The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It
Blue Ocean Strategy: How To Create Uncontested Market Space And Make The Competition Irrelevant
The Know-It-All: One Man’s Humble Quest to Become the Smartest Person in the World
I have the best gig in the world. I get to help people move their dreams forward. I have the opportunity to help college kids who are just starting out. I can advise business owners who have hit a plateau, reach out and find the next big thing that will propel them to higher levels. It is all a big rush. I have talked previously about things that Young Entrepreneurs should know (some seasoned business owners could use these lessons as well). I have written about why someone would use a mentor and Real Social Networking.
But until now, I haven’t written much about what makes me want to get involved with a business. It just so happens that last week I interviewed a number of business owners who were looking for mentors. They each were smart, focused and clear about their mission. But I asked each what they hoped to get out of a mentoring relationship and I literally got blank stares.
For me, there are 8 things that I am looking for when looking to take on a new mentoring opportunity:
- Is the business owner able to clearly articulate his or her business? Does she understand her proposed business model? How does it make money? What does winning look like? Who is the competition? What makes you unique and thus memorable in the marketplace?
- How well does the entrepreneur take to proffered alternative ideas? In almost every first encounter (and many subsequent ones as well), I will offer up some differing opinions. I look for reaction and thought process when the entrepreneur replies. I am absolutely not looking for the entrepreneur to just accept my thesis. Rather, it is how they respond. Are they argumentative? Are they passive? Are they confident? Can they riff off of my idea to get to a better place? Some of my biggest failures as an advisor are when the entrepreneur has all of the answers and feels the need to continue to do what they want to do without seriously considering alternative opinions. Why invest time and effort in the mentoring relationship?
- Does the entrepreneur have a reasonable level of vision? By this I mean, is the entrepreneur focused only on global strategic issues with no real plan to get anything done? Conversely, it is almost as bad to have one who is buried in the minutiae of running the business with no thought beyond the next payroll cycle. While each entrepreneur has a preference for one or the other, it is critical that the entrepreneur develops to have both levels of vision in play at all times.
- Is the entrepreneur a professional? Even the youngest should have the basics down. Business cards, website, firm handshake, thank yous, elevator pitch of the business — all are critical. But most important, is your word your bond? If you promise something, can I count on it? This is where a lot of folks fall down. In most cases, I am volunteering to help you. The least you can do is to make promises you can keep and engage me wisely. Part of my value to you is access to my network. I cannot squander that resource on folks who cannot follow through.
- Is there a plan? Can you build a plan for what you want to do and then live to the plan? Can you stay away from the ADOS — Attention Deficit… Ooh Shiny — method of project planning? There are going to be lots of shiny objects out there. You need to stick to your plans and get stuff done.
- Have you got a reasonable financial plan? You need to keep your monetary requirements as low as possible. Looking for investment is the biggest shiny object project out there. I have seen more business falter through the fund raising period than at any other time. The entrepreneur is focused on making investor pitches and not running the business. Can you wait to get financing until you have a solid revenue stream? Your multiples and percentage of the company that you will retain will certainly be enhanced by waiting.
Yes, I know, some companies need a significant amount of financial assistance to get a prototype up and running. Do the best job that you can of bootstrapping the company and using Friends and Family to get you to the revenue stage if at all possible.
- Are you enthusiastic about your venture? You need to have energy to sell me on the concept and sell others as well. It will come through as you describe your company. You don’t have to be a marketing whiz to be enthusiastic. One of the company owners I met last week was a PhD candidate in materials science. She was as enthusiastic about the potential of her company and product as any of the other CEOs I have met recently.
- Lastly, do you understand my specific skills and capabilities? Is there a fit with the company’s business plan and the CEO’s capabilities? I am a mentor and not a miracle worker. There are areas in which I can help a business that come very easily to me, either because of specific experience or my particular aptitudes. If the business really needs something else, I would try to help them find the right type of mentor to solve that problem. In many cases, the company will require several mentors, who will each work on areas of specialization. It often helps if the mentors know each other and can collaborate, but it is not necessary.
It is a thrilling thing for me to be able to be a part of the growth of young companies. I take the charge of mentorship seriously and hope that the CEOs and founders find value in the journey.
