Questioning the inanities

Here are five extremely well written articles this week (except may be the fifth one) that take down popular and feel-good but false theories and claims.

1. Power of Positive Thinking
   “Nearly every technique in which positive thought is meant to bring about better results may actually backfire”. Don’t go walking on coal based on Guru’s goading.
2. Role of Luck
   “Work by Watts, Sagalnik, and Dodds suggests that although market success does depend on the quality of a product, the link is extremely variable and uncertain. Even the best contestant in a product category may fail, and even the worst one sometimes wins. And for an overwhelming majority of contestants in the intermediate-quality range, they found success to be largely a matter of chance.”
3. Ideas not worth spreading 
   “Today TED is an insatiable kingpin of international meme laundering—a place where ideas, regardless of their quality, go to seek celebrity, to live in the form of videos, tweets, and now e-books.” One TED video I watched about a man standing up and dancing and everyone joining him comes to my mind as classic example of stories told without considering alternative explanations.
4. How to write a Malcolm Gladwell book
   Or a Seth Godin book, or a Chris Anderson book. They are all the same. Just ask Mr. Godin to explain what he means by “remarkable“
5. Effect of Boards on Stock Performance
   Do board of directors have any influence on a stock’s performance? Given that how can a study make a case that companies that have at least one woman board member performed better than those that did not?

Finally here is another article about Nigerian scammers that can explain why Gurus seem to be producing theories and articles that have no evidence other than the only stories they used to develop the very theories. They are not writing for the thinking public. They are targeting those who have willfully suspended their thought.

Who Needs Analysis When The Future Of Pricing Is “Free”

Consider the following case

You have just designed a web service. It lets you publish your body temperature from your phone that all your friends can follow.  You are thinking of charging for such service, so people pay a monthly fee to use the service. But you do not know what price to charge and you do not know how many will subscribe at each price. In other words you do not know the demand curve. Because finding the demand curve is not a simple exercise and it is all the more complicated when you are creating a new product and the value to your customers is not clear.  It will cost you to do a market research but nothing compared to what it will cost you to develop the market and reach our target customers. If you do not know the market size and what what you can capture you cannot undertake a huge investment in marketing this product.

It just happens that you read and hear a lot  about the future of a radical new price and how the marginal cost of digital goods is $0 and how making your service free or following a free + premium model works and is now the law.  You are told that what you are competing for is attention because this is an era of attention economics and abundance economics at the same time. Do note that attention is a scarce quantity but the products are available in abundance. The  free + premium  = freemium  seems like the perfect fit for you.

All you need to do it is first give away the version of your service for free to grab people’s attention. You are told that since your marginal cost is $0 it does not cost to add any one free subscriber.  Because you gave your service for free, it is going to go viral and will have a great uptake. Now that you have all the attention you wanted start monetizing it, either by up-selling some of your customers to a premium service that lets them publish temperature in two different units or by selling them thermometers. Simple right?

Why are you not running with it? What did you ask? You want to know  the demand curve for the new upgraded service and thermometers?   You want to know how the profit gained from this business model compares to profit you would have gained if you had bothered to find the demand curve in the first place and charged for your service? No, no, you got it all wrong. Your business is to grab attention, you got it now just monetize it without asking questions that will require market research and marketing budget. Demand curve is valid only in economics which is a study of scarcity and does not work when things you sell are in abundance.

What did you say? You are making decision not on whether or not to support one additional free customer but whether not to offer the service at all because all your costs are fixed? Your marginal costs are $0, be happy.

And you are worried about setting a bad reference price of $0 now and how this will affect customers’ willingness to pay for the premium service? Are you forgetting you will not achieve such a high uptake if not for the $0 price?

What now?  You say, there are at least 100 others offering the same temperature publishing service – 60 of them offer your premium multiple units publishing for free and 100 others are offering  a service that lets people publish their heartbeat? That is abundance, right? This is the era of abundance, did you not read or understand all the materials on that already?

Now don’t stand around claiming free is not a law. You did not understand the freemium model correctly. It is happening now whether you like it or not.

Free – The Effect of Reference Price

Mr. Malcolm Gladwell reviewed  Mr. Chris Anderson’s new book, “Free: The Future of a Radical Price”. It is a very well written review and very methodically breaks down Mr.Anderson’s claims.  From Mr.Gladwell’s review I found that Mr.Anderson quoted Professor Dan Ariely’s work and using it to support his case for free.

Anderson describes an experiment conducted by the M.I.T. behavioral economist Dan Ariely, the author of “Predictably Irrational.” Ariely offered a group of subjects a choice between two kinds of chocolate—Hershey’s Kisses, for one cent, and Lindt truffles, for fifteen cents. Three-quarters of the subjects chose the truffles. Then he redid the experiment, reducing the price of both chocolates by one cent. The Kisses were now free. What happened? The order of preference was reversed. Sixty-nine per cent of the subjects chose the Kisses. The price difference between the two chocolates was exactly the same, but that magic word “free” has the power to create a consumer stampede.

This experiment is very well explained in Professor Ariely’s book. But the problem is Mr.Anderson seem to have only read part of Professor Ariely’s work on free and ignore that parts that argue why free as a starting price is not a good idea even when you reach a large number of customers.  The problem with Mr.Anderson’s book and his argument is he talks in absolutes without considering all arguments about a topic and quotes research (even from the same source) selectively. Here is what Professor Ariely said in an interview with WSJ regarding giving services away for free to attract users (WSJ (September 2008):

BUSINESS INSIGHT: On the other hand, what about companies that set the initial price of something too low, even offering a product or service free of charge in order to encourage people to use it? Isn’t that why so many online publishers are facing such great difficulties, because they initially offered their content for free and then consumers couldn’t move past that anchoring point?
DR. ARIELY: The truth of the matter is that it’s very hard to realize the value of something even after you’ve used it. Say you use e-mail. How valuable is it to you? Sure, if something is free then people will start using it. But what companies don’t realize is that the mapping of utility to money is very difficult. People won’t say, “This is so great. I’ll pay $20 for it.” Instead they’ll say, “I used it for free all along and now you’re charging me? I’m not interested.”

You can clearly see the effect of the initial price of $0. Once people get it for free, $0 becomes the reference price and it is very difficult to change that. The New York Times tried it with Times Select and failed. Airlines had a tough time charging for what used to be free and only could do it or baggage fees. USAir tried to charge for inflight drinks but backtracked on customer backlash.

You might succeed in stealing market share from the competitors but by giving away for free you set a bad reference price that destroys value in the long run.