Are you a bottom-up or a top-down thinker?

It’s such a cliché that entrepreneurship and innovation is dependent on creativity. Personally I think creativity is a good thing, but generally I think people attribute the success wrongly to creativity. What’s really the reason that creative thinkers succeed, it seems to me at least, is not so much their creativity but what causes it. Creative thinkers are relentless bottom-up thinkers and it’s this bottom-up thinking that causes them to be both successful and creative.

So what is this notion of bottom-up and top-down thinking? Well, imagine that you are writing your business plan and you come to the part where you need to estimate sales, this should be a well known situation for most entrepreneurs. A top-down thinker will start at the top, he will say something like, well, the market for my product is a $4 billion market, and if I get 1 % of that I’ll make $40 millions. A bottom-up thinker will start at the bottom, he will say something like, I know I can sell my product to these 15 companies, which means I’ll make $2 million. Then when I have those as references I believe I can get those other 100 companies, and then I’ll get those 1000 over there.

This is a mindset that works in many situations. In product development the top-down thinker will start by looking at what the product will look like when it’s done. The bottom-up thinker will start by looking at what is at his disposal, and then try to see what can be achieved. A similar notion has been termed effectual reasoning versus causal reasoning. Causal reasoning is the kind of reasoning thought in business schools. Student’s get to start with pre-determined goals, often set in the text of an assignment and some knowledge or assumptions that they are given, from this point they need to navigate their way, using theory, to the correct answer. The sad part is that causal reasoning is also thought in elementary schools and up, so by the time we get to university level most remnants of effectual thinking has disappeared. Is this why entrepreneurs such as Richard Branson, Steve jobs, Michael Dell, Coco Channel, Walt Disney, Henry Ford, Bill Gates and Ty Warner all dropped out of school?

Effectual thinkers don’t necessarily start with a predetermined goal, they start with what’s available to them and look at what they can achieve using those resources. When you think like that you also become more creative. A good example is an assignment some students got at Stanford. They were divided in to 14 groups and each group received an envelope with $5 in seed capital in it, they were told that the assignment was to make as much money as possible until next week’s class. They could plan as much as they wanted, but when they opened the envelope they would only have two hours to complete the task. Interestingly, none of the three top groups used the seed funding. But that’s another story. The winning group made $600 in 2 hours. Such an assignment, though it had a predefined goal of making money, is a practice in effectual thinking because they had no limitations on what to do. The students were only given the resources ($5 and an Ivy League education) and had to come up with ideas as to how to act themselves.

I see way too little of this kind of thinking going around. Business managers do stay away from this kind of reasoning, and in many situations rightly so. I wonder however if there is a way to switch between the two sets and use whatever is appropriate for the situation? The really sad part is that we don’t teach our children and our future leaders to think bottom-up or effectually. In fact we teach them not to. The ideal thinking in the civilized world is causal and top-down, firmly founded in the scientific method. Maybe it’s time to see what would happen if we let children talk back and challenge our ideas? Maybe we would be surprised, and maybe they would turn in to decent human beings anyway? Well, I’m digressing, but in any case I think that we need to rethink. The lesson from this was meant to have you think about what kind of thinker you are. In many cases it seems to me that each way of thinking has its pros and cons, but if we can learn to use both sets of thinking we can surely be much better thinkers.

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Do I launch my product or do I develop it further?

As a start-up you will eventually end up in a situation where you have to make a choice; do you spend your last money on improving the product, or do you spend it on launching your product and marketing it? Most marketers will tell you that you should always have a perfect product (you see the “product” is one of the four P’s in marketing). But I disagree.

Imagine that you have $1000, but you are afraid it will get stolen, the only way to avoid this, it seems, is to buy a safe. Unfortunately the safe cost $1000. Would you buy the safe? The same concept applies here, do you make a fantastic product that no one will hear about or do you make a mediocre product that many hear about? I would chose the latter and then use the money I make to improve the product later. This will grow your company quicker. And let’s face it, you have no idea what the consumer want in a product anyway. Just face it.

This is of course assuming this is a new product to some extent, you probably don’t know what people want, even if you think you do. Edison started rolling out electricity at an alarming rate, the killer application, was of course electric light. This meant that when people first got electricity, the outlet was a socket that matched the light bulb, not the socket we know today. Little did Edison know that washing machines and electrical irons would come along and that a socket where you had to screw in the cord would become dangerous. Everything, as we know now, worked out well for Edison, but he had no idea what electricity was going to be, or how big it was going to be. Start rolling out your product, make money and adapt your product to the feedback you get, who knows, maybe the technical improvement you have in mind isn’t what you should improve at all?

I also talked to a former product developer at Phillips once, he now runs his own company. He explained that Phillips, and the other big ones, never launch with their best product. Launch with your number two, price it in the stars, and then when your sales decline, introduce the next generation at the same price and lower the price of the last generation. And never launch a new generation until the next is in a drawer somewhere ready to launch

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.

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?”.

Fu the FAQ - or do it right!

If you own a website, my challenge to you is that if you ever create an faq, don’t guess what people would ask. That’s just stupid. Wait until you actually get questions! I’m so incredibly tired of clicking the faq link and getting to a site where the first 50 questions was probably never asked. Your faq is a place to go to get answers, not another advertising channel. If your most frequently asked question is “Why is *** better then everyone else?”, then something is wrong, ok! No one has ever clicked a faq link to get that answer. You see Microsoft does this right. On the IE8 faq the most asked question is “How do I uninstall IE8?” isn’t that just honest?

Predictable irrationality: Why we are wrong!

 A central theme in marketing as well as leadership is the question of: how do we make decisions? It seems suitable to kick of this new blog by saying some words about this. For most people that have either studied psychology or business it seems like a cliché to say that humans have long been looked at as rational actors, when we are really not. Stating this over and over has little or no value, but the question is: why are we systematically wrong? This is a topic that is intriguing to me, and the other day I came over a series of short lectures (13 x >5 minutes), that shed some light over this question, the introduction follows:

Lecture by: Dan Ariely, author of "Predictably Irrational" and Professor of Behavioral Economics at Duke University

To see all the chapters go to http://www.predictablyirrational.com/?page_id=7. Click the pictures on the right to open the videos, I recommend viewing them in the order they are presented.