Has anybody got any spare change? This economy has made it difficult for everyone, except possibly, the guys (and gals) at Goldman Sachs.
But that is not exactly the type of change that I was thinking about. The change that I want to talk about today is related to change in your business. As an advisor to small businesses, sometimes I work with folks who have run their companies for 4, 6 or even 8 years. Over that time they have developed a business concept that has built a client base and some revenue stream. But there they are. Their goal is to grow their business, but they are having a rough go of it. None of the concepts or ideas are working.
So, one way to get things moving, they think, is to bring in an advisor. Ah ha, someone who has been there and seen a lot of other companies. Somehow they find out about me (Thank you to all of you who refer business my way). So we talk. I ask questions and they are caught up in the moment of thinking about a big payday. “I know that my concept is worth 4 or 5 times what I am making now. Look at my customers. All I need is someone to show me the path. I’m willing to do anything.” And in a few cases, this is probably right. The company may only be a couple of small tweaks away from greatness.
But way more often, there is disappointment on both sides. Why is this? I believe that a big portion of this is resistance to change. The business owner cannot give up what got her to the current point. Sometimes it is that the owner is doing the work that his employee should be doing (what got him there). Other times, the entrepreneur is feeling that doing the hard work of selling, implementing new programs or developing relationships with partners is below her.
Change is the starting point for the next level of business. Most businesses run in a predictable pattern. Up to about $1 million in revenue, the owner (and entrepreneur) can manage the business by himself. He can figure out the right hires and engender enough loyalty to build a stable business. At about $1 million, in order to grow, the entrepreneur needs to change. Things need to get more formalized. You need sales forecasts, HR forms, partnership negotiations, perhaps even a new business model. The owner needs to get out from servicing the customer directly on a daily basis and start to lead the business in these new directions. In the cases where the owner is capable of growing and changing, this is the start of the entrepreneurial-managerial journey. You are not just running a business, but at this level you are also leading a team that will help to propel the business.
As hard as I try to help an entrepreneur evaluate their readiness for the types of changes that I have described, very few are ready for the reality. It reminds me of the saying “What got you here, won’t take you there.” You have to be willing and capable of change. You have to look at change as an opportunity to learn new things or to try out talents in different areas. Will you be successful? Maybe not, but by not trying you certainly will not be able to get to the next level. Perhaps you will find out that you are capable of performing some of the skills, but woefully inadequate to do others. Fine. Now would be the time to grow your strengths and find others to join your team that can do the painful stuff. Over time, if you look seriously at increasing your talent base, you will become a much stronger businessperson.
But at the heart of the matter, you have to be willing to change – go out on a limb and try something new.
Business is often compared to sports. You hear of someone hitting it out of the park or the slam-dunk opportunity. When you need to get back to the basics, it is often blocking and tackling. And who hasn’t had to develop a game plan for the upcoming budget year. But one thing that sports has that business doesn’t always is a clear opponent. Sports are all about the competition. Business, too, is about competition, but the opponents are often hidden.
Often, I have read business plans where the entrepreneur states that there is no competition for his particular venture’s product or service. If I am judging a business plan competition (there’s that word again), I automatically downgrade a couple of points. If, I am a mentor to said entrepreneur, that begins a longer conversation about the business.
My friend Jeff, the marketing strategist, likes companies to develop “Only” statements. As in, the widget is the only product that will wash your floors and leave your mouth minty fresh. I’m kidding, but Jeff is serious. In marketingland, it is critical to explain why your product is the only way to get things done. But from the other side of the fence, we understand that while we are the “only” X, our prospective customers also get to decide what is important to them and there are others out there who have something to say about their products.
Let’s face it, there is always competition. A few examples…
What about Microsoft, back when it was a tiny company? There is the oft told tale of how Gary Kildall, founder of Digital Research was a strong competitor to Bill Gates’ early efforts at Microsoft and lost out on the original IBM PC operating system contract because he wasn’t willing to sign the IBM non-disclosure documents. Had Gary Kildall signed the contracts, no one would have heard of Bill Gates or Microsoft. Instead of Windows, we might be using GEM.
