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.

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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.

Which products should you push first?

Walking past my local grocery store today I noticed a sign that that said “Ice cream. On sale.” Now for those of you from the warmer parts of the world let me underline the fact that I am from Norway and in Norway only a very special segment of the populations yearns for ice cream in December. It came to my mind that this grocery store probably had left over ice cream from the recently concluded ice cream season, which they were afraid would go bad if they didn’t sell it soon.  But was this really a good idea?

It occurred to me that if they advertised packets of instant hot chocolate instead they would sell much more extra units than if they sold boxes of ice cream. So I thought to myself, let’s assume that a packet of instant hot chocolate cost about the same and have approximately the same margins as ice cream, should they advertise for ice cream or hot chocolate? It is important to underline that if they sell one extra hot chocolate they would have to buy an extra one from the grocer while in the case of the ice cream they would have to throw away that which is not sold. Given that the price and margins for both goods are, well let’s say $5 and 20 %, we can see that only if the sign sells five times as many boxes of hot chocolate than ice cream the store should focus on selling hot chocolate. Let me explain that again.

Since the alternative to selling the ice cream is to throw them away, both the 20 % margin and the already spent 80 % purchase price counts as profit for the ice cream. If the store can sell 1 additional box of ice cream it makes $5, since the alternative is to throw away the box. If the store sells one additional carton of instant hot chocolate it only makes $1, because the alternative was to order less hot chocolate next week, and thus avoiding the $4 expense it would mean to buy an extra unit. Because of this the store should keep selling the ice cream if it is more than 20 % as effective as advertising for the instant hot chocolate. Also you shouldn’t throw food away.

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Google vs. Newspapers: Why Murdoch is right and why he will fail

Murdoch is right. By taking stories of Google, his customers will have to come to his site to read the news there. It has worked for Schibsted in Norway, but then again, they have a virtual monopoly on country wide news (at least a very high share). If more newspapers follow Murdoch, it will work for them to, but it is unlikely that it will work if only News Corp. Newspapers follow this practice. This may be viewed as a prisoner’s dilemma game. If no newspapers choose to have their news on Google, then the entire newspaper sector will benefit, because consumers will be forced to go directly to the sites they wish to read news from, and thus watch the ads, or pay for the content. However, in such a scenario each individual newspaper will benefit relative to the others should they choose to index their sites, because they might up their share of readers. Therefore it is likely that Murdoch will be alone outside of Google Search and Google News, and loose readers due to it.

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.

How to decide the size of your marketing budget? or Viewing marketing as an investment instead of cost let you make a better decision

I, and I suppose most of us, have often heard people asking questions along the line of “What is a reasonable marketing cost as a percentage of revenue?”, which is an interesting angle to determining marketing spending. I would argue that if marketing only represents a cost for you then you might as well cut it out. The purpose of marketing, as I am sure most people would agree, is to make more money. Thus, marketing should be viewed as an investment. Marketing as an investment is difficult to understand, partly because the long term effects are hard to measure.

I would pose that if you knew exactly how much you would have to spend in marketing to get one extra sale then you would be able to determine your marketing budget quite easily and logically. This however, to the dismay of many marketers, is a difficult and often impossible task. But if we stick to the economic assumption that the first marketing activity you buy is the one that gets you the highest yield/cost ratio, and when that resource is exhausted you move to the next best, then the marginal returns of marketing does decline. In this case the marginal ROI (the derivative of ROI)  will eventually reach a point in which adding extra money to marketing, is equal to adding that extra money to the second best investment (let’s say new production facilities, or a better webpage or whatever). Identifying this point is of course impossible for most businesses.

One way to approach logical thinking is to ask, if I add x money to the budget, how many more customers will that buy me? And if so, what happens if I add 2x, and so forth. Correspondingly, you should ask, if I don’t add x, what else could I use that money on, and how would that effect the value of my business? What if I remove x? The problem with this approach is that it may to some extent be based on a gut feeling rather than on actual performance metrics, in a scientific sense, but still this may be a better way to think about marketing. I would also like to note that the practice of assigning a given percentage of revenue, or budget or whatever to marketing is one that is widely criticized, because it does not look at what your business actually needs. The main lesson here is to think “what does that next dollar buy me?” and “what else could I have bought for that dollar?”.