Sunday, 17 April 2011
New language, new blog!
I have decided to discontinue the english version of my blog and go for a norwegian one instead. Please feel free to follow the new, norwegian blog at oppst.blogspot.com
Thursday, 21 October 2010
Your first customer
Enough with the top-down total addressable market (TAM). Enough with the press releases, the ads, the unsolicited e-mails, the planning, the strategizing and the writing of comprehensive business plans. Your first customer is the hardest one you’ll get, and by far the most important. And the best way to get it is to pitch your idea to people that might want to buy your product.
That first customer will provide market validation – i.e. someone actually needs your product. It will provide feedback – i.e. the little hints, tips, tricks and tweaks that focus your product offering to best service the customer. And finally it provides you with a reference, meaning someone that can actually communicate that the product had value to your second, third, your forth and so on, customer.
So pick up that phone and start pitching!
Wednesday, 20 October 2010
Designing a simple business part I: Working that idea
This is the first in a series of posts I plan on the topic of designing a simple business. The idea for the series started when I realized simplicity is a common feature of many of the great startups that are out there. If you can visualize a business it’s easier to evaluate it, and improve the individual parts. This first post deals with the initial idea, and the main message about your initial idea is to get you to simplify your idea - don’t bite off more than you can chew.
What is a business idea? - The three components.
A business starts off with an idea. The idea should be something that creates value for someone, said value must be deliverable to whomever it creates value for, and there should be some way of capturing this value (including protecting it). If this process seems simple for a particular idea, it’s easier to think of it as good.
A good idea exemplified
Imagine you’re the inventor of corrective eyewear (i.e. glasses). Until now there has been no product which deals with bad sight. You can probably pretty quickly see roughly how you could go about making money on this idea. Corrective eyewear creates value for people that have poor eyesight, it can be delivered through for example pharmacies, and you can capture the value through charging money on the spot. Additionally it is likely that you could protect the idea with patent, for instance the use of optical lenses for correcting eyesight should be patentable if you are the first to think of it.
The simplicity that makes this idea good comes from three aspects. Firstly, the idea deals with a specific need. Secondly, there is a clear path to market which may not cost you too much (i.e. it’s “doable”), and lastly there is a clear way to make money, as well as a clear model of how you can protect the idea (patent) while you build a strong market position.
Simplify your idea!
Too often entrepreneurs pitch ideas that are just too complex, and it comes from the typical business/engineering school instinct of wanting to cover everything. Every customer, every need that customer have/will come across in the foreseeable future. Every possible product that can cover these needs, and every application of said product. The reason we do this is that we think there’s more money in more customers, and more products. Which of course there is. However, very few companies end up where they thought they were going. Starting a business is all about adaptation. And to be successful, you need an idea that you can test systematically and improve upon.
Note that it’s not always that complex ideas are bad. They’re just hard to test objectively, because you cannot separate the issues. For this reason I propose that the first thing to do when starting a business is to simplify the business idea.
A complex idea
The other day I met a young aspiring entrepreneur. He was full of life, and eager to tell me his idea. I paraphrase:
So what’s the need anyway?
This idea is so complex, and includes so many different aspects, that it's really hard to understand even what the actual need is. At first it seems the need is for a simpler shopping experience. But is it really simpler to go to a website and pick everything you need? How would you pay, do you need to enter your credit card number or would you pay on pick up? Do you need an account? How do you verify that the person that picks it up is the right person? What if someone else picks up your groceries after you paid for them? It could be a simpler shopping experience, but maybe it’s really just a faster shopping experience? Maybe removing the need for staff is a significant cost reduction for a store? Or is it just a cooler shopping experience?
In any case simpler and faster in this context are secondary needs. The consumer’s primary need is for groceries. Imagine the complexity of creating a grocery chain in and of itself. Imagine to then try to make it simpler and faster! Indeed you would have to compete on a lot of other factors as well. Would you for example be equipped to keep the salad green? And I'm not even going to attempt to comment on the capital needs to make this happen.
Let’s simplify!
Creating a new grocery store is very complex, and I think we can agree that doing so is probably not something you'd want to do. And if you are not deterred yet, let me assure you that you will not have an easy time raising funds for such a venture.