But, really, when Henry Ford started making cars, he had no competition. Not so fast. Henry Ford had lots of competition. Besides the other automakers who were building cars on a custom basis, there was always the horse and buggy. People did not really need the automobile. Remember that “do nothing” is always a competitor in the minds of your potential customers. What Henry Ford did was change a manufacturing process for a product that had already been in the market.
OK, then, how about Segway. Dean Kaman built a product that no one had ever thought of. It was an entirely new product and how could there be any competition? Ah, but the competition was there, it was just disguised. Let’s see, people could walk (buy nothing), purchase a bike, hybrid car, roller blades, scooters. It depends on how they were looking at the problem. In actuality, the competition was what led to a less than successful introduction for the Segway and why they are still looked upon as curiosities, rather than a mainstream transportation choice for consumers.
I believe that you have to be honest with yourself when you look at your business. There is always competition and you have to be ready to confront it. Don’t forget about “Do Nothing” as a competitor. Look at alternative uses of other products and how your product may be viewed in the marketplace. In fact, if you can honestly say that there is no competition for your product, I would question the value that the marketplace has for your product.
So, if we can agree that in order for you to be successful, there will be competition, then how can we develop strategies that will further your business idea?
First, we need to realize that competition is good. In a way, competition validates the marketplace. If others are selling into the consumer base, then we know that the consumers are able to purchase to solve their needs. This gives you an idea that people may also buy your products, if they are marketed, produced and delivered with care.
Second, competition will force you to raise the level of your game. You have to understand the marketplace and react to it on a regular basis. This will hone your product offerings to be as good as they can be.
The one thing that I would emphasize to companies facing direct competition is, don’t play the other guy’s game. Change the game and make him play by a new set of rules, if at all possible. Going back to the Henry Ford story, this is his true genius. He was able to change his manufacturing process to lower the cost of the first mass produced automobile. The consumer really didn’t much care that it was mass produced, but suddenly the price for an automobile was not a stumbling block and Ford was able to literally change the world.
For you, look for ways to change the game as well. Maybe there is something that you can bring to the table that doesn’t cost you much, but the other guy hasn’t cottoned on to. Put your emphasis here. Go to your customers and let them know about that extra special feature and try to get it written into specs. Understand what is important to your purchasers. Is it value, couture, large portions, safety from lawsuits? Whatever it is, if you can provide it and your competitor cannot, you have a better than even chance of (sports metaphor coming…) landing the big one.
But, if you are successful, be aware that the circle has a way of coming back. Look at Microsoft and Google today. It’s all part of the game of business. Real entrepreneurs don’t shy away from the competition, they look for ways to compete on the playing field.
In the world of entrepreneurship, one of the most interesting questions that is debated is what really defines an entrepreneur. Much of the research and efforts in academic circles and Entrepreneurial Service Organizations are focused on getting people to start businesses. The curriculum covers everything from teaching the fundamentals of market research to building a business plan. The rationale is derived from studies that show that small businesses create much, if not all, of the growth in employment in the US. I believe that this type of education is important, but I truly believe that there is a more critical area that needs to be emphasized.
The usual definition of entrepreneurship usually has some connection with risk. That is, an entrepreneur is someone who is willing to assume the responsibility, risk and rewards of starting and operating a business.
Getting an idea is not difficult. In fact, most of the skills necessary to start a business are relatively easy to obtain. The difficult task is to finish. Let me explain. Many of the entrepreneurs that I have met have a reasonable business idea. They can put together some sort of business plan; some go with the mini 10 page report, others produce a tome of over 100 pages. They can put together a demo or a prototype. Then they lose their nerve. They review their research, they add just another modification to the web demo, they send out another survey. This is the point when they need to drive forward. As Steve Jobs says, Real artists ship.
I believe that real entrepreneurs ship. By shipping (or opening the website or performing the sales calls or signing the partnership agreements), the entrepreneur will gain knowledge about what the market really wants. She can make the changes to the offering to appeal to the customer. She can invite customers to be part of an inner circle and tie them closer to her company. And, possibly, even record some early revenue.
