Welcome back.

Have you thought about subscribing? It's free.

The magic rule of seven (and the banality of alphabetical order)

2pulldown If you approve or create online forms or deal with consumer interactions, I hope you'll think about the following:

1. If you have more than seven items in a pull down list, you have failed.

Human beings have no trouble keeping seven ideas in their head (hence the seven digit phone number). So, if asked you, "what's your favorite kind of music among: polka, reggae, ska, jazz and country" you can probably juggle those ideas in your head all at once. But if I asked you to pick among 25 movies in a list, it's a lot harder, because you have to keep going back and forth to see if you've got it straight.

So, for example, don't give me a list of possible job descriptions and ask what I do. If it's got 60 items on it and there is no direct match (well, I'm sort of in management and sort a writer and sort of in car repair) then my brain freezes over.

Computers are smarter than people. Don't use long lists of multiple choice when a simple fill in the blank will suffice. This is why asking for my state in a pull down list is inane. Just let me type in the two letters. (Hint: that's why Google works. It's fill in the blank, not multiple choice).

2. For non-complete lists, alphabetical order makes no sense

Sure, if you want to list a group in which I'm sure to find what I'm looking for (all the authors on Amazon, say) then alpha is smart. But if you're showing me, for example, a menu of items for dinner, or the names of your kids, then surely there's a sensible way to index them that actually adds value. "Here are the appetizers," makes more sense than putting avocado salad next to almond pudding.

You could, for example, list your items by price, or by popularity. But putting the "Melissa" model slightly above the "Sherwood" is just wasteful.

Benefit of the doubt

It's almost impossible to communicate something clearly and succinctly to everyone, all the time.

So misunderstandings occur.

We misunderstand a comment or a gesture or a policy or a contract.

And then what happens?

Well, if we're engaged with someone we like or trust, we give them the benefit of the doubt. We either assume that what they actually meant was the thing we expected from someone like them, or we ask about it.

If we're engaged with a stranger or someone we don't trust, we assume the worst.

The challenge, then, is to earn the benefit of the doubt. How many of your customers, prospects, vendors, regulators and colleagues give you the benefit of the doubt?

If you worked at it, could you make that number increase?

The amateur scientist (that’s us)

Many people buy a car (probably their single biggest discretionary purchase) based on slamming a door, kicking a tire and judging the handshake of a salesperson.

We choose a surgeon based on the carpeting in his office and a politician by his hair cut.

During the first week of swine flu vaccines in New York, most parents (more than half!) chose to keep their kids out of the program.

Interviewed parents said things like, "I'm not sure it's safe," and "I wanted to see if it affected other kids…"

No mention of longitudinal studies or long-term side effects. No science at all, really, just rumors and hunches and gut instincts.

This gut-instinct approach served people well for hundreds of thousands of years, but it's pretty clear that it doesn't work in a complex world. Eating salmon at a wedding feels 'safe' because we always have, but of course any professional scientist will tell you that farmed salmon is an ecological disaster. You can't see the problem, so you ignore it.

Audiophiles spend thousands of dollars rewiring the electrical lines in their house with .99999% pure copper, ignoring the fact that the power from the street is in the same old cables. Adding decimal points to our irrationality doesn't change much.

The problem with being an amateur scientist is precisely the reason that marketers relish the opportunity to sell to us, the amateurs: we make stupid decisions, easily manipulated by those who might choose to do the manipulation (on their behalf or on ours).

The news here is not that people are irrational, giving too much credence to the dramatic and the local and the short-term (that's not news), but that people have added a veneer of scientific rationality to their irrational decisions. Armed with Zagats or internet data or some rumor off Snopes, we act as though now we're supremely rational choicemakers.

This is one of the problems with breast cancer screening. It appears to give information, really good information, but in practice, it doesn't. Since the information is vivid, we give it too much credence.

The challenge for people trying to market vaccines or highlight long-term side effects of various consumer choices is that it's much easier to spread a story about exploding cars or hair falling out than it is to spread a story of 'nothing bad happens' or 'no one got the swine flu and died' or 'three years from now, this section of ocean will be dead.' We prefer the vivid anecdote to the dry and statistically useful fact, which in a complex world, is to our detriment.

PS if I was marketing the swine flu vaccine, I'd name it after a kid who died last season and put her picture on the release form. Alas, teaching amateurs like us to be real scientists is going to take a while.

Embracing lifetime value

If you walk into a company-owned cell phone store to sign up for a contract, what are you worth?

Given the huge gross margins at AT&T and Verizon and the standard two-year contract, I think it's easy to figure on more than $2000 in lifetime value.

If you ran a business where a customer represented an additional $2,000 in profit, how would you staff? How long would you make someone wait? If staff costs $25 an hour, how long would that extra person take to pay off?

Few businesses understand (really understand) just how much a customer is worth. Add to this the additional profit you get from a delighted customer spreading the word–it can easily double or triple the lifetime value.

So, a chiropractor might see a new patient being worth $2,500, easily. And yet… how much is she spending on courting, catering to and seducing that new customer? My guess is that $50 feels like a lot to the doc. Instead of comparing what you invest to the benefit you receive from the first bill, the first visit, the first transaction, it's important to not only recognize but embrace the true lifetime value of one more customer.

Write it down. Post it on the wall. What would happen if you spent 100% of that amount on each of your next ten new customers? That's more money than you have to spend right now, I know that, but what would happen? Imagine how fast you would grow, how quickly the word would spread.