But there's a silver lining, because surely there are great ideas within this idea. From the idea, we can find many smaller ideas. The point is to start with something simple, something that you can easily test against the market. One way we can go about extracting ideas from his idea, is by looking at the needs, and finding solutions to service them. Let’s look at the need for lower costs for grocery stores, and see if we can extract something simpler. Now I’m not claiming that this is a good (or new) idea - just that it’s simpler, and therefore easier to understand and test in a structured way. Let us then ask the question, "how can we use automation to cut costs in a grocery store?"
A simpler idea to lower costs for grocery stores
One of the main drivers of costs for grocery stores is the staff. The main bulk of people working at grocery stores are those that scan items and receive payment. So if we could automate checkout it would represent a clear cost reduction. One way to do this is by allowing customers to do this job themselves. Self-checkout would be presented in stations, each station consisting of 5 registers, each with a scanner and a system for payment. At each station one clerk would be stationed to help customers that need help, to receive cash payments (if this is important to incorporate of course), and to make sure everyone is using it correctly (e.g. so they don’t leave without paying). The solution could be delivered on a store-by-store basis, so that a chain of stores would try it out at some locations first, and then scale it up when they were comfortable using the system. Value could be captured through a leasing based plan, and the idea would be protected by moving quickly to gain a first mover advantage (for those that believe in that sort of thing).
Evaluating the idea
Regardless of whether the idea above is good or not, we certainly understand better what it’s all about now. If we decided to start a company commercializing this technology we could write down hundreds of clear and testable hypotheses about the market, which we could then proceed to test, for instance:
- Grocery chains wish to reduce costs by replacing staff
- Customers are willing to check out their own goods
- Cash payments are important for customers
- Customers will generally be honest when scanning their merchandise
Some things would be confirmed, and some things would be completely different from expected. These things would have to be sorted out. This is where the real innovation lies. For example, if customers are dis-honest, how can you make the check-out desks verify that all goods was scanned, and that the correct goods was scanned?
Of course it’s not that straight forward in real life, you still need to consider your competitors, make a strategy to avoid being copied too soon, facilitate production, consider your costs and pricing structure, and so on. However, you can now visualize how the business might look. This is a necessary first step to formulating the hypothesis that needs to be true in order for your business to flourish. The next step would then be to start testing these
The next post will look more closely on evaluating your idea, and deals with the 10 questions you should spend 15 minutes asking yourself before you move ahead to more advanced and time consuming analysis' of your idea.
Lessons learned:
- Ideas should ideally include how your business might create, capture and deliver value.
- When you see how an idea might work, it’s easier to formulate testable hypotheses about the product.
- Complex ideas, that are hard to visualize can and should be simplified.
What is a business idea? - The three components.
A business starts off with an idea. The idea should be something that creates value for someone, said value must be deliverable to whomever it creates value for, and there should be some way of capturing this value (including protecting it). If this process seems simple for a particular idea, it’s easier to think of it as good.
A good idea exemplified
Imagine you’re the inventor of corrective eyewear (i.e. glasses). Until now there has been no product which deals with bad sight. You can probably pretty quickly see roughly how you could go about making money on this idea. Corrective eyewear creates value for people that have poor eyesight, it can be delivered through for example pharmacies, and you can capture the value through charging money on the spot. Additionally it is likely that you could protect the idea with patent, for instance the use of optical lenses for correcting eyesight should be patentable if you are the first to think of it.
The simplicity that makes this idea good comes from three aspects. Firstly, the idea deals with a specific need. Secondly, there is a clear path to market which may not cost you too much (i.e. it’s “doable”), and lastly there is a clear way to make money, as well as a clear model of how you can protect the idea (patent) while you build a strong market position.
Simplify your idea!
Too often entrepreneurs pitch ideas that are just too complex, and it comes from the typical business/engineering school instinct of wanting to cover everything. Every customer, every need that customer have/will come across in the foreseeable future. Every possible product that can cover these needs, and every application of said product. The reason we do this is that we think there’s more money in more customers, and more products. Which of course there is. However, very few companies end up where they thought they were going. Starting a business is all about adaptation. And to be successful, you need an idea that you can test systematically and improve upon.
Note that it’s not always that complex ideas are bad. They’re just hard to test objectively, because you cannot separate the issues. For this reason I propose that the first thing to do when starting a business is to simplify the business idea.