Lose the fear. There are few downsides to shipping earlier. Make sure that what you ship, you can be proud of, but don’t obsess over every aspect. Remember that Windows was unusable (but a good demonstration of future technologies) for the first several releases. It wasn’t until Windows 3.1 that Microsoft had a solid winner.
Yes, it is good to start businesses. But the risk inherent in an entrepreneurial company is multiplied if you don’t ship your product. You risk increased competition. You risk wasting critical capital by waiting. You risk your potential customers finding alternatives. You risk losing employees to other more exciting projects. The way to reduce the risk is to deliver a product to the marketplace and continue to respond to the market by reacting quickly to new information.
Shipping product is a virtue. Get it out there and find out whether you actually have something that the market demands.
Seth wrote an article this past week about companies that have lost their ability to deliver functional customer service. It reminded me that I needed to talk about a few companies that I have read about or been exposed to that have gone the extra mile.
A few weeks ago, I was privileged to have the opportunity to meet Bo Burlingham, an author and former editor at Inc. Magazine. He wrote a book a few years back called Small Giants: Companies That Choose to Be Great Instead of Big. As a result of his talk, I reread the book and found a few nuggets. The premise of the book is that there are some companies that have remained entrepreneurial and have decided to be great companies without reaching out for the siren song of growth forever. Bo looks at a total of 14 companies in depth and examines the decisions that the management of each company makes to be the best they can be without uncontrolled growth.
One of the companies that he profiles is CitiStorage, a records management and retention company based in Brooklyn, NY. You can’t get much more pedestrian than this business. They take boxes of records from companies, store them in a huge warehouse and deliver them back to the customer when requested. Yet, even here, a savvy business owner can make a difference. Norm Brodsky, the CEO of CitiStorage, is a crusty, exerienced and by the books manager. Yet he understands the power of customer service. The book recounts a sales interaction with a potential customer:
The prospect was to meet with Brodsky at the end of the tour. As they were sitting in his office, Brodsky asked the man if he was considering other vendors. “Yes, two,” he said, and mentioned the names of CitiStorage’s major competitors.
“Did you see any differences between them and us?” Brodsky asked.
“Yes, I did,” the prospect said. “Everyone of your employees was smiling, and they all said hello. I’ve never seen anything quite like it. They really must be happy.”
“I hope so,” Brodsky said. “Thank you for noticing.”
“Because of that, in fact, I’ve decided to give you the business.” the prospect said.
This was an important exchange. First because the prospect noticed that the people who worked at CitiStorage were happier and showed it. Second, due to this, the prospect make a business decision based on his interactions in an hour that usually took several weeks.
In the past several weeks, I have noticed a couple of other companies that have gotten the message. First, I have been to two Chicago Cubs games and every employee from the ticket takers to the ushers have had a great attitude, smiling and conversing with the patrons. It is a big change from previous years under the Tribune ownership. I think that this is an intentional customer service posture that is required by the Ricketts family, new owners of the team.
Second, I had the opportunity to participate in a company tour at S&S Activewear, a company that sells apparel to companies that will further customize them for end users. They had the requisite big, sprawling warehouse with forklifts and conveyors, but they also had a difference in how things were done. Again, it was evident in the way their employees interacted with us. Everyone from the president (who gave the tour) to the order picker was helpful and displayed a genuine excitement about the work that they were doing. Yet you think that this is an outlier due to the company tour, my contacts who deal with this company report that every interaction with the company is treated this way. Due to this fact alone, they have consolidated all of their apparel purchasing to S&S.
Going back to the Seth article, I flew four flights on American Airlines in the past week. They have gotten to the point where the only time that I really have an interaction with them in person, is when I leave the jet and the pilot is standing there waiting for us to get off the plane. Otherwise, it is use the website and the automated check-in, swipe your credit card to pay for checked baggage and yet again for an overpriced package of chips or a pillow. They have squandered any potential opportunity for delivering a positive customer service experience and thus made the choice of airlines for this consumer to be a random choice, rather than an informed choice.
Don’t let yourself fall into this trap. Sure it is cheaper to let a web site do your customer service, but in the end you do your business a disservice if it is the only (or even primary) method of interacting with your customer.
