The Radical Price #emba27

Gusby Written by Gusby · 2 min read >

Dan Price spent his high school years working as a salesperson for a payment processing company in California. So, it came as a shock when he discovered afterward that these companies overcharged small businesses for their services. While still a freshman at the Seattle Pacific University, a 19-year-old Dan founded Gravity Payments in February 200 with his brother Lucas.

Gravity Payments offered different processing and financial services including credit card processing, POS (point of sales) systems, mobile payments, working capital financing, and gift and loyalty cards. Their customers were mostly small and medium-sized businesses. They pursued a low-cost strategy and word of mouth strategy, which made them very successful. Gravity payments charged less than half of the industry-average processing rate. By 2008, they were serving 15% of small businesses in Seattle, Washington. This made them the largest credit card processor in the state. Eventually, Dan was honored with the National Small Business Administration’s “Young Entrepreneur of the Year” award in 2010. 

Increased Gravity of Payments

A friend shared her worries about trying to pay her bills and student load on an annual income of $40,000 to Dan. Dan became worried because some of his employees earned less than that.

He read a 2010 study conducted at Princeton University by economist, Angus Deaton, and psychologist, Daniel Kahneman, a Nobel laureate. According to the study, people who earned less than $75,000 were likely to experience emotional pain and job dissatisfaction. However, those who earned more than $75,000 did not feel any greater level of happiness. The study concluded that low-income increased pain associated with misfortunes such as ill-health, divorce, and loneliness. Dan decided to implement this in his company.

In 2015, Dan announced a new minimum salary of $70,000 for all 120 employees at Gravity Payments. This took everyone by surprise.

Most of his employees labeled him as the “world’s nicest boss.” The media also portrayed him as a young entrepreneur who took the issue of inequality into his own hands. Gravity Payments became a front-page page media story in major national media outlets. Many businesses sent emails of support to them.

Subsequently, they received 5,000 job applications in one day. The number of new customers they added every month increased from 200 clients to 350 clients.

A Price to Pay

Dan budgeted 75% to 80% of the company’s $2.2 million profit to implement the salary increments. He also reduced his salary from $1 million to $70,000. The plan was to implement the changes over 3 years.

Dan’s elder brother, Lucas, filed a lawsuit against him two weeks after the announcement. He owned a 30% stake in the company and was blindsided by the news. In his opinion, the long-term sustainability of Gravity Payments was at risk. Also, he believed that the decision violated his rights as a minority shareholder.

Two of Gravity Payments’ best employees left the company because of the decision. Maisey left because she felt Dan was rewarding the least skilled workers at the expense of the skilled ones. She worked long hours while spending little time with her family since joining Gravity Payments 5 years ago. Grant had similar sentiments as Maisey. He also did not like the fact that his wage was advertised publicly. This seemingly changed the perception of his family and friends who would now ask for loans from him.

Fortune Favors the Brave

Dan Price did not anticipate the uproar of political debates that ensued following his announcement. The minimum wage discussion was divisive. The average CEO in the US earned more than 300 times the salary of an average employee. The income gap between the rich and poor kept growing year on year.

For Dan, if this was the price to pay for his contribution to bridging the income gap, then it was worth it. He continued with the implementation of his decision to the letter.

Two years later, it paid off big. Gravity Payments increased its client base significantly and added more employees. His employees came together to purchase him a Tesla car. He also won the lawsuit against him.

Critically, his employees decided not to take their salaries during the COVID-19 pandemic. Most cited the fact that they had already fulfilled their financial commitments with the raise. This ensured that Gravity Payments survived the pandemic, unlike many companies.

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