The three (design) mistakes of my life

[Note: an abridged version of this appeared on YourStory last week.]

Don’t you get irritated when you make a rookie mistake?

I’ve been reading a few books and articles on product design lately (I recommended one of these in last week’s newsletter). Some recent, and some classics that designers still swear by, 30 years after first print. Comparing the two, one thing struck me. Devices, user interfaces and users have morphed beyond recognition. But the principles of good design haven’t.

Yet, we still make tons of elementary mistakes. I know I do. These were silly mistakes then, and they’re silly now. It’s a cycle we’re all prey to – make a few basic errors, learn from them (I’m optimistic), and then go make some new ones.

But, surely, reinventing the wheel is not efficient. Each time someone repeats a basic mistake, it’s a waste. A waste of our collective efforts.

So here’s my attempt at reclaiming squandered time. Here are the three most critical design mistakes I’ve made. I hope others who are building new products can learn from them (or scoff at me – I know I run that risk).

 

A. Not Onboarding the User (or Onboarding her, but badly)

Design gurus talk ad infinitum about the importance of onboarding users. And it’s also common sense. Therefore, in the first version of my app, I included a six-screen tour upfront to help users immediately see how they could get value from the app. But that didn’t work.

In a world where you lose 80% of your users within 3 days, users don’t just want to see the value upfront. They want to get the value immediately.

So, after a few cycles of lower user activation, we now focus exclusively on soft onboarding – guiding users as they do actual activities on the app, rather than “teaching” them before they enter.

Another mistake we made was asking the user to invest too early.

If you ask the user to do some “work” before she’s sold on the app’s value, you’ve lost her. Let’s say you ask users to create an account. 90 per cent won’t if they’re not convinced that the app is great. What about Facebook login, you may ask. Yes, it takes only 14 seconds. But no, that’s too long.

To overcome this, we made the registration simpler in each successive iteration. First, we reduced the number of mandatory fields. Then, we removed some fields altogether. Then a couple more. Finally, we had only “mobile number” left. Just one ten-digit number, which your fingers know by rote; surely that’s not convenient? But still, user metrics were quite deflating.

It was only when we removed the login altogether that our sickly funnel began to recover. We now collect the mobile number only once the user completes her first iteration through the app – when she has already derived some value from it.

Moral of the story: Unlike your investors, your users need to see the return BEFORE they invest

 

B. Not Optimizing User Funnels

On the mobile screen, space is scarce. And given the vast multitude of competitors vying for your user’s attention, space in her mind is, if anything, in even shorter supply.

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Therefore, you must keep things simple. Don’t make the user think about what she wants to do. Once she opens your app, the next step should be self-evident.

There are two ways to mess up here: (a) give the user too many options; or (b) put important actions deep inside the app. We paid attention to the first, but missed the second. No matter how many triggers we gave, if a functionality was two or more taps away in some menu, users wouldn’t see it.

Finally, we mapped out the possible user flows on the app. And redesigned it such that the user sees what she’s looking for on the first screen itself. And not in some corner of the header. Front and center. No brain cycles wasted makes for a happy user (and a happy me).

Moral of the story: Think about all the contexts in which the user will use your app, and make each of these as simple (one-click) and clear (visible) as possible.

A related issue that several apps (including mine of course) suffer from is that funnels tend to be too long.

It’s pure wishful thinking: “I’ve placed a pot of gold at the end of the funnel. The user will jump through as many hoops as I place in the way.” Won’t happen.

We did this too. In one funnel, for example, we wanted the user to (a) watch a video; (b) answer a couple of questions; and (c) take a photo before they saw any value from the app. Some of our early adopters were enthusiastic enough to do this. But alas, this smoke did not bring fire, as our user base expanded.

Today, we’ve made our funnel much shorter, and are seeing far more users complete the journey through it. And they’re earning their (small) pot of gold.

The important learning for us here was that shorter funnels are always more optimized for conversion.