It doesn’t matter if you are big or small. Be like CitiStorage, the Cubs and S&S. Ensure that your team provides customer service with a smile. It will pay off in the long run.
I have been away from my blog posts for way too long and I am missing the act of writing things down. I have been busier with a lot of projects lately, but that is really no excuse. I have a few small articles that I will be publishing over the next week or so and then hopefully will get back on track with a more normal publishing schedule.
My son, Eric, is a musician. He has played in bands for 7 years now and is a sousaphone player for the Illinois State Redbird Big Red Marching Machine
. At the end of Eric’s emails, he includes the quote:
Music expresses that which cannot be said and on which it is impossible to be silent. ~Victor Hugo
As a non-musician, it always seemed to me to be a little strange. How can music express that which cannot be said? I enjoy music and my kids have introduced me to new stuff that I never would have heard without their help. But, really, expressing things?
Then I saw this video showcasing Bobby McFerrin (of Don’t Worry, Be Happy fame) and how music is innate within all of us, everywhere. To me this showed how we all have the basic music sense within us. It is astonishing how quickly the audience “gets it”. Most of the audience members would not consider themselves musicians at any level, could not tell you what note they were singing, yet they were able to use these unknown skills to generate lovely music, under the direction of a “real” musician.
So now, of course, the question is what other types of knowledge are innate at least at the basic level? What else can we do that we don’t know that we can do? I don’t have the answers, but I am interested in the discussion.
I have been doing some thinking about mentoring. As I get more experience in providing business guidance to others I have found that there needs to be some more structure put around these relationships. Perhaps it is that old thing that it seems like you find articles in the news when you were thinking about them, but I found this article today about mentoring turning into a multi-player sport.
It makes a lot of sense. Clearly, mentors have a lot to give to their charges. Last week at the Launch Depaul new venture competition, all three of the for-profit teams have dedicated mentors through the Coleman Entrepreneurship Center Blueprint program. But not as clearly, mentors are usually really good at a couple of business topics and relatively weaker on others. As an entrepreneur who is looking to recruit a mentor, it is a good idea to perform a serious self evaluation to understand what your true needs are and what you hope to have the mentor accomplish. In many cases, it makes sense to work with several mentors to cover the spectrum of issues that the business owner has uncovered through the analysis. A good mentor will know his or her strengths and where they can provide the most support, but they will also know of other potential mentors who can cover other areas and be a good fit for the corporate culture.
Currently I am working on a project with another mentor, where a portion of the need is in my wheelhouse, finance and operations. But the other mentor that I am working with is a whiz with technology, planning, HR and legal. The entrepreneur understands sales and marketing, so we are fairly close to covering the ongoing needs of the company to enable serious growth.
As a business owner engaging a mentor or mentorship team, it is critical that you all agree on the structure for the support. In the cases where I was just a mentor on call when someone had an issue, the result was less satisfying for both parties than when the mentoring was clearly defined. That is not to say that you cannot deviate from the plan, however it is incumbent on all partners to understand what needs to be done and to adhere to a process to manage plan changes.
Both parties get so much out of a mentoring relationship, when it is managed as a true business relationship.
In the blogosphere, there is a large hue and cry about the death of newspapers. And it’s true. Newspapers are losing advertisers, subscribers and relevance. There are a lot of reasons for this.
- It used to be that only the newspapers had the printing press. Therefore they owned the news manufacturing (reporting) and distribution (printing and delivering) of the news. The advertisers were looking to get to the subscribers and this was the only way to do so on a local basis.
- Journalists were proud of their independence and their political slants. They were proud of the investigative reporting and in-depth stories that were difficult to tell in other formats. People wanted and were willing to pay for the news. Because this was the way that the stories were told, people did not even look outside the news box for other alternatives. Publishers made fortunes — ever been to San Simeon, home of William Randolph Hearst?
- First to take some of the local advertising dollar from the newspaper was local cable tv and radio. Now the options of advertisers become a little more open. You could focus your advertisement more closely geographically, ethnically, demographically and politically, in ways that you could not with newspapers.
