that to be the case, it simply does not follow that it must be the case. ” http://www.p-ced.com/1/node/76  

  11. I agree, Todd McKissick. Writing the word vociferous feels great! Try writing it with an “!” instead of an “?” and you will feel even more of the power! 😉

    Very interesting, and insightful comment. I like your thinking. Are labor costs really that low though? I would expect that they would be quite a bit more than that. What is that based on? 

    And by the way, I agree with your point. Just checking on where you got that number. 

  12. Jeff Mowatt​ give the common good a seat on the board of directors? 😉

  13. Gideon Rosenblatt Thnx for that.  My favorite word to type is needed.  Not sure why.

    I honestly can’t find any charts showing the cost breakdown of manufacturing operations.  Not sure what I searched on when I originally found tons of charts to compare.  I wasn’t so shocked that labor was so low as I was that sales and marketing and finance was so high.  Those three take around 60+% of the retail pie.  That’s where I got the idea to eliminate them by using word of mouth advertising (from both the workers and the customers) to do both sales and marketing.  And then getting rid of the debt is the next major thing.

  14. Grizwald Grim Richard Wolff makes just such a proposal.  See:

    https://youtu.be/pJlXhYigqAQ (hour and a half long!)

  15. An interesting experiment still — I am earnestly hoping it will succeed. However, note that Gravity’s business model isn’t something that can be cookie-cut’d to different industries (example – superconductor, semiconductor manufacturing; advanced materials design; entertainment in movies, etc.)

  16. Grizwald Grim Essentially an agreement between said directors that the common good is the entire point of doing business. http://www.p-ced.com/1/node/112

  17. I laugh at this because you all ignore that the rise of clients only came from this being a hit on the media, if this was common practice there would be no free publicity, no rise in customers and therefore bankruptcy.

    Also a lot of competent people left the company, as they weren’t getting rewarded compared to their other (less competent) co-workers.

    Everything about this company is laughable

  18. What’s the proof that a lot of competent people left the company, Belial Pt? 

    And yes, I agree that much of the upside they’ve experienced has been through the exposure they’ve received because this is rare. Were this practiced on a larger scale by more companies, the benefits would shift to something else entirely – like living in a society where more wealth flows to the middle class rather than being constipated at the very top.

  19. Gideon Rosenblatt that sounds awesome, except it doesn’t work that way. You are letting your feeling affect your reasoning because it was stated that he reduced his pay, let’s say that the company simply raised the minimum wage to 70k, it wouldn’t work anyway. If you are overpaying employees above market price for no reason and no gain, it doesn’t work.

    Also for the source..

    “The New York Times reports that two of Gravity Payments’ “most valued” members have left the company, “spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises.” “

    “He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump”

    http://www.businessinsider.com/dan-price-gravity-payments-employees-leave-2015-7

  20. Grant Moran, 29, also quit after the pay changes were enacted.

    “Now the people who were just clocking in and out were making the same as me,” he told The Times. “It shackles high performers to less motivated team members.”

    http://www.washingtontimes.com/news/2015/aug/1/dan-price-seattle-ceo-who-set-company-minimum-wage/

  21. Belial Pt In other words, his ego and jealousy were too big to allow him to see the greater good.  Got it.  Sounds like it was better that he left.

  22. Todd McKissick “his ego and jealousy were too big”, woah, you make it seem like people don’t go to work for money

  23. I’m not saying that pay should be unfair, Belial Pt. Fairness has two very distinct notions: 1) that when I work harder, I should be compensated more; and 2) the egalitarian sense. Both are important. Try to build a system that ignores either one for too long, and you risk killing the system. 

    Here in Seattle, since the rollout of the new minimum wage law, I’ve seen some of the negative fallout show up in interesting, unexpected ways. For instance, some of the baristas at Whole Foods who’d been there a long time and were really good at their jobs, ended up making the same pay as those just starting. The company was already feeling like it was absorbing a lot, no doubt, from the increased pay hikes, and so probably didn’t feel like it could then add additional pay raises to help differentiate and recognize the better performers of its more senior staff. The result is that they lost a number of the top folks, at least in the local store I go to. 

    But that doesn’t mean you simply scrap the whole idea of ensuring that people have enough to live well on in your economy. You need to balance both of these definitions of fairness. It’s not easy, but it’s absolutely essential to a healthy economy and society. 

  24. I find it hard to imagine someone wanting to be a lifer at Whole Foods.

    I mean, it’s better than lifing in a factory, but still…

  25. Belial Pt “you make it seem like people don’t go to work for money”

    No.  That’s the exact opposite of what I wrote.  This top-performing person who quit because people below him are now making the same… he didn’t lose any pay.  He was butt-hurt because he lost status as in he wasn’t recognized as being better than the others anymore.  In fact, he probably got a raise to the $70k mark.