  1. Removing low-value actions from the user flow increases the prominence of the high-value steps
  2. Highly optimized flows make it insanely easy to understand, “what do I do next”
  3. The user gets to her “AHA!” moment much faster and more often. This is especially important – as Facebook and Twitter will testify, what users do in their first visit is often a strong predictor of eventual loyalty and retention.
  4. Fewer moving parts means it’s easier to tune the engine going forward as well.

 

C. Not personalizing user messaging

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I learnt early on that notifications are quite powerful. When a user first installs your app, she may not check it often. Notifications help build the habit. Make her phone buzz every day with a message from the app, and she’ll check in often.

So, armed with time-tested copywriting wisdom, I set to work. I focused each message on the user benefit, and put a clear call-to-action each time. And it worked!

For a time, anyway.

Early on, we would get a solid bump in user engagement in the few hours after a notification. But that quickly fell away. As users got more acquainted with our app, the standard daily messages, albeit highlighting user value, became just noise. Of course the user knew how she could benefit from our app. She’d been using it for a month! After receiving a stock notification for five straight days, the only action users often took was to uninstall the app. As we very heartbreakingly heard from some of our (ex) users.

The only notifications that work sustainably are personalized messages. I don’t mean just including the user’s first name in the notification. That feels clever, true. But here’s the thing – every app worth its salt does it. And the user knows it’s automated.

Instead, customize the message based on what the user does on the app. If a user comes to your app every day for five days and suddenly misses a day, then tell her you’re missing her (in a non-creepy way, of course). If she’s close to a milestone, remind her of the rewards awaiting her. Remind of her recent wins on your app to bring her back. Even if a user knows these notifications are machine generated, they still work.

Referencing users’ past activities creates a much stronger hook, reeling them in.

Today, we strive to send more personalized messages to users, uniquely tailored to their usage of the app.

 

D. Bonus mistake – not learning from any of the above

Since you’ve stuck with me this far, here’s a bonus mistake. This is as rookie a mistake as they come.

Over our initial few months, we made several design changes to the app in each version. So, when user behavior changed (or didn’t change), we weren’t really sure what the driving factors were. Which changes helped, and which ones didn’t? Were none of them helpful? Or were some cancelling out others? No clue.

And even in those situations when the data may have had definite implications, we weren’t disciplined about looking at the numbers and learning. Does a tree fall in a forest if no one’s around, etc.

Now, we try and make changes in such a way that we can track their impact. Make a change, wait a while, and check for variance in user behavior. That’s the only way to learn what’s working and what’s not.


I hope I’ve learnt from these mistakes, and that our bucket won’t be as leaky now. What about you? What are the design mistakes you’ve made, that now make you cringe? Drop me a line at gt.jithamithra@gmail.com or @jithamithra, or just comment here. I’d love to hear from you.

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Winners don’t do things differently. They do different things.

No, I haven’t made a typo in the title. The age old saying “Winners don’t do different things. They do things differently.”, made famous by Shiv Khera in his book You Can Win, is wrong.

I remember when the book came out, everyone quoted it as gospel. Every individual can be great. All you need to do is work hard, and work smart. And they would all nod knowingly at the last clause. So that’s what I did – studied hard, went to a good B-School, got a great job and worked hard (and smart) there.

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But unfortunately, this saying isn’t true. And it’s becoming more false as technology eats the world (to co-opt Marc Andreessen’s pet phrase).

 

This mentality of doing things smarter now pervades all aspects of our life. But it suffers from one fallacy – what I call ‘focusing on the numerator’.

It’s like a company that focuses only on improving its profit margin. It brings in cutting-edge efficient machines, implements Just-in-time production techniques, and what have you. But with all these productivity improvements, how much could the profit margin increase? From 15% to 20%? 40%? 100%??

Even in the best (and impossible) scenario, the upside is capped at 100% of revenue. What if you focused, instead, on the denominator? What if you looked for ways to achieve a step jump in revenue? Suddenly, there’s far more value to capture, even if you are inefficient.