- Then the internet was born. The internet changed all of the rules. Craigslist was the first to take on a profitable piece of newspaper turf, classified advertising. Then CareerBuilder and Monster.com took on the employment section. Coupons became available on-line. Blogs on every conceivable (and some not conceivable) topics were started by people with a passion. There was more variety, because more people were adding to the mix. And all of it (well, most of it anyway) was free. The newspapers had nothing to counter these new offerings.
- So, the papers tried to find alternative ways to bring in revenue and lower costs. They reduced foreign bureaus and they furloughed editors and reporters. The big guys started to syndicate their reporting to smaller papers in hopes of getting some revenue boost. Now, the same NY Times story was being reprinted in the Orlando Sun or the Topeka Capital-Journal. The big papers put in paywalls, where a consumer would have to pay a subscription fee to view their content, but since folks in Topeka or Orlando already saw the content and it was available free, people had an easy way to Google their way to the same content that was behind the paywall.
- Then Google came up with Google News and culled news sources from around the globe and presented the news to viewers for free. Newspapers no longer had any loyalty from their readers when you could read multiple articles from different viewpoints on the same topic with only a click. Of course, the newspapers blamed Google for taking away their business, but in reality, they had not changed their business model in over 100 years and had not kept up with the changes in their customer base. And their old consumers were loving the new world with more choice and more information, in a more usable format.
Folks like Jeff Jarvis think about the news world all of the time and are trying to figure out what the next big thing is. He is running a project at City University of New York’s Graduate School of Journalism that explores new business models for news. But not all of the good ideas come out of New York.
Here in Chicago, a couple of friends of mine, Jeff Leitner and Jim Jacoby at Manifest Digital have been working on what could be a game changer for the news business — or rather, the vacuum created by failing news businesses. Jeff and Jim are teaming up with another Chicago company to produce something they call a private label news service.
In short, they create legitimate news outlets for their clients — professional reporters, professional editors, straight news. Watch this — it’s a minute and a half and pretty damn entertaining.
The point of this is that one of the things that newspapers have always provided is a third party objective view of a story. The best news stories are not a press release sent out by companies, but real stories reported by real reporters. For example, the US Chamber of Commerce was interested in delivering news about the state attorneys general, so they created Legal News Line. Real news on a regular basis reported by credentialed journalists through their own news portal, but also delivered to places like Google News.
I’m not sure that I believe that this is the future of news, but it is darn interesting.
Entrepreneurship Blogger: I just found a new entrepreneurship resource that I need to share. Mark Suster writes Both Sides of The Table as an entrepreneur turned VC. His writing is clear and he writes about things that all entrepreneurs need to read. I think I have “starred” his posts 4 or 5 times in the last several weeks as clear thinking about topics I care about.
Reminders: Do you sometimes send an email request out to someone and then forget about the fact that you are expecting something in return? Then a deadline passes and you say, “Where in the heck is that response from so and so?”. There is a simple new tool out there for free that will help you. It is called FollowUpThen. To use it is simple. Just add an email address in the form email@example.com to your cc: or bcc: list and the site will send a nicely formatted email after that time period has passed. If you add it to the cc: list, then if the recipient doesn’t reply all with the answer to your request, FollowUpThen will send both you and the recipient the reminder email. If you add it to the bcc: list, the reminder will be sent only to the originator of the email. The xdays can be any number of days, weeks, months, years or hours. The tool seems to me to be an elegant solution to a common problem.
Legal Aid: If there is one thing in this world that I love is a business success story. There are a lot of things that make me crazy, but one of them is lawyers who go the extra mile to make tons of money at someone else’s expense, damn the particular merits of a case. The latest Chicago entrepreneurial success story is Groupon. If you have never heard about them, they create a deal a day for each city that they are in (now up to well over 50 cities). If a minimum number of people sign up for the deal, it is a go. The deals are usually pretty great — normally 50% or more off of some service. Each day you get this little present in your email box describing the deal — a manicure, massage, dinner, auto show tickets or Cubs rooftop box are just some examples. I have used their service and absolutely love it. Its free to sign up and just choose each day whether a specific deal will work for you. Their customer service policies are unbelievable. If you have a problem, normally they will just refund your purchase price, but they have been known to work with their vendors to make alternative dates available or accept expired certificates. Nothing but good things.