A complex idea
The other day I met a young aspiring entrepreneur. He was full of life, and eager to tell me his idea. I paraphrase:
“So what I was thinking was to automate grocery stores, so customers can just make a shopping list online, say when they want to pick their goods up, and just appear at the store. Also there would be no one working in this store, so you would check out everything yourself. Furthermore all inventories would be updated at the suppliers, so everything would always be in stock, but just enough to handle the daily demand”.Ok, I thought, as he continued:
“Now I’m into automation, so I would make a system where deliveries would be made at the back and everything would be tagged with RFID-chips,( there’s so many cool things you can do with those), robots would then sort the goods and pick out what people order into bags. So everything’s ready when the customers appear!”
So what’s the need anyway?
This idea is so complex, and includes so many different aspects, that it's really hard to understand even what the actual need is. At first it seems the need is for a simpler shopping experience. But is it really simpler to go to a website and pick everything you need? How would you pay, do you need to enter your credit card number or would you pay on pick up? Do you need an account? How do you verify that the person that picks it up is the right person? What if someone else picks up your groceries after you paid for them? It could be a simpler shopping experience, but maybe it’s really just a faster shopping experience? Maybe removing the need for staff is a significant cost reduction for a store? Or is it just a cooler shopping experience?
In any case simpler and faster in this context are secondary needs. The consumer’s primary need is for groceries. Imagine the complexity of creating a grocery chain in and of itself. Imagine to then try to make it simpler and faster! Indeed you would have to compete on a lot of other factors as well. Would you for example be equipped to keep the salad green? And I'm not even going to attempt to comment on the capital needs to make this happen.
Let’s simplify!
Creating a new grocery store is very complex, and I think we can agree that doing so is probably not something you'd want to do. And if you are not deterred yet, let me assure you that you will not have an easy time raising funds for such a venture.
But there's a silver lining, because surely there are great ideas within this idea. From the idea, we can find many smaller ideas. The point is to start with something simple, something that you can easily test against the market. One way we can go about extracting ideas from his idea, is by looking at the needs, and finding solutions to service them. Let’s look at the need for lower costs for grocery stores, and see if we can extract something simpler. Now I’m not claiming that this is a good (or new) idea - just that it’s simpler, and therefore easier to understand and test in a structured way. Let us then ask the question, "how can we use automation to cut costs in a grocery store?"
A simpler idea to lower costs for grocery stores
One of the main drivers of costs for grocery stores is the staff. The main bulk of people working at grocery stores are those that scan items and receive payment. So if we could automate checkout it would represent a clear cost reduction. One way to do this is by allowing customers to do this job themselves. Self-checkout would be presented in stations, each station consisting of 5 registers, each with a scanner and a system for payment. At each station one clerk would be stationed to help customers that need help, to receive cash payments (if this is important to incorporate of course), and to make sure everyone is using it correctly (e.g. so they don’t leave without paying). The solution could be delivered on a store-by-store basis, so that a chain of stores would try it out at some locations first, and then scale it up when they were comfortable using the system. Value could be captured through a leasing based plan, and the idea would be protected by moving quickly to gain a first mover advantage (for those that believe in that sort of thing).
Evaluating the idea
Regardless of whether the idea above is good or not, we certainly understand better what it’s all about now. If we decided to start a company commercializing this technology we could write down hundreds of clear and testable hypotheses about the market, which we could then proceed to test, for instance:
- Grocery chains wish to reduce costs by replacing staff
- Customers are willing to check out their own goods
- Cash payments are important for customers
- Customers will generally be honest when scanning their merchandise
Some things would be confirmed, and some things would be completely different from expected. These things would have to be sorted out. This is where the real innovation lies. For example, if customers are dis-honest, how can you make the check-out desks verify that all goods was scanned, and that the correct goods was scanned?
Of course it’s not that straight forward in real life, you still need to consider your competitors, make a strategy to avoid being copied too soon, facilitate production, consider your costs and pricing structure, and so on. However, you can now visualize how the business might look. This is a necessary first step to formulating the hypothesis that needs to be true in order for your business to flourish. The next step would then be to start testing these
The next post will look more closely on evaluating your idea, and deals with the 10 questions you should spend 15 minutes asking yourself before you move ahead to more advanced and time consuming analysis' of your idea.
Lessons learned:
- Ideas should ideally include how your business might create, capture and deliver value.
