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.
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.
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.
I just finished reading Atul Gawande’s newest book, The Checklist Manifesto: How to Get Things Right. Dr. Gawande is a great thinker and I had enjoyed reading his prior two books about the medical community: Better: A Surgeon’s Notes on Performance
and Complications: A Surgeon’s Notes on an Imperfect Science. In this book, he talks about a simple way to reduce errors in the operating room, a checklist. He talks about how checklists can be developed and how they are used in aviation to reduce errors in the cockpit.
There were a couple of key takeaways for me from this book. Gawande reports on the research of the science of complexity. Professors Brenda Zimmerman of York University and Sholom Glouberman of the University of Toronto have developed a distinction between three types of problems in the world. The first type is simple – like following a recipe to bake a cake. You may have to learn some parts of it, but it should be repeatable if you follow the instructions. The second type is complicated – think of sending a rocket to the moon. In a complicated problem, you can usually break it down into many simple problems, but you will have multiple people or teams, multiple specialties and timing and communication become serious obstacles to be overcome. The third type is complex – the example given here is raising a child. Unlike sending a rocket to the moon, if you successfully raise a child, there is no guarantee that your second child will turn out the same. Experience is helpful, but by no means sufficient. It is possible to successfully raise a child (no matter how you define that), you just can’t predict how it will happen.
In each of these types of problems, a checklist can be helpful. In the simple case, a recipe is a simple checklist that ensures that all of the steps are completed in the correct order. In the complex case, a checklist can be used to schedule the work that needs to get done, coordinate the interactions between the different teams and even regulate the communication between teams that is required to iron out issues that arise during the project. Gawande spends some time in the book detailing a large building project and their use of checklists to ensure that all of the myriad details that must be accounted for during a skyscraper construction project are managed.
It is in the complicated cases that the uses of the checklist have really not been utilized. For many years, the complicated cases have seemed to be too random to be managed through checklists. In the surgery, complications are all too often a regular part of the job. This antibiotic doesn’t work for this patient. The patient suddenly develops an infection. The laboratory does not deliver the right type of sample collection device. But Gawande and a team at the World Health Organization worked on a trial project with 8 hospitals around the world to try checklists in the operating room. Their goal was not to address all of the potential complications. They created a list of 19 specific things to check before, during and after a surgery. Things like, did you check the patient’s name bracelet, did you give pre-surgery antibiotics, if there is a chance for blood loss, did you request blood supplies be available. In addition, the checklist required that the team all introduce themselves before surgery. This bit was introduced to help the surgical team function like a team, when the complications arose.
The results from the trial were unbelievable. Hospitals from the US, Canada, UK, Australia, India, the Phillipines, Jordan and Tanzania participated. Overall, the rate of major complications for surgical patients in all eight hospitals fell by 36% after the introduction of the checklist, while deaths fell 47%. Such a simple concept. But it forced everyone to concentrate on the issues that they had control over, while preparing them to work as a team on the unforeseen complications that inevitably arise.
Now, usually I write about entrepreneurship, so why is this so important?
Well, Dr. Gawande took his message of the value of checklists to experts in other industries to see if there was a correlation. One of the folks he talked to was Geoff Smart, who wrote a top selling book on hiring called Who: The A Method for Hiring. Smart did a project with Venture Capitalists where he evaluated the style that the VC used to make investment decisions. The VC’s that used a checklist approach had a 10% likelihood of replacing the senior management versus 50% for VC’s that didn’t use the checklist. They were also more financially successful. The checklist users had an 80% ROI versus 35% or less for the rest.
As you look to develop your businesses, it seems like a good idea to implement checklists throughout your businesses. Even though your outcomes may not result in life and death, like Dr. Gawande, the benefits of using checklists to cull out the simple and mundane errors and focus on the complicating factors will strengthen your business.
Lately I have become fascinated with the sales process. Those of you who know me well, are not surprised, since sales has always been a Black Hole area for me. But my fascination is really directed at a certain type of sales process. Let me explain.
When you think of sales, you normally think of a company who has a product or service and has to find customers for that deliverable. There are a lot of folks writing articles about and perfecting their sales processes to get that prospect to sign on the dotted line. Everybody from Boeing to the local deli has their own process down and understands what they need to do to ensure that the income keeps rolling in.
In the past several weeks, I have had conversations with several businesses that have a dual sales process. That is, they have to sell someone on the idea to sell a product to the end user.
At DePaul University’s Coleman Entrepreneurship Center, I attended a Blueprint Connections networking event recently. These events give student entrepreneurs an opportunity to talk with and present their ideas to experienced business folks. I am always excited by the future of business after attending these sessions; there is just so much energy there.
At this event, I met a student named John. John had started a business of providing real estate services to college students. His goal was to match students to the perfect apartment. John had a good sense of his market, he understood the value of high quality service and he made a compelling case. His challenge, though, was that in order to make a sale, he actually had to make two sales. He had to develop relationships (and contracts) with landlords, so that he could show their properties and get paid for the successful lease process. Then he had to sell the students on the need for his services and the “inventory” of properties that he could show. It is a devilishly hard process to manage.
Another company that I have been working with sells a licensed commodity to a large retail chain. The owner needs to get legal authorization from each licensee (think over 15,000) to sell their licensed material. Then he has to work with the store manager (there are over 5,000 of those) at the retail chain to offer his products. Even though corporate has given the green light to selling the products, they want the store managers at the local level to make the final decision. It is a balancing problem. You want to go out to the licensee and get the authorization so that you have something to provide to the retail chain, but it certainly is helpful if you have the local retail store already on board to sell the products and can go to the licensee with a pre-order.