 

What you work on matters, and matters far, far more than how hard you work. This is an example of a Power law, which I’ve written about before.  In the early 1900s in England, there was a profession of people called ‘knocker-uppers’ (no, it’s not what you think). Their task was to wake people up every morning. They would walk the streets with a long stick, and tap on windows till people woke up. Many of them worked hard. I’m sure they worked smart too – with well-balanced, aerodynamic and sonorous sticks. Still, they lost their livelihoods in a jiffy when alarm clocks came into the market.

Moral of the story: Do more valuable tasks, instead of doing less valuable tasks efficiently or smartly. Doing something unimportant well does not make it important.

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This is how the world is today – it’s the new normal. The companies that win are the ones that innovate 10X and ‘change the game’. Not the ones who innovate incrementally. As Peter Thiel says in his book, don’t move an industry to greater efficiencies (i.e., from 1 to 1.1). Focus instead on moving something from zero to one.

Look at the biggest companies around us – Google (search advertising), Apple (iPhone), Amazon (e-commerce, e-books, etc.). They didn’t just improve search algorithms, build a better phone, or sell books through a simpler distribution chain. They revolutionized their respective industries. Not by doing things differently or more efficiently, but by doing different things.

And it’s not just companies – it’s visible in every aspect of life. No longer can you say, “Karm kar, phal ki chinta na kar” (“Work hard, don’t worry about the result”) in all honesty. If the recipe sucks, it doesn’t matter how good a cook you are.

This may be bad news. But it’s good news as well. Once you start looking for this ‘focus on the numerator’ behavior everywhere, you can make more valuable decisions about your company, your products, and your time.

A few examples of the implications, off the top of my head:

  1. Product Management: Instead of A/B testing and optimizing your nth new feature, focus on getting more people to use your product. Andrew Chen puts this well in a recent article.
  2. HR: Instead of trying to getting the best out of your team, learn how to build a better team. [This is more important in technology businesses, and less so in traditional brick-and-mortar companies.]
  3. Health: You can try to manage your cholesterol by eating french fries cooked in refined oil or unsaturated oil or whatever the flavor of the season is. Or, you can just stop eating french fries!
  4. Personal Finance: Focus on earning more, not spending less. A direct corollary of the revenue-profit point I made earlier. It’s ironic, but I’m the prime target for this lesson. As a Tam-Brahm, I started expense budgeting almost before I could walk. I’ve spent countless hours balancing my expenses, tracking my receipts, and strategizing lower spends, when I could have instead focused on doing more valuable things. Which means anything else, basically.
  5. Personal Productivity: Be effective, not efficient, as Tim Ferriss says in The Four Hour Work Week. Do two important things, instead of 10 unimportant ones. Again, a slap on my face – so far, I was firmly in the ‘get more out of your day‘ brigade.

TL:DR: In work as in life, we should strive hard by all means. But we must think hard first – is what I’m doing the most valuable thing I could do? Let’s build more important things, instead of optimizing our lives away.

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What do you think? Are there any other examples of ‘focus on the numerator’ behavior? Drop me an email at gt.jithamithra@gmail.com, comment here, or tweet at @jithamithra.

[Note: This article first appeard in Yourstory.]

 

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Your Minimum Viable Product can be more ‘minimum’ than you think

[A slightly abridged version of this appeared first in YourStory.]

Minimum Viable Product, or MVP, is sure to show up in any startup glossary. It would be the first word in the glossary if glossaries weren’t alphabetical. And like most other jargon, it is often misunderstood.

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But before we get into that, let’s come up to speed on the popular notion of the MVP.

An MVP, or Minimum Viable Product, is the most basic version of your product that still delivers your core offering. You build a bare-bones product fast (emphasis on ‘fast’), so you can get validation early before investing more time and money. Thus, the product needs to be as ‘minimum’ or basic as it can, but it also needs to be ‘viable’ – i.e., it still needs to solve the one problem it was created to solve.

