The Hippo Problem in Business Advice

Which animal do you think Hippos are related to?

My guess was elephant because in my native language Hippo was called water-elephant. Hippos are big, grey, herbivores and spend most time in water so they were related to elephants – so thought my culture.

In the modern world early naturalists thought Hippos must be related to pigs. I guess they used other physical cues like looks and teeth and that they both wallow in mud and decided on pig relation.

Not until other scientists looked at relevant evidence, not just what is convenient, available, fits a story, and supports one’s pre-conceived notion, did we find out the real relation.

Take hippos, for example. Early naturalists thought hippos must be related to pigs. After all they look somewhat alike and have similar teeth. But fossils and genetic studies showed that hippos’ closest living relatives are actually dolphins and whales. (NPR)

No one who looks only at the superficial symptoms and what is overt could have come to this conclusion.

We have a Hippo problem in business advice. More like Hippo crisis with bigger ramifications than not getting Hippo-Dolphin connection right.

Look at successful businesses. Look at their seven traits. If only you had them your business would be successful too.
Look at this magical number Net Enchantment Scores of highly successful companies. If only you get your score to that level you would be insanely profitable too.
Look at Brand V’s successful social media campaign. You better get on twitter and start conversations with your customers.

Hundreds of management/marketing/business gurus, thousands of books,  and hundreds of thousands of articles bombarding us with advice on how we should run a business based only what they saw as a relation between Hippo and PIg.

And millions of fans who have suspended skepticism to embrace a Guru’s preaching and spread it around, taking solace in the numbers. After all millions of people who read the blog articles and pass them around can’t be wrong and we are not alone in following Guru’s footsteps.

The Hippo problem in business advice is not just the fault of self-confident Gurus with not an iota of self doubt pushing their snake-oil with no repercussions. We who accept and embrace these prescriptions without asking difficult questions are bigger part of the problem.  Questions like,

1.  Is my business like the Hippo Guru is talking about?
2. What evidence will cause Guru’s advice to be wrong? Sure I run cupcake store, does that mean my customers want engagement and not just cupcakes?
3. What is the opportunity cost of following in Guru’s footsteps and getting it wrong? Should I adopt razor-blade model because Guru says that is the future?

In the recent past, before the explosion of self-anointed Gurus, we had a framework for making decisions. We did not make decisions because someone else did it that way, we looked our goals, our customers, market dynamics, marketing channels, sales channels and our ability to compete.

Now everyone is a Business Guru. There is no need for looking for evidence, the Gurus know. They know just from the few anecdotes they have seen – be it a farmers market vendor, Grateful Dead or Harry Potter movie. They have their prescriptions for us on how to run a business, do marketing and price products.

The problem is not going to go away because Gurus get self-realization (intended). I think one can’t be a Guru peddling snake-oil prescriptions unless one loses all self-doubt and strongly believes in what they are selling. These people are selling to a segment with need for magical prescriptions – like engaging in social media, telling stories or to be remarkable.

Until we the consumers of business advice stop worshipping Gurus and seek relevant evidence the Hippo problem in business advice is going away.

Are you ready to stop following your Guru and start asking tough questions?

Value Distribution – Weight Scales

 

Can you see the likely value distribution for features and the pricing is aligned to capture that value?

You really don’t believe Wifi is priced about $70 more because of marginal cost, do you?

Do you know how to find how your customer segments value different features and hence how to charge for them?

A Simple Tutorial on Conjoint and Cluster Analysis from Iterative Path

 

Note: In the example above observant readers will notice brand is another variable that could influence the price difference.

You are more likely to retweet HubSpot post than this …

The post is titled, “10 horrifying stats about display advertising”. In a attempt to tell stories or relate arcane data to something common the author goes on to make some likelihood comparisons

You are more likely to complete NAVY SEAL training than click a banner ad.

You are more likely to get a full house while playing poker than click on a banner ad.

You are more likely to get a full house while playing poker than click on a banner ad.

You are more likely to birth twins than click a banner ad.

You are more likely to get into MIT than click a banner ad.

You are more likely to survive a plane crash than click on a banner ad.

It is pointless and simply wrong to make such comparisons based on respective frequentist probabilities. Let us say there is a one tenth of one percent of people who see  display ad click on it. Let us us say one percent of people who sign up for Navy SEAL complete the training.

That does not mean these two are comparable nor can you say that chances of  ANYONE completing Navy SEAL training is far better than clicking on display ad. What is missing here are the hidden hypotheses we take for granted (the context).

Think of those who sign up for Navy SEAL. Consider their drive, motivation, physical fitness, mental strength, initial screenings they survived to get to training stage. You already have weeded out people like us. If indeed 1% of people who attempt SEAL training complete, it is the conditional probability

P(Complete SEAL training | Passed all screenings and have wherewithal to complete it)

This is not the probability of any random person you pick from street, which is highly likely close to 0.