  26. Gideon Rosenblatt I don’t believe for a minute that pay must be proportional to how “hard one works”.  (The latter being defined to include how smart as well.)  There are other ways people can get that warm & fuzzy from being better.  

    Picture, for example, two guys starting a business together.  One brings ALL the skills and the other brings something else that’s needed, be it money, contacts, resources or whatever.  When they’re employing 100 people to cover all those extras that founder #2 brought, is founder #1 going to go to him and ask that his ownership be increased in proportion?  

    Those two guys realized that they needed each other equally for success and that deal remained in effect after those needs changed.  Most likely if they’re doing well, they both were wealthy enough to not squabble over the difference.  One a different level, a junior apprentice employee is just as important as an experienced professional.  The only thing different is we’ve come to accept that it’s ok for the former to starve for years before “earning” the higher pay.  But that’s not going to be where this whole thing is headed.  

    One way or another with automation pushing technological unemployment across the globe, two new truisms will become the norm.  The first is that less total hours will be worked (likely by about 85% in the next 15 years).  The second is that a new system is needed so that income can be spread out more evenly so the poor can survive.  And the only logical way both can be done is for the buying power of all hours worked to rise about 5 fold.

    This doesn’t necessarily mean all work must be paid the same but it seriously leans in that direction by some percentage.

    And IMHO, the easiest way to accomplish all this is to lower prices, not to worry about wages at all.  We are, after all, automating everything, right?

  27. Todd McKissick that’s laughable, think a little about what you said, if I work hard and a guy that doesn’t gets the same wage, I’ll just work less. In the long term things just got worse, you pay more for unskilled work, and skilled workers will work less or leave.

    Also, automating things doesn’t mean anyone will get a better wage for the work he isn’t doing anymore, get real.

  28. Todd McKissick​ why do we care if the poor survive?

  29. The point I was trying to make, Todd McKissick, got lost in my word choice. It’s not really about working harder, but it is about one’s perceived contributions of value. When we perceive that someone else is getting the same benefits as we are despite our having contributing what we perceive to be more value, it creates discord. The process of socialization selects agains free-riders. I’ve managed very idealistic organizations, and even in these great collections of people, this force is present. 

    As to your other point, I find it interesting and I think this is going to be the bigger, long-term question. If income equality is the goal, I think we might get there more easily in a world of rising automation through something like Basic Income – don’t you think?

  30. Belial Pt It’s not laughable.  It’s inevitable.  Just look at where the world is headed.

    First off, we must draw a distinction between working harder and doing different jobs.  They’re not the same things.  I’d be more willing to pay high wages to an industrious janitor who does a wonderful job and takes pride in his work than a skilled but lazy and entitled engineer.

    Secondly, if I was the employer and equalized all wages and you decided to slack off because your pride was hurt, you wouldn’t have to quit because I’d fire you.  The company would need both of you to function and if you felt insulted because I raised someone else’s wages to yours, you’re not welcome.  

    What you’re missing here is that automation WILL be removing most labor from society.  It’s not a question of “if” but “how soon”.  And the old system of working just to get ahead is going bye bye.  The new system will incentivize those with certain passions to do what work remains for them in that field.  Pay will become a moot point.  The entire system of money and barter will also fade away soon after the jobs go.  The reason is that between robotics and automation and new manufacturing techniques, humans simply won’t be needed anymore.  But this doesn’t mean that one company will own all the bots and sell everything at high prices to get rich.  No, the automation movement is equally available to anyone interested and willing to use it.  That brings unlimited competition and that will drop prices so close to zero that it won’t be worth the time to collect the money.  Sounds crazy but I’m not sorry to say it’s very much in the near future.  

    The question then becomes how rough the transition will be.  If we continue to prop up the greed, ego and hyper-commercialization system, it will be that much more difficult and slow.

  31. Gideon Rosenblatt You made your point very well and I got it.  I think we’re missing each other in the context assumed.  You’re clearly discussing the present which is scarcity based and rationally causing all the actions you refer to.  There’s no fighting that for now.  However, I’m looking down the road a decade or so and then applying that scenario piecemeal to a transition that SHOULD begin around now.

    Regarding the transition and a basic income oriented solution, sure.  A guaranteed income floor is one way to ease the expected pain.  In fact, it’s the only solution I see so far that could eliminate all the pain beginning tomorrow (sans politics).  I’ve ran the numbers and come to two conclusions which IMO, should be shouted from the highest hills.  First is that, given it will eliminate most of the interest paid in a person’s life and much of the crime, it could be done for an average of 80% of our current entitlement costs.  Second is that it could be done instantly with more success and GLOBALLY if done privately via Bitcoin.

    However, without a basic income, I see the newest technology (that’s cutting costs disruptively) as accelerating much faster than with it.  In other words, income/inequality problems would speed up the abundant society’s arrival by 2-5 times.  YMMV

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