Graham Weston | Crain's Philadelphia

In this ongoing series, we ask executives, entrepreneurs and business leaders about mistakes that have shaped their business philosophy.

Graham Weston

Background:  

Located in Windcrest, Rackspace is a leading cloud-management technology firm, offering expertise around the world.

The Mistake:

I'm not sure I want to talk about my biggest mistake, but I'll tell you about one of my most instructive mistakes. It came in my very first business venture, while I was in junior high school growing up on a ranch east of San Antonio.

This was during a period when Americans were becoming more cautious about nitrates and other additives in their meat. So I decided to grow and market organic pork, under the slogan "Go Hog Wild!" I reared the pigs on organic feed and had them processed without additives. The pork sold really well and I got my hands on more cash than I had ever dreamed of, and I was thrilled.

But then my dad, a successful businessman and rancher who always encouraged my entrepreneurial streak, taught me the difference between revenue and profit. He helped me add up what I'd spent on the breeding stock, feed, veterinarian's bills, meat processing and marketing. And when we subtracted all of that from the revenue, it turned out I had lost money on every ham and slab of bacon that I sold.

And that was just on an operating basis. My loss was even bigger when you considered the space I was using in the barn, and the use of a truck and the other uses we could have made of those capital assets.

I thought back to my organic pork business, and felt grateful to my dad that he taught me about pricing discipline back when the lesson was cheap.

The Lesson:

I learned a big lesson about pricing discipline, and it's one that we apply very carefully at Rackspace, the cloud-computing company that I helped found in San Antonio 17 years ago.

A lot of young tech companies act as if the only thing that matters is growth in customer count and market share. They'll spend a lot to bring in customers who don't cover the cost of the products or services they consume. The theory of these tech companies typically is that, as they scale, their unit costs will decline enough to eventually make them profitable. That's worked for a few companies like Amazon, but for most it only works until the bubble bursts, as it did in 2000-01 and again in 2007-09. And it will again.

Rackspace remained profitable through both of those downturns. We've priced our services so that they not only cover all of our operating costs — such as salaries and marketing — but also our capital costs, including the servers and other gear that we have to buy to serve new customers.

We also price our services so that they deliver a true profit — meaning, a return on capital that is higher than our cost of capital. If you want to learn more about this key concept — one that's overlooked by too many businesses of all sizes — you can search "economic value added," or EVA.

Our commitment to true profit at Rackspace was tested fairly early in our life as a company. At the time, we were eager to land some big, brand name customers who would tell the world how great our services are. So along came this giant New York investment bank that wanted us to handle a huge chunk of its IT. It offered us so much new work that we would have to lease a whole new data center and fill it with servers and other gear.

We were thrilled at the prospect of this deal — and the big bank knew it. So it drove a hard bargain on price. When we did the math, we found that the price it wanted to pay didn't cover our cost of capital. We considered whether the marketing value of having this big customer might be worth the money we'd lose. We decided it probably would not be. So we politely declined. One of our huge competitors took the deal — and lost money on it.

Follow Graham Weston on Twitter at @gweston.

Pictured: Graham Weston | Photo courtesy of Rackspace.  

 

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