- When you see how an idea might work, it’s easier to formulate testable hypotheses about the product.
- Complex ideas, that are hard to visualize can and should be simplified.
Sunday, 15 August 2010
Free-ranging skilled laborers
Whenever I have my hair cut I adhere to two rules. Firstly, I try to switch between hairdressers which I know and new ones, and secondly I give the hairdresser free reins. The first rule is really just in case there are better hairdressers out there than the ones I've been using, it’s about discovery. The second rule is the one that’s the most fun. It's worth noting here that I've been in college for the past five years, so it’s never really been a big problem if my hair was a bit weird. There has been no boss to send me home should I suddenly have a green mohawk, and thus I have been in a position to take high risks with my hairdo.
This is how it works; I go to a hairdresser and get seated. The hairdresser will ask me how I want my hair, and I’ll say something like ‘Oh, I really hadn't though of that…. What do you think? Ok, I trust you. Do what you think would look awesome!’ The reason of course is this: I am not an expert on hair, hair dressers are. They cut hair al day, they know what's cool! Imagining and describing new hair styles and judging their awesomeness is way outside my field of expertise. I trust experts to do this for me.
The really surprising part of the story is that I have never experienced, in five years of doing this, a truly horrific haircut. No green mohawks. And what’s more is that I can see the hairdressers faces light up when I tell them. Apparently, this is not a common practice. Normal customers just want the handiwork, not the creative part, yet hairdressers are often times really good at that. I believe that if you free skilled and creative people, that they will sometimes do awesome things. This, I think, begs the question, ‘do we do this in other situations?’ I mean, when we hire ad agencies, do we bring a slogan, and an idea for how the final print media should look? Do we say, ‘Yeah, you guys should just design this…’ Because that seems like a really bad idea, right? Or do we go to architects get them to draw the exact house that we had already decided on. I think we do, and i don't think it's a smart way to buy services from skilled people. I think we need to let go, and trust that professionals are good at what they do.
It’s important, I think, to be aware that you have people around you that are good at things you aren't, and it’s even more important to utilize these people. When you micromanage people that knows what they’re doing, you get sub-par results. Letting people do what they do best will often give the best outcome. But yes, it does entail a risk. You don’t always get exactly what you wanted, and you won’t always have control over every part of everything you do.
If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.
This is how it works; I go to a hairdresser and get seated. The hairdresser will ask me how I want my hair, and I’ll say something like ‘Oh, I really hadn't though of that…. What do you think? Ok, I trust you. Do what you think would look awesome!’ The reason of course is this: I am not an expert on hair, hair dressers are. They cut hair al day, they know what's cool! Imagining and describing new hair styles and judging their awesomeness is way outside my field of expertise. I trust experts to do this for me.
The really surprising part of the story is that I have never experienced, in five years of doing this, a truly horrific haircut. No green mohawks. And what’s more is that I can see the hairdressers faces light up when I tell them. Apparently, this is not a common practice. Normal customers just want the handiwork, not the creative part, yet hairdressers are often times really good at that. I believe that if you free skilled and creative people, that they will sometimes do awesome things. This, I think, begs the question, ‘do we do this in other situations?’ I mean, when we hire ad agencies, do we bring a slogan, and an idea for how the final print media should look? Do we say, ‘Yeah, you guys should just design this…’ Because that seems like a really bad idea, right? Or do we go to architects get them to draw the exact house that we had already decided on. I think we do, and i don't think it's a smart way to buy services from skilled people. I think we need to let go, and trust that professionals are good at what they do.
It’s important, I think, to be aware that you have people around you that are good at things you aren't, and it’s even more important to utilize these people. When you micromanage people that knows what they’re doing, you get sub-par results. Letting people do what they do best will often give the best outcome. But yes, it does entail a risk. You don’t always get exactly what you wanted, and you won’t always have control over every part of everything you do.
If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.
Wednesday, 21 July 2010
What I mean by "Killer Customers"
I find myself inventing terms sometimes, and lately I’ve been using the term killer customer as a parallel to killer applications. Today I thought I’d share with you what I mean by it and why it’s a good term to have in the back of your mind when considering start-ups.