Here's how you'll know when you've really embraced this–a good customer at your podiatry practice (or supermarket or tax firm) walks out the door in a huff and you turn to your partner and say, "There goes $74,000."

Some books for November

Random thoughts from all over for those of us hungry for new ways to think. This month's list is here.
The previous list was blogged in September.

The reason they want you to fit in…

is that once you do, then they can ignore you.

Breakthroughs and drips

There are only two ways to win in the market.

You can create a breakthrough. A promotion so powerful that people can't help but engage. An innovation so remarkable, people can't help but talk about it. A pricing strategy or ad campaign that breaks the mold and is worthy of attention. This takes huge guts and substantial investment.

Or you can win with consistent benefits, delivered over time. You win by incrementally earning share, attention and trust. This might take years.

Almost all marketing attempts to do neither of these, and of course, fail. Painless and quick are rarely associated with 'successful.'

Debt, equity and a third thing that might work better

If your business needs money, it seems as though you have two choices:

  • Get a loan from a bank
  • Raise equity from an investor, giving up part of your company in exchange

Banks are everywhere, so the idea that they can loan us money seems obvious. And venture capitalists and the companies they fund are in the news all the time… and making a billion dollars sounds like fun.

Here's the thing: for most businesses, most of the time, neither is a realistic option.

Banks aren't in the business of taking risk. Which means that they make boring loans to boring companies for boring purposes. They do everything they can to be riskless. Which means you need to guarantee the loan with your house or with assets worth far more than the loan. Which means that a good idea is not a sufficiently good reason for a loan.

And equity? Well there are two problems. The first is that the number of investments that professional VCs can make is microscopically small compared to the number of businesses that want them. A bigger reason is that if there's no obvious and reliable exit strategy (like going public or selling to a huge public company) then there's no rational reason for someone to make an equity loan. The entire upside comes when you sell, and if you can't easily sell (which is most businesses–they're even harder to sell at a profit than a used car) then there's no VC investment to be had.

But that doesn't mean you're stuck. I'd like you to consider the idea of selling part of your income.

It works like this: you have an idea, a fledgling business or a new market to enter. You find an amateur investor (a wealthy dentist, a retired executive) and raise the money to bring it to market. And in return? The investor gets $xx for every unit you sell. From the first one until forever.

No fancy bookkeeping, no board meetings, no worrying about the accounting. Instead, you pay a royalty on income. The rest is up to you.

Of course, this is exactly how the math of book publishing works. The publisher puts up money and keeps 80 or 90 percent of the income. You get the rest.

It could even run on a sliding scale, with early royalties to the investor being lower, or with a buyout once a certain amount was earned back… If you needed $5,000 for some tooling, perhaps you could offer an investor $100 for every unit you sell until you've paid her $10,000, then $40 a unit forever after that. (typos fixed, sorry).

Need to raise money for a restaurant? It's hard for an investor to figure out how to win by owning equity (because it's so easy for the owner of the restaurant to manipulate profit). But if the investor gets 4% of every check paid, that's money back starting on the first day.

Investors are as irrational as the rest of us. They buy a story and expectation about risk. They buy the excitement of upside. They buy an opportunity to turn one thing into another. Banks want a boring story. Other investors might like this alternative story quite a bit.

My general bias for entrepreneurs starting out is to bootstrap their business, because raising money is so hard and so distracting. But if you've set out to do something that needs cash you can't raise any other way, this is worth exploring. Tell a story to an investor that wants to hear it, and create a cash-flow scenario that makes the investment worth it for both of you.

Learning by analogy

Some people are way better at this than others.

The other day, I was talking to someone about a complex and specialized issue. It's quite possible that this was the first and only time in the history of the world that this precise set of circumstances had ever occurred. He said, "do you have an example of how this has worked before for you?"

I was puzzled. I mean, not only hadn't I ever had this precise problem, but no one in the world had.

It's like the left-handed chiropractor in Berkeley wondering how he can use new technologies and marketing techniques wondering why there aren't more case studies about left-handed chiropractors in Berkeley.

Sure, the industries change, the goods/service ratio changes, regulation changes, names change. Doesn't matter. It's all the same. People are people, and basic needs and wants don't vary so much.

Put aside your need for a step-by-step manual and instead realize that analogies are your best friend. By the time there is a case study in your specific industry, it's going to be way too late for you to catch up.

Teaching the market a lesson

Some book publishers don't like the Kindle. Either they're afraid of it or they've crunched the numbers and they don't like what they see. (Some days, 95% of the top selling Kindle titles are free… demonstrating that digital goods with zero marginal cost and plentiful substitutes tend to move to zero in price).

Worried about the medium, they hold back, delay or even refuse to support it.

Which is fine if you have market power, but you likely don't. No publisher does, certainly. The Beatles couldn't stop iTunes from changing the record business by sitting out the platform, and there's no book publisher who can stop the Kindle alone.

It's tempting to look at a high-momentum market innovation, something that brings efficiency but leaves change in its wake, and try to stop it single-handedly. Tempting, but not so smart, I think. The market waits for no one.

The alternative to joining in is to sit out the game loudly. Don't just hold back your support, organize your peers. Create a (sometimes illegal) coordinated effort to stop innovation. I'm not going to bet much on your efforts, but it will certainly outperform a solo effort.

Quiet, passive-aggressive whining in the corner is both annoying and ineffective.

This site uses cookies.

Learn more