These opportunities are golden opportunities, because they have the benefit of a contractual relationship between the parties and that makes it more difficult for others to enter. When we talk about investors funding ventures, one area we normally talk about is barriers to entry. These dual-focused sales efforts do provide some level of barrier. The challenge is how to balance the sales efforts in a knowledgeable and responsible way to grow your business.
A number of the technology companies that I have been advising have been working towards building whatever they have to build to get a product into the marketplace. They have lists of features and are using some sort of project management system to track their progress. The feature lists are long and sometimes include esoteric features that the founders believe will immediately make them more newsworthy and consequently, more able to be funded.
My advice to my entrepreneur friends is simple. The biggest thing that makes a difference in getting funding is having paying customers. The faster that you can get a paying customer, the faster you can show to the world that you have a product or service that people want. The difference between pre-revenue and post-revenue is huge. Of course, post-revenue has a volume to it. One paying customer means something; 200 paying customers means something much more. But as the old Chinese proverb says, a journey of a thousand miles began with a single step. Take that step early.
Take the time up front to identify the minimum that you need to do to give your potential customers value and give them a glimpse of the future. Once you have decided what the initial feature set is, develop with all your heart and soul. Work fast and resist the temptation to add features. Keep a list, off to the side, of the neat features that you might want to consider in release 1.1 or 1.2. Go through the entire development cycle. Do not forget to quality check and validate your user interface. But release that code and sell that product. Most likely, your initial customers will not be shy about asking for additional features. Add them to your list and keep track of how many times each item is requested and by whom.
Only when you have gotten some paying customers to utilize your system can you determine which features are most critical to your success. That gives you the understanding to wisely choose the small set of features that will be in the next release. The unanticipated advantage of this is that you get another chance to tell your customers and prospects about a new release with new features that were suggested by them. You can’t get better PR than telling your customers that you are listening to them.
The best software firms out there do this… Look at Google with Google Reader or Google Docs. They push out new features almost every other week. Look at 37 Signals. Backpack today is much different from when it started out and the founders had no idea of the direction it should take, but their customers did.
You can’t get customers until you have a product out there. Release early and often.
When I think of all of the businesses that I might want to be involved with, the airline industry is down near the bottom of my list. Massive government intervention, public ownership, reliance on a wildly fluctuating fuel cost, overcrowded marketplace, customer service nightmares, unionized unhappy employees throughout the organization. Wow! But it still amazes me that the executives in charge of the majors take their eye off the ball so often.
Doug Parker, president of US Airways, crowed that the carrier was making $400 million per year on ancillary fees. Never mind that the industry continues to lose money. Never mind that US Airways lost $100 million in a recent quarter and saw its revenue drop over 13%. United Airlines makes $14 per passenger in ancillary charges, but lost $382 million in Q1 2009.
Never mind that the average consumer is tired of being nickled and dimed – window seat, head set, cut in front of the line, extra 5 inches of legroom, snack, soda, more miles, checked bag, overweight bag, travel on a busy day, talk to a ticket agent, redeem a frequent flyer award – all of these cost extra on at least one major airline (excepting Southwest). The whole travel experience is now so convoluted that some people have decided that the hassle of air travel is just not worth it. I have had 4 opportunities this year to travel that in years past I would have chosen to fly. Not this year… my rule has become only fly if necessary.
From a customer service perspective it is a disaster. Every time you need to talk to the company, they want your credit card. Their eagle eyed bean counters (and remember that I usually love bean counters) are crowing about the new revenue, but aren’t looking at how many people have stopped flying. That seems to be to be a bigger issue.
I mentioned earlier that Southwest has not moved to a la carte pricing. They haven’t had a losing quarter this year. Maybe that should tell the bean counters something.
Even in areas outside of the airlines, we see the same “logic”. I tried to buy college football tickets online last week. The website gave me two options for delivery. Print them out at home for $6 or pick them up at Will Call for $3. In neither case, did the college incur any significant additional cost, but there was that ancillary charge. Guess what, I didn’t purchase the tickets over the internet. Oh well.
For those of you out there looking to break down your pricing to provide a more a la carte menu solution, I would recommend really investigating whether you will achieve the goals that you hoped by doing so. You may be much better off by playing the Southwest to the majors.
Recently, as part of some non-profit work I have been doing, I have been to two banks. The purpose was to redeem CD’s that have matured. These are not small accounts. One was for low 5 digits and the other low 6 digits. Small community bank and mega-bank. From the outside, not a whole lot of similarity here.
What was amazing to me was that no one at either bank asked if they could do anything to keep our account? Can I tell you about our new CD rates? I would be happy to match the rate for any local bank. Nothing. Just typed up the cashier’s check and handed it to us. I know that the banking business is in such a difficult place these days that I was floored that no one tried to keep an existing customer from leaving.
But hey, what do I know, I am not making the huge bucks running a bank. I am sure that they know way better than me.
So, if you don’t run a bank, take my advice. Ask people who are leaving “Is there anything that I can do to keep you as a customer?”. Fix the problem or make a better offer. It has to be cheaper than signing up a new customer and you have the possibility of someone like me writing a very different blog post about you.
I haven’t done a good listing of links lately, so here you go…
Fun: Gotta love this picture…
Video: Regular readers know that I love Seth Godin. If you have never heard him speak, take an opportunity to view this video of a speech he gave last year to a software developer’s conference.
Management: Netflix, a company that I admire for a lot of really great things, has posted a slide deck of how their corporate culture works. It is long (128 slides), but it reads quickly. It is a must read for any entrepreneur trying to establish a coherent and successful culture.
Time: I read this article a couple of weeks back and it keeps coming back to me with a simplicity of the content and yet the relevance. Paul Graham writes about Maker’s Schedule and Manager’s Schedule.