Common business manager mistake

They think it’s their job to ‘sell ice to Eskimos,’ as the old saying goes, rather than figure out what kind of ice Eskimos might value.

It is assumed that Eskimos don’t need ice since they are surrounded by it.

Many folks in the lower 48 are surrounded by trees, yet they still buy wood in many different forms like lumber that frames their home, furniture, cabinets and decks.

And, they didn’t need a slick-talking salesperson to persuade them not to cut down the trees in their backyard and fashion their own wood products from them.

It’s like pork rinds and potato chips

Newbie managers and sales people often want to lower prices to increase sales. “It’s simple,” they say, “if we lower prices, we will sell more units and make more money.”

The first part of that is typically true. More units will be sold at a lower price.

The second part is the problem. Not enough extra units will be sold to increase revenue.

The math behind this is difficult for many people to grasp. How can we sell more units and bring in less money?

They don’t consider that we will bring in less money on the units we would have sold at the higher price if we had not lowered the price.

One day, I was having trouble explaining how this worked to a group of sales managers. One of them helped out with a simple story that went something like this.

It’s like pork rinds and potato chips. Some people love pork rinds. Some love potato chips.

What you’re saying is lowering the price of potato chips won’t get enough pork rind lovers to switch to potato chips to cover the money you lose by selling chips at a discount to chip lovers, people who would have bought the chips at the higher price.

Yes!

Further, rather than trying to sell pork rind lovers something they don’t want at a discount, try selling them something they do want (pork rinds) and see what happens.

 

 

The value prop of opt-out vs opt-in

The world has been transitioning from opt-in to opt-out for awhile. Have you noticed?

What does that mean?

In the old days, if you wanted to buy clothes you had to opt-in to the whole process. You opted-in to shopping, finding and then buying. You did a lot of the work.

Stitch Fix changed clothes buying to an opt-out value proposition. Many people attracted to Stitch Fix for low cost styling, but stay for the convenience of the opt-out process.

Of course, styling and fit are key value components. If Stitch Fix missed on those marks, few would stay.

But, as a customer, I’ve found more value than I expected because I can now avoid a good deal of the opt-in clothes shopping process while keeping my wardrobe up-to-date.

Of course, Stitch Fix did not invent this approach. After all, fruit-of-the-month clubs have been around for awhile.

But, they did tweak it with some technology so customers get more of what they want by  doing less. I imagine the business does less, too. It seems having one or two locations that you ship orders from should be more cost effective than stocking and running a network of retail stores.

And, by more of what I want, I mean that on several dimensions. I get styles I like, clothes that fit and keep my wardrobe up-to-date. I also get to try new brands and to try slightly experimental styles (a risk profile you can set) that I might not pick out myself.

By doing less, I mean I don’t have to drive to multiple retail stores, rifle through their racks, try on things, compare, winnow down, stand in line, buy and then drive home.

Managers who haven’t thought how they can deliver their products or services with an opt-out model in valuable ways for their customers should be.

Why many companies don’t innovate well

While discussing this post about innovation with a friend, it occurred to me why so many managers “don’t put enough hooks in the water” with their innovation efforts.

That post likened primitive survival fishing to business innovation.

A good primitive survival fishing strategy is to put 10 or more hooks in the water. This recognizes that any one hook has a 10% chance of catching a fish each day. If you want to catch a fish every day, you need to put 10 hooks in the water.

This is also a good business innovation strategy. Each innovation experiment has a low chance of success (even the ones that sound like sure winners), so best to get as many hooks in the water as possible, to improve your chances of finding a few that work.

Many primitive survivalists don’t consider those odds or think they can beat them by knowing the best spots to fish. This is like managers who think they know how to pick winning innovations.

These types of managers tend to view the ‘putting more hooks in the water’ strategy as a sign of weakness, an admission that they don’t have the answer to lead the organization forward. And, they believe their job is to have that answer.

Sometimes they are lucky and catch a fish. They then mistakenly view that as a success of knowing where to fish instead of chance.

Over the course of their career they are likely to hit a one or two successes, which is enough for them to believe it was their skill, instead of luck. The failures, though, they write off as bad luck.

When they fail, they move on to their next employment and hope for the best.

The core problem is with who hires them. They hire people who exude confidence in knowing where to fish and, like the less successful primitive survivalists, don’t find putting more hooks in the water as desirable.

I can envision how these interviews go.

“What are your ideas for moving the company forward?”

“I don’t know. I like to try a lot of stuff and see what works.”

If your mindset is in the ‘knowing where to fish’ camp, this does not sound acceptable. You might think, ‘Well, if it was as simple as that, we could do that without you. Why do we need you?”

More on how I would answer that in a future post.

Co-ops and employee-ownership

These two forms of business organization are interesting since they align two of the three main stakeholders of organizations.

REI Co-op is a retail co-op that sells outdoor recreation equipment. I am a co-op “member”. I paid a $20 one time fee for the honor.

I receive my dividend each year in the form of product discounts that add up to 10% on what I spent the previous year.

The co-op aligns the interests of the customer and owner, because they are the same people. Customers want good quality products and services and good prices.

As owners, though, we also want the co-op to stay in business so we can keep buying good stuff, so we don’t want prices to be too cheap, or else the quality we desire as a customer may be sacrificed.

Because of this co-op customers may more aware that reasonable prices (rather than rock-bottom prices) serve their interests than customers of other types of organizations.

Credit unions are similar. They are essentially banks owned by the bank’s customers.

One of my parents worked for an employee-owned company.

Employee ownership aligns the interests of the employees and owners, because they are the same people.

The employees want to be paid well and also want the product quality and prices to be reasonable so the business will continue to do well.

Employee-owners may be a bit more aware of where their paychecks come from than employees of other types of organizations.

I wonder why these types of business organizations aren’t more common.

What if the union bought GM? Instead of having to bargain with management about compensation, they could pay themselves what they want.

Or, how about a streaming service owned by it’s members? What would that look like? Could that compete with Netflix?

Second order effects in retailing

As I shop for the holidays, I have encountered more than just by random chance items where the website claims “Hurry, Only 1 Left in Stock!”

I’m sure a randomized control trial somewhere showed that this message creates a sense of urgency and increases the conversion rate for those viewing the item.

However, I also find myself thinking that I don’t really care to frequent retailers that have such thin inventory where every purchase feels like a bidding war to get that last item, especially when we’re talking about relatively mundane, everyday items.

I prefer retailers that carry deep inventory in such items so that I can feel confident that the effort I put into visiting their website or store will give be rewarded with actually being able to obtain the item.

I predict that a second order consequence of this inventory messaging may decrease returning shoppers.

Storybook managers

Powerpoint presentations are the norm in business today.

Folks good at telling stories in presentations have become useful.

The trick is to follow the format of a children’s book. Don’t make more than two points per page and have a simple and nice looking graphic to illustrate those points.

The downside is that organizations need these folks at all. They’re needed because people find their way to high positions who don’t understand the basics of the business or of business, so having the business explained to them in a children’s book format is helpful.