A killer application is that thing about your product that is so awesome that it just compels people to buy it. It’s that first application of the technology that proves its worth. For example last year I came to talk with a student at the University of Oslo who had worked with some other people to create a software that reduced lag in networking. It would only have to be installed on a server and it would use some previously unused capacity to send redundant information and thus reduce lag significantly. My first thought when I heard about this was: “Give it to me! I’ll make us all millionaires”. Unfortunately (for me) it turns out it was open source, and the code was already meant to be implemented into the Linux kernel. But that’s really besides the point, the point is that I could see a killer application at once. Online gaming. Everyone that has ever played a MMO over a bad connection with loads of packet loss will understand why this is a good idea.
With this in mind, it's easy to imagine a killer customer: World of Warcraft. If this technology hadn't been open source it’s likely that they would gladly pay a lot to have it implemented. And with Blizzard on board it would just be a matter of calling those other MMO games to stack up the other millions. When that market is saturated you could go after video streaming, stock market information, and so on. A great opportunity.
The killer customers, thus, are the obvious customers that will give you cash flow quickly. Sometimes killer customers are those that need your product badly, and that will be glad to pay for it. Other times it may be someone that agrees to let you use them as a reference. For example I once met up with a start-up in Houston that was a spin-out from a major oil company, the company had extremely low market risk because the oil company had committed to being its customer should it succeed in productizing their technology. Having killer customers reduce your market risk, and will give you a much easier time getting funding and getting people to trust that your company will succeed. You don’t need to call them killer customers of course, just remember that the first customer is extremely valuable!
If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.
A killer application is that thing about your product that is so awesome that it just compels people to buy it. It’s that first application of the technology that proves its worth. For example last year I came to talk with a student at the University of Oslo who had worked with some other people to create a software that reduced lag in networking. It would only have to be installed on a server and it would use some previously unused capacity to send redundant information and thus reduce lag significantly. My first thought when I heard about this was: “Give it to me! I’ll make us all millionaires”. Unfortunately (for me) it turns out it was open source, and the code was already meant to be implemented into the Linux kernel. But that’s really besides the point, the point is that I could see a killer application at once. Online gaming. Everyone that has ever played a MMO over a bad connection with loads of packet loss will understand why this is a good idea.
With this in mind, it's easy to imagine a killer customer: World of Warcraft. If this technology hadn't been open source it’s likely that they would gladly pay a lot to have it implemented. And with Blizzard on board it would just be a matter of calling those other MMO games to stack up the other millions. When that market is saturated you could go after video streaming, stock market information, and so on. A great opportunity.
The killer customers, thus, are the obvious customers that will give you cash flow quickly. Sometimes killer customers are those that need your product badly, and that will be glad to pay for it. Other times it may be someone that agrees to let you use them as a reference. For example I once met up with a start-up in Houston that was a spin-out from a major oil company, the company had extremely low market risk because the oil company had committed to being its customer should it succeed in productizing their technology. Having killer customers reduce your market risk, and will give you a much easier time getting funding and getting people to trust that your company will succeed. You don’t need to call them killer customers of course, just remember that the first customer is extremely valuable!
If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.
Thursday, 15 July 2010
What does “make each other good” mean?
Part of my philosophy about teams is that each member should strive to better the other members, even at his own expense. This may sound weird, and in most cases it is in fact counter intuitive. That’s also why it deserves its own wording – making each other good, as well as its own blog post.
Let me give an example: consider two classmates that are applying for jobs after finishing their studies, they both have a lot of the same interests as well as the same educational background. This is a good example, because these individuals are not in a team, in fact they are competitors, it’s likely that they will apply for many of the same jobs. And just like them quite often team mates may find that what is good for one may not be so good for the other. Otherwise of course they would make each other good because there's no conflict of interest. But back to our example: So should they tell each other about interesting job postings they find? The intuitive answer is of course no, after all they are competing with each other for most of these jobs. Hmm, let’s look at some simplified math.
