Recipes for Growing a Business

How can a business grow its revenue?

In one form or other this question is posed and answered many times –  be it in management consulting interviews,  in popular business books by self-proclaimed gurus, or in real-life in businesses small and large.

An MBA student looking for summer internship with any of the big names, McKinsey, Bain, BCG etc. will use one of the common recipes (“framework”) to explore ways to help a hypothetical business struggling to increase it revenues. One tried and tested framework is the Ansoff Matrix – a 2X2 matrix representation of the business world.

The options are sell more of the same or new products to existing customers, acquire new customers, sell something completely new to you to new customers. All nicely fit in 2X2.

The popular business books rely on popular successful examples that are already well published in the news media. They look at how GE, Microsoft, Apple, Amazon, Zappos, etc grew their revenue from $0 to billions. Then they distill a causation out of it. The solutions they recommend are simple and far reaching with universal applicability.

It could be searching for excellence, seeking customer loyalty, customer engagement, co-creation, Word of Mouth Marketing, employee engagement, delighting customers, delivering them happiness, telling stories to customers, etc. When you do all these, revenue will grow, trust them.

Real businesses do not answer them any different. After all they have the same MBAs working for them either directly or through a consulting firm. Businesses that cannot afford to hire MBAs (or despise them like startups do) rely on the wisdom of popular Gurus and their pet theories. They succumb to the lure of snake-oil salesman selling social media marketing, social commerce etc. Since there are thousands of businesses, each trying a different growth recipe, just by sheer randomness some of these businesses will succeed.

The biggest of these successes get written about and causation attributed to the recipe they tried. We get Harvard Business School case study, Management consulting case question, yet another book by Seth Godin or someone else — and the cycle continues.

In the interest of intellectual honesty, it would help if all of us stood up and accepted that we really do not know for sure. There is considerable uncertainty and other variables in what we prescribe, we ignored macro-economic factors in studying growth of businesses and frankly we (especially Gurus) are making things up as we go along.

Unfortunately uncertainty, self-doubt and measured approach do not sell. MBAs are repeatedly taught at school and told by their consulting mentors to, “take a stand, don’t waffle”. Gunslinging entrepreneurs believe ounce of any action is better than taking the time to think through the scenarios. Gurus, lacking real skills and critical thinking, cannot afford to state anything less than certain. Try selling a book titled, “A few complex procedures that are 60% likely to grow your business by 15% if the macroeconomic conditions do not change and may still cost you lot more to achieve that”

But businesses (or the people who run them) want 80% growth from just 5% change in a simple metric. We want easy solutions, like telling stories to our customers or making them Like our facebook page.  No one wants uncertainty or understand uncertainty.

So that is what we will get – Certain, simple and elegant (can you spell say 2X2) but mostly wrong solutions to a very complex problem in an increasingly complex world.

The Many Reasons Why Borders Bookstores Failed – Courtesy of Management Gurus

None of the gurus named or implied actually said anything about Borders, just taking their stated recommendations and applying it to Borders. You can see the futility of adopting that single magic, one-size-fits-all and Guru’s pedigree based recipes for running a business.

  1. Marketing is about telling stories. Borders failed to tell a compelling story that customers want to believe.
  2. Borders did not have a Level 5 leader. That would have moved them from Good to Great.
  3. They should have focused on their existing customers and retained them. Because increasing loyalty by 5% will increase profits by 80%. Not only that, the loyal customers will continue to pay higher prices.
  4. Borders stores were not managed and run by designers, they lacked Design Thinking.
  5. They did not follow the Toyota Way of lean manufacturing and lean inventories.
  6. Borders should have been a Long Tail retailer. (while this may sound as plausible, I would point you to the fact that Amazon makes bulk of its revenue not from the so called Long Tail products).
  7. Borders failed to Enchant their customers, the should have influenced people to keep coming back and pay the full price even though Amazon was selling it at 40% off.
  8. Borders failed in the area of customer service. They should have under-promised and over-delivered.
  9. Borders should have increased their prices by 1% because that would have resulted in 12-15% profit they could have used to grow the business.
  10. Borders lacked good copy-writing in their Ads. If the copy is fun and engages the customer they would come and pay full price for the books.
  11. Borders failed to recognize that marketing is about customer conversations. Your customers are having conversations about you whether you are part of it or not. Borders was left out of the conversation.
  12. Borders should have adopted co-creation, working with the customers to design the books they want to read.
  13. They should not have been running the business based on Airport business books instead they should have run this like a Silicon Valley startup. They should have gotten out of the building and talked to customers and pivoted.
  14. They should not have been running the traditional media Ads. They should have been blogging and done inbound marketing.
  15. Their website should have been ridiculously easy to use. It is all about the user experience.
  16. Borders employees were not in the “flow“, when employees are really engaged in what they are doing the business results take care of themselves.
  17. Discovering books should be fun, a game. Customers must be surprised, not knowing what is going to come next week. They failed to recognize this.
  18. A street vendor selling vegetables in India is still in business. Borders is not. They should have learned from that vendor.
  19. Borders stores and their eBook were not remarkable. When you are remarkable, people will remark on it.
  20. Borders should have given free lessons on each subject. Like Lulu Lemon did they should have asked local speakers and tutors to come teach free classes on various subjects at their stores.
  21. The should have adopted , The Sony Way, The Motorola Way, The GE Way, The Apple Way, …
  22. They should have followed in the footsteps Justin Bieber, Lady Gaga, Bruce Lee, Michael Jordan, …

Do you have one?


Survivorship Bias and Other Flaws in Anderson’s FREE

[tweetmeme source=”pricingright”] In his new book, FREE: The Future of a radical Price, Mr. Chris Anderson supports his arguments with many examples of businesses that used razor-razor blade model, advertising model, and free + premium model. The last few pages of his books are just a list of examples of businesses that are successfully implementing, according to him, what he calls the “freemium” model. Are examples enough to state absolutes like “the future of a radical price”?

Even if that is enough, Mr. Anderson lists only those businesses that seem to have made it, at least for now, and does not include those businesses that tried many of the free models and failed. That is the classic survivorship bias. If we restrict just to the new media businesses that Mr. Anderson focuses on, there are many instances of ventured that went under. Even the small subset one can find in TechCrunch’s  “DeadPool” is a daunting number.

Even among those businesses selected,  the time horizon is too short to say they are successful or will deliver long term profit growth. Mr. Anderson uses  a different metric, “uptake among customers” rather than profit to measure their success. His careful choice of metric is not by accident, it is about cleverly framing the argument and directing his readers and listeners to focus on a metric that is irrelevant but supports his argument.

The next problem is confusing correlation with causation. Among the blockbuster success stories he quotes like YouTube, he attributes the customer uptake to the free model. He uses  Prof. Dan Ariely’s  Hershey’s experiment to substantiate this claim on causation. You can see Prof. Ariely’s comments on people using his experiment in his blog. In his Hershey’s  experiments, the claims were based on experiments that used control groups and treatment groups. But Mr. Anderson makes his claim based on YouTube being free.

Businesses, before jumping on Mr. Anderson’s far-reaching conclusions, should ask about his decision making process and analyze their own business based on hard data. As professors Pfeffer and Sutton point out in their book Hard Facts, the difference between an academic (who is much maligned by the new media Gurus) and a self proclaimed Guru is  that an academic gives you an open system of decision making where as a Guru gives you a closed system that talks in absolutes, ignores evidence, focuses just on benefits and minimizing the drawbacks of their recommendation.