It is indeed horrifying that they would compare such unrelated events and their conditional probabilities to make their case about display advertising.

Now to the title of this article. Determining whether or not this is relevant comparison of likelihoods is left as an exercise to the reader.

See also: Chances of winning mega-millions vs. that of dating super model.

Value to Customers Comes from?

Why do you think 10oz mini Pita pockets are priced 18% more than 12oz pita pockets?

Don’t just focus on quantity consumed? Value to customers comes from many aspects – from ease of use, convenience, fit, …

To be precise customers value a product that is a better fit for the job at hand and easy to hire for that job. Be it form factor or ease of doing business.

Focusing on just one aspect leads you to not capture your fair share of the value created. What you see is the case of value staircase the flip side of value waterfall.

Plug the value leaks, you get to capture a share of it as better price.

How do you determine what your customers value?

 

The $10,000 Smartphone

Print version of Fortune poses the question to its readers,

Are you ready for $10,000 smartphone?

Then teases us with a promise to answer

Who buys these phones and why?

Un-Fortun(e)-ately it is asking the wrong question and fails to answer who and why in its article. The digital version does not commit these mistakes opting for a benign informational title.

Asking its readers whether they are ready for $10,000 smartphone is wrong because that’s not whom Vertu is targeting. Opinions of the columnist or the comments of their readers are irrelevant. You should consider the possibility Vertu understands

1. Who their target customers are? (Hint: Not Fortune readers, likely Richistan )
2. What job are they hiring the luxury phones for? (Hint: conspicuous consumption)
3. What is their phone’s competition? (Hint: not $650 iPhone, likely other luxury products)
4. What their willingness to pay and wherewithal to pay are? (Hint: No pricing pressure here)
5. What budget will customers pay from? (Hint: not their smartphone budget)
6. How to reach them? (Hint: Not through Fortune magazine)

Fortune quotes McKinsey study (don’t you love those sentences that start with, “McKinsey study states …”),

brand needs to continue building on its heritage — highlighting the skill of its craftsmen

And guess what? Each Vertu phone is assembled by a single craftsman and Vertu shows it off to its customers at its manufacturing site.

You don’t believe $10,000 price tab is due to the labor cost, do you? Or that the craftsmen are more precise and produce better quality smartphone than the automated machinery that can assemble parts with near perfect precision? In this case McKinsey finding is partly correct.

It is true Vertu wants to highlight the skill of craftsmen but not to the target segment buying the watch  but to us in the peanut gallery (and Fortune readers) how great the craftsmanship is so our admiration makes it worth it for those buying the $10,000 smartphone.

Finally an IDC analyst interviewed for the story states,

“even capturing 1% of the $295 billion global smartphone business would be an achievement for the firm”

If you followed the real target segment and understand the job they are hiring Vertu for you will see how irrelevant the size of smartphone market is or the share to capture. Vertu is not competing for the job of iPhone/Galaxy and customers are not paying for it from their budget for smartphone (as a utilitarian device).

The real market size should be based on luxury spend and the market share question is how much of that spend on Gucci handbags and Tiffany’s diamonds can Vertu capture.

The moral of the story is, your understanding of business opportunity, market size, market share, competition, pricing and likelihood of success will all be wrong if you do not start with customer segment and what they are trying to get done.

How do you size your business opportunity?

 

 

Do you need to maintain pricing parity across all channels?

Let us look at this case study:

Airport terminals are not gourmet ghettos. We mostly get a food court with the usual chain restaurants. Wouldn’t it be great to give the travelers – locals, those in transit, and visitors – a taste of the local flair? Phoenix airport is trying to do exactly that. They are giving the local coffee shops, bakeries and restaurants an opportunity to open their shop at the airport terminal.

It does provide the local businesses a new revenue opportunity by adding a new sales channel. Forty million people pass through Phoenix airport every year. That is a large Target Addressable Market (TAM), even a 5% conversion with average tab of $8 means adding another $16 million in new revenue from one location. There is also the positive side effect of marketing exposure.

But it does come with many drawbacks.

First the rent at airport can be up to 10 times what these local restaurants pay in city locations. Second the hassle and costs associated with security and regulations. Third the additional infrastructure cost in equipment and other things to make the place resemble the city location. Lastly, customers want to pay same price they pay at city locations.

There are many questions here. Primarily should a business consider adding airport location given the huge exposure and opportunity. That is a topic for another day or you can hire me to help you with the analysis. Here I want to address just the last drawback

Customers want to pay same price they pay at city locations. One restaurant decided to do just that,

what you pay for a salad at Chelsea’s original Phoenix location is what you’ll pay at the airport.

Is that the right thing to do? Doesn’t it matter that the restaurants incur significant incremental costs when they open a sales channel in airports? Shouldn’t that costs be offset with a price markup on products? How should the pricing be for a new sales channel?

