How are first principles applied in pricing and supply chain optimization?

Haha, this is an interesting question, and it's not as mysterious as it sounds. Let's talk about it in plain language.

So-called "First Principles Thinking," in a nutshell, means don't always "copy homework" or think "everyone else does it this way, so I should too." It encourages you to be like a super curious child, breaking down a complex thing into its most fundamental, irreducible units, and then, starting from these "building blocks," reassemble something better.

Alright, let's see how it plays out in pricing and supply chain.

Let's start with pricing, which is closer to our daily lives

You open a bubble tea shop and want to price your signature pearl milk tea. How do you set the price?

• Not using First Principles (the "copying homework" approach): You'd first run over to the shop across the street, or next door, and check their prices. Oh, they sell it for 15 yuan, so I'll sell mine for 14 yuan, or maybe 15 yuan but add two extra pearls. This is following the trend; your price is dictated by others.

• Using First Principles (the "breaking down building blocks" approach): You'd sit down with a pen and paper and start calculating the most fundamental costs:

  1. Material Costs: What are the most basic costs to make one cup of bubble tea? Water, tea leaves, milk, sugar, pearls, cup, straw, lid – add these up, down to the cent. For example, 4.5 yuan. This is your physical cost, non-negotiable.
  2. Operational Cost Allocation: Your shop's rent, utilities, staff salaries, machine depreciation – these expenses need to be spread across each cup of bubble tea. Suppose you sell 500 cups a day, and these fixed daily expenses are 1500 yuan, then each cup needs to cover 3 yuan.
  3. Perceived Value: This is the most crucial and often overlooked point. What does your bubble tea bring to the customer? Just quenching thirst? No. It might also bring "life-sustaining energy" in the afternoon, a "social prop" (for posting on social media), or a sense of joy. Your shop is well-decorated, and the staff are friendly – these are all part of the value. How much is this value worth? How much are customers willing to pay extra for this "feeling"? Maybe 5 yuan.
  4. Profit Target: You're not running a charity; you need to make money. How much do you hope to net per cup? For example, your target is to earn 3.5 yuan.

  Okay, now let's put these "building blocks" together: 4.5 yuan (materials) + 3 yuan (allocation) + 3.5 yuan (profit) = 11 yuan. This is your cost floor price. Then, considering that 5 yuan of "perceived value," you can set your price between 11 yuan and 16 yuan (11+5).

  You see, by breaking it down this way, you have a clear understanding. You're no longer blindly seeing others sell for 15 and selling yours for 14. Instead, you clearly know your price floor is 11 yuan, and your ideal price is 16 yuan. If market competition is fierce, you can drop to 12 yuan because you still make a profit. If your brand is strong and customers recognize that "value," you can sell for 18 yuan, and people will still buy. Your pricing strategy becomes very flexible and proactive.

Next, let's talk about supply chain optimization, which is a bit more macroscopic

Imagine you're a large e-commerce company managing warehouses and logistics nationwide.

• Not using First Principles (the "path dependency" approach): When the company was founded, it built large warehouses in Beijing, Shanghai, and Guangzhou because those areas had the most orders at the time. Ten years later, the company still uses these three warehouses, only expanding them repeatedly. As a result, many orders now come from Chengdu and Wuhan, and goods have to travel a long way from Shanghai and Guangzhou, making it slow and expensive. But everyone is used to it, thinking, "This is how we've always done it."

• Using First Principles (the "disrupt and reorganize" approach): You'd ask some fundamental questions:

  1. What is the ultimate goal of the supply chain? To deliver intact goods to customers at the lowest cost and fastest speed.
  2. What are the fundamental elements that constitute this goal?
     • Goods: Where are they produced?
     • Customers: Where are they located? Plot all national order addresses on a map to form a "heatmap."
     • Transportation Tools: Airplanes, high-speed trains, trucks, ships – what are their speeds, costs, and capacities?
     • Warehousing: What is the purpose of a warehouse? Is it for long-term storage or quick transit? What is the cost of storing goods for one day (capital tie-up, warehouse rent)?

  Now, forget those three old warehouses. You look at this "customer heatmap" and "production base distribution map" and start re-planning. You might find that, oh, Chengdu and Wuhan are new order centers. Building transit warehouses there, or even shipping directly from factories to these regions, is much more cost-effective than routing through Shanghai. You'd also calculate whether it's more cost-effective to maintain a large inventory (high warehousing costs) to handle all orders, or to keep low inventory and occasionally use expensive air freight (high transportation costs) for urgent orders.

  Through this approach, you might design a completely new logistics network, for example: closing down a large coastal warehouse, building two small transit centers inland, and deeply collaborating with several regional express delivery companies. The overall supply chain efficiency would significantly improve, and costs would drop considerably. You're not "optimizing" an old system, but rather "rebuilding" a new one.

To summarize

First Principles Thinking is like giving you a pair of "X-ray glasses," allowing you to see through the surface of "industry conventions," "historical experience," and "competitors' moves," directly to the core framework of things.

• In pricing, it makes you start from cost and value, not from price.
• In the supply chain, it makes you start from the essence of time, space, and efficiency, not from existing facilities and processes.

Ultimately, it's a way of thinking that involves "asking 'why' repeatedly until you can't ask anymore," and then, starting from that most fundamental answer, solving the problem.