So, what’s the problem? Well, a local law firm just filed a class action lawsuit claiming that Groupon systematically deceives their customers. Best retort I have seen in a while — Groupon is declaring a class action lawsuit against itself. Let them know if and how you were deceived and they will make it right. If only there were some procedural way to have a law firm punished, if found to be bringing frivolous lawsuits. This one certainly sounds frivolous to me.
When I went to school in the Dark Ages, we were taught in Economics that there is such a thing as Homo economicus, a purely rational human who makes all economic decisions based on “What’s in it for me” — sounds a lot like Chicago aldermen, but I digress. In many ways, this short cut made economics much easier. We didn’t have to worry about things like people’s desire for respect or willingness to impose “fairness” into our negotiations. But it was also a bit like physics, where we were told to ignore the effects of friction in some of our equations – a shortcut than didn’t really help our understanding of the world we live in.
As time moved on, economists and psychologists started to research whether the Homo Economicus was real or a fallacy. Scholars like Amos Tversky, Daniel Kahneman, Ian Ayres, Dan Ariely and Richard Thaler ran scientific experiments to see if people really did act rationally when it came to economic decisions. What they all found, in various ways, was that we are not rational at all when it comes to buying, negotiating, selling, responding to advertisements and even going to the movies. In fact, to steal the title from Dan Ariely’s most famous book, we are Predictably Irrational.
I have recently completed reading the book Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone. I had read a number of Poundstone’s books before. He wrote books on secrets and puzzlers like How Would You Move Mount Fuji?, but I wasn’t prepared for the level of detail and research that he had completed to write this book.
The book is structured into 53 chapters. Each chapter takes a specific pricing case and talks about the specifics of the deal. There is also a description of a scientific experiment that describes the psychology of the participants. I had read about a lot of the experiments before, but this book allowed you to tie the results of the experiment with the results of a pricing decision in a very real way.
Poundstone opens the book by retelling of the McDonald’s hot coffee lawsuit, where the attorney for the plaintiff in the case employed a simple scheme to raise the amount of the jury award — he simply asked for an astronomical award from the jury. This raised the anchoring point for the jury so that while they awarded much less than the asked for judgment, they awarded much higher than any rational person would have considered the case to be worth. Anchoring also works in the grocery aisle. Not too long ago, the standard size for ice cream was a half-gallon. Consumers had in their minds what they normally paid for a half-gallon of ice cream. Manufacturers wanted to raise prices (their costs had increased) but were concerned that if they raised prices, people would notice and either change brands or even more worrisome, consider alternative dessert items. So, now if you go into the grocery store, most ice cream is sold in 1.5 or 1.75 quart sizes (a reduction of 12-25%), but the pricing is kept in the same familiar range. The average consumer doesn’t realize that they are getting less for the same price and the market share of ice cream as a portion of the dessert market is safe. Anchoring at its best.
One of the experiments that gets a lot of play in the book is the ultimatum game. In this game, one person is given $10 and is told that they can give any part of the $10 to another player. If the other player agrees, then the deal is done. If the other player does not agree, neither party receives any money. This simple game uncovers a lot of different outcomes. Men perform differently from women, Type A’s perform differently from Type B’s, Liberals perform differently from Conservatives, sober people perform differently from those more tipsy. Is the proposer most rational when he proposes $1 to be given to others while keeping $9 for himself? Is the receiver rational when rejecting a deal that would make them $1 richer in order to punish the unfairness of the proposer? The best example in the book of the ultimatum game in real life is the story of Jack Welch’s divorce negotiation. While we normally think of Neutron Jack as a most savvy businessman, it was fun to read the story how of his former wife turned the tables on him using the precepts of the ultimatum game.
Each of the chapters talks about ways that we as consumers are manipulated to paying more or selling for less than our mythical ancestor Homo Economicus would have been expected to. This is certainly important to consumers, because a savvy consumer who is aware of the psychological tricks can make smarter purchasing decisions. As business people, it is helpful to understand how to price your products and services in order to reduce price resistance.
This book was a pretty easy book to get through with enough concrete examples to catch your attention. In the 1-5 star rating category, I would give this book a solid 4 star rating.