Let’s say these two have very specific interests, so that there’s not a whole lot of jobs, and they have to shift through a lot of information to find good prospects, now let’s say both find 10 jobs that are not overlapping, and that there are on average 30 applicants for each job (which I would say is a conservative estimate for good jobs these days). If they don’t tell each other they have a 1/30 chance to get each of their 10 jobs (assuming all candidates are equal of course) which means:
1-(1- 1/30)^10 = 0,29
29 % chance for each of them to get at least one of the jobs. If however they share their information so that both apply for all 20 jobs, they only have a 1/31 chance for each job:
1-(1- 1/31)^20 = 0,48
48 % chance each to get at least one of the jobs. The math here isn’t that important, it’s the principle that cooperation beats competition that is. This is transferable to other situations, but the issue however is how not to get locked in to a prisoner’s dilemma game where everyone wants everyone else to share but doesn’t share anything themselves. Nobody wants to share with people that don’t share back, and thus a negative spiral can reinforce itself until everyone walks around paranoid and keeping everything they do a secret. Sharing is a learned skill, one that involves reciprocity – quid pro quo. Teams and companies should be built on trust, we all know that, and one of the best reasons is that trust enables sharing, and sharing at (or despite) the expense of one individual creates synergy for the entire group.
Edit: I just thought of a little digression I should have included: When I was in the army I remember our sergeant would always ask for volunteers, and when nobody out of the 30 soldiers in our troop raised their hands the tension got so thick at times that you could cut it with a knife. One day we all decided that the next time he asked for volunteers we would all raise our hands, and the odds of having to do something would still be the same. This became a habit and later that summer it must have looked pretty neat when the officer in command of the entire base asked for a volunteer and saw 30 young boys eagerly raising their hands in the middle of about 1200 recruits that didn’t. We made our sergeant look extremely good that day, and that was not a bad thing for us.
If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.
Let me give an example: consider two classmates that are applying for jobs after finishing their studies, they both have a lot of the same interests as well as the same educational background. This is a good example, because these individuals are not in a team, in fact they are competitors, it’s likely that they will apply for many of the same jobs. And just like them quite often team mates may find that what is good for one may not be so good for the other. Otherwise of course they would make each other good because there's no conflict of interest. But back to our example: So should they tell each other about interesting job postings they find? The intuitive answer is of course no, after all they are competing with each other for most of these jobs. Hmm, let’s look at some simplified math.
Let’s say these two have very specific interests, so that there’s not a whole lot of jobs, and they have to shift through a lot of information to find good prospects, now let’s say both find 10 jobs that are not overlapping, and that there are on average 30 applicants for each job (which I would say is a conservative estimate for good jobs these days). If they don’t tell each other they have a 1/30 chance to get each of their 10 jobs (assuming all candidates are equal of course) which means:
1-(1- 1/30)^10 = 0,29
29 % chance for each of them to get at least one of the jobs. If however they share their information so that both apply for all 20 jobs, they only have a 1/31 chance for each job:
1-(1- 1/31)^20 = 0,48
48 % chance each to get at least one of the jobs. The math here isn’t that important, it’s the principle that cooperation beats competition that is. This is transferable to other situations, but the issue however is how not to get locked in to a prisoner’s dilemma game where everyone wants everyone else to share but doesn’t share anything themselves. Nobody wants to share with people that don’t share back, and thus a negative spiral can reinforce itself until everyone walks around paranoid and keeping everything they do a secret. Sharing is a learned skill, one that involves reciprocity – quid pro quo. Teams and companies should be built on trust, we all know that, and one of the best reasons is that trust enables sharing, and sharing at (or despite) the expense of one individual creates synergy for the entire group.
Edit: I just thought of a little digression I should have included: When I was in the army I remember our sergeant would always ask for volunteers, and when nobody out of the 30 soldiers in our troop raised their hands the tension got so thick at times that you could cut it with a knife. One day we all decided that the next time he asked for volunteers we would all raise our hands, and the odds of having to do something would still be the same. This became a habit and later that summer it must have looked pretty neat when the officer in command of the entire base asked for a volunteer and saw 30 young boys eagerly raising their hands in the middle of about 1200 recruits that didn’t. We made our sergeant look extremely good that day, and that was not a bad thing for us.
If you liked this post or any other post feel free to click the “follow” button to the right to stay tuned to new posts when they appear. You can also follow me on Twitter as @vetleen.
Friday, 25 June 2010
What do you sell? A new view on brand based products
What do you sell? I guess there’s already many ways of classifying this, nevertheless I would like to add one more. Do you sell a product or a commodity? Our economy grew out of what were largely commodities; agricultural products were traded in markets, often at market prices. Cotton is cotton, the only differences between vendors are price, quality and quantity.