If you know the answers you can skip the rest of the article.

Here is what you need to consider.

Where do you start for pricing? You start with customer segments based on their needs. In airports you have

1. Those who hire your restaurant as a better (healthier, tastier, fresher …) alternative to greasier and generic options available. This segment includes some members from all travelers.
2. Your loyal locals who are happy to have their favorite option available before they board the plane (without having to make a side trip).
3. Those who hire products simply based on price.
4. Those who hire products based on brand – a local restaurant likely has no brand recognition outside of locals going through the airport
5. Lastly, most ignore this segment, those who work at the airport and need better options for their meals.

This is a case of adding top-right and bottom-left quadrants from Customer Jobs Growth Matrix.

The question of price parity does not come into play with (3) and (4) and anyone that is not local in (1). Stated another way you only need to worry about pricing parity if they already have a reference price – what they pay at your city locations.

Your options?

You could maintain pricing parity as long as the profits far outweigh profits from opening other city locations for the same investment. That is consider your opportunity costs. But don’t charge same price because it is the “right” thing to do or your locals demand that. This is as bad as simply adding your airport cost overheads to your local prices.

You have access to a segment (likely large and constantly refreshed) who value the better options at airports and have higher willingness to pay. You should find a way to capture this value with better pricing.

If only you could do third degree price discrimination – say asking for driver’s license – and give a price discount to locals you are good. But that is a hassle and mostly not something you want to do because of overall customer experience.

That leaves you the following options to capture additional value from customers choosing your restaurant in the airport location (that flows from the recommendations in the Growth Matrix)

1. Price Higher and Use Cost Argument – Recognize it is okay to not serve all customers. Don’t focus on 40 million customers, ficus on who perceive higher value from our offerings. Do a marketing research if need be. You may want to give up on some of your locals buying at airport and choose to target only those with higher willingness to pay.
   Most times you can convince locals of hardships in running your restaurant in airports and charge a premium over your city location prices. You are not doing cost based pricing – you will set prices based on what customers are willing to pay at airports – you are only using cost to justify higher prices.
2. Product Mix – Play with your product mix. Add newer options that are available only in airport locations and charge a premium for them. These could be simple variations of your menu choices. You should do this even if you don’t have pricing pressure.
3. Creative Packaging – Consider different sizes – think smaller for same prices as city locations. A 10-20% decrease in marginal cost can stand in for not raising prices. Apply creative messaging like -ToGo, OnAir etc. You should do this even if you don’t have pricing pressure.

The cardinal rule however is start with customer segments before you decide on pricing. Be it opening an airport location, adding food cart version of your restaurant or serving down markets with your enterprise products – start with customer segments, their needs and their current alternatives.

How do you set pricing for your different sales channels?

Serving New Jobs of Customers You Already Have

Let us look at this news story that is more than three years old and comes to us from NPR on a story on how Holywood gets fed.

In the old days, craft service  didn’t deal with food at all, because there was no free food service on the studio sets. Actors simply brought their own food in brown bags, and there was a break for lunch.

But then hours on set really began to stretch out. ”Now you get into issues of people being tired, being hungry,” Conover says. “Well, who’s gonna order the pizza? We’ll have the craft service guy do it.” Craft service was already doing odd jobs: digging a hole to place a camera at ground level, laying out protective material on sets — and cleanups, too. (Source: NPR)

Previously I discussed a real simple yet powerful variation of Ansoff Growth Matrix – one that is fitted to look at customers and customer jobs instead of markets and products. Customer jobs in its essence is a customer need (utilitarian or hedonistic) and customers buy products (or hire them) to fulfill those needs.

Here is how the growth matrix looks like with customers and jobs.

 Any business that is either trying to break in (startup) or trying to expand (enterprises) has four paths based on this matrix and related actions that go with those options. One of the options is:  Serving new jobs of customers you already have (that is jobs you did not serve in top left quadrant).

When customers already hire your products for certain jobs you have an incredible opportunity to understand  rest of their jobs and identify those that you could serve with simple product pivot. You can’t go after every job. Strategy is about making choices. Your choice has to be based on opportunity size, your cost to fill that job better than what customers hire to do the job and your likelihood of success.

In the case of Craft Service featured in the NPR story their customers originally had hired them for different job. The new job of feeding the production crew did not exist or had alternatives (brown-bagging). A change in environment created this new job that needed addressing.

It is likely Craft Service did not actively make a strategic decision to take on food service. But they did their current job so well that their customers sought them out to fill new jobs. As managing food service fit  within the realm of what Craft Service was doing it was a right product pivot.

While Craft Service got lucky, if we want to take this path to grow our business we must be constantly engaging with our customers to surface new jobs that our offerings would serve better than current alternatives while making a profit for us. Sometimes better product positioning would suffice, other times product pivots are required.

How do you find the jobs your customers hiring products for?