As our society closed in on the industrial revolution we made a leap forward, we started making products. Pants are not equal to each other, even if they are made from the same material. The reason is that when we add some sort of processing to our commodities, we make them into products, but a side effect is that products vary more in terms of (perceived) quality than commodities do. Sure there’s good cotton and bad cotton, but nothing that justifies the kind of price differences we see in for example clothing.
This insight is something that is often overlooked, especially in economic theory. After all, consumer’s perceptions are hard to measure in numbers and models, and are thus often let out of the equation altogether – just represented by the demand function. The solution for this is usually to assume perfect markets, which, if they exist at all, mainly describe commodity markets. This is the source of our propensity to think that price is the only thing that matters. If the market leader in an industry is about to launch a product that competes with mine, the instinct is to lower price or increase quantity. This is often the wrong thing to do.
Economic theory has however also created useful tools. One of the best ideas, in my opinion, is the concept of utility. In all simplicity utility is a measure of the relative satisfaction from, or desirability of the consumption of various goods and services, and can as such contain whatever criteria consumers (or businesses) use to decide on which product to buy. In this view utility is the only reason people buy products, and the explanation why people buy something is simply that it yielded the best utility for the price.
Though many would disagree with me, utility is in my mind what sets commodities apart from products. By this I’m not saying that commodities don’t have utility, of course they do, or people wouldn’t buy them. What I’m saying is that it’s the very nature of the utility that sets them apart. For commodities the utility is given, there’s no added value, just “real” value. For products utility is made up, it’s socially constructed; it’s whatever you think it is. This is where you can charge more for your products than they cost to produce.
So what do you sell? Do you sell a product or a commodity? If you sell a commodity you would want to switch to a product at once. Cotton can be de-commoditized by adding socially constructed value, “It’s organic!” The same applies to other commodities. If, on the other hand, you sell a product then you should understand what “utility” constitutes in your marketplace. The utility of clothing is certainly not only that they cover up parts of our bodies we don’t want others to see, or keeping us warm – if that was true, clothes would be commodities and priced close to production price.
So ask yourself - and don’t settle for the first answer – "What do I sell, and what should I do about it?" It may be the first step to really understanding branding at it’s core.
As our society closed in on the industrial revolution we made a leap forward, we started making products. Pants are not equal to each other, even if they are made from the same material. The reason is that when we add some sort of processing to our commodities, we make them into products, but a side effect is that products vary more in terms of (perceived) quality than commodities do. Sure there’s good cotton and bad cotton, but nothing that justifies the kind of price differences we see in for example clothing.
This insight is something that is often overlooked, especially in economic theory. After all, consumer’s perceptions are hard to measure in numbers and models, and are thus often let out of the equation altogether – just represented by the demand function. The solution for this is usually to assume perfect markets, which, if they exist at all, mainly describe commodity markets. This is the source of our propensity to think that price is the only thing that matters. If the market leader in an industry is about to launch a product that competes with mine, the instinct is to lower price or increase quantity. This is often the wrong thing to do.
Economic theory has however also created useful tools. One of the best ideas, in my opinion, is the concept of utility. In all simplicity utility is a measure of the relative satisfaction from, or desirability of the consumption of various goods and services, and can as such contain whatever criteria consumers (or businesses) use to decide on which product to buy. In this view utility is the only reason people buy products, and the explanation why people buy something is simply that it yielded the best utility for the price.
Though many would disagree with me, utility is in my mind what sets commodities apart from products. By this I’m not saying that commodities don’t have utility, of course they do, or people wouldn’t buy them. What I’m saying is that it’s the very nature of the utility that sets them apart. For commodities the utility is given, there’s no added value, just “real” value. For products utility is made up, it’s socially constructed; it’s whatever you think it is. This is where you can charge more for your products than they cost to produce.
So what do you sell? Do you sell a product or a commodity? If you sell a commodity you would want to switch to a product at once. Cotton can be de-commoditized by adding socially constructed value, “It’s organic!” The same applies to other commodities. If, on the other hand, you sell a product then you should understand what “utility” constitutes in your marketplace. The utility of clothing is certainly not only that they cover up parts of our bodies we don’t want others to see, or keeping us warm – if that was true, clothes would be commodities and priced close to production price.
So ask yourself - and don’t settle for the first answer – "What do I sell, and what should I do about it?" It may be the first step to really understanding branding at it’s core.
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