Aiming for an MVP helps entrepreneurs (especially first-timers like me) avoid the rookie mistake – building too much product before validating market need. We all want the ten revolutionary features in our first version. But not only will these features take five extra months to build, most users will also not see them.


So that’s the concept of an MVP – sounds simple, right? I thought so too. I congratulated myself many times as I built my first prototype in three months, found that people didn’t need it, and junked it. And again when I built my next one in four months, tested it out over the next three, and pivoted it to its current form.

But when I took a step back recently, a thought struck me, “Four months to build an MVP? Sounds excessive.” We’d done all the right things – cut the feature bloat, honed in on the two key functionalities, and built them. But that’s how long it took. Notwithstanding my obvious bias, we couldn’t have done it in less than three months.

From talking to other entrepreneurs, I see that this is a common conundrum – why does the damn MVP take so long?

The reason is that we’ve got the notion all wrong – for all but the most tech-intensive products, you don’t need to ‘build’ an MVP. You just need to ‘put it together’. And this often doesn’t need much coding at all.

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Let’s say you’re starting a website that offers personalized fashion tips. You can launch in one day or less – you don’t need the full website right away.

  1. Buy a domain – 3 hours. [Hint: The name doesn’t matter. But we know you’ll take the time. And buy five domains.]
  2. Build a one-page website with LeadPages, where people can upload photos or ask questions – 1 hour. No need to create an account or browse any content – they can ask fashion-related questions, and you can email your replies.
  3. Or, you know what? Ditch the website. Just have a number that people can Whatsapp their snaps or questions to. 1 hour [for you and your co-founder to fight over whose number to use.]
  4. Run a small Facebook campaign publicizing this site / phone number. Or tell ten friends, and have them each tell ten more. That’s your test audience. 2 hours.

Thus, you can be up and running tomorrow – even if you’re slow because this is your first time. What are you waiting for?

I know what you’re thinking – why should we listen to this guy? What has he done?

I’ll tell you what he’s done (yes, it’s normal to talk of yourself in the third person). He’s compiled a list of companies that hacked together an MVP. You may recognize some of them.

 

A. Started with an incomplete product

  1. Zappos is a US e-retailer specializing in shoes. When it started, the founders visited a few shoe stores, took photos of their merchandise, and put them on their website. When customers purchased the shoes, they would buy them from the stores and ship them.
  2. I’ve heard this about Flipkart too. At the beginning, they went out and bought books themselves when they received orders, and couriered them.

Back then, they still had to build the e-commerce website. Today, with Shopify, you can do even that in a jiffy.

 

B. Started by combining existing products

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  1. Angellist is a LinkedIn for startups – a marketplace that connects startups and investors. How did they start? Their MVP was good old email. They made intros connecting a startup looking for funding to an investor looking for investments. That’s it!
  2. Amazing Airfare helps you find ridiculous bargains on airfare. The company put together its MVP with text messages, PayPal, Excel, and email. No code.
  3. Saralmarket is a fruit procurement company. They don’t have an ordering website or complex prediction algorithms. They use Whatsapp to send out market rates and take orders.

 

C. Started without a product (!)

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  1. DropBox started as… a video! No product – just a clip of the founder shifting files between folders. Interested people could sign up for updates. And tons of people did, so this was strong validation.
    1. Wait, there’s no product! So how can this be an MVP? You’re right – this may not be an MVP. But it is a great example of how to validate your product without a single line of code.
  2. Kickstarter campaigns do exactly this. You put up interesting product ideas before you build them. Others demonstrate their desire by supporting you. Validation complete – go build the product now.
  3. Buffer, a tweet-scheduling tool that manic tweeters swear by, also started as a two page website ‘MVP’ – the user could see what Buffer would do, and could sign up to learn more. When several people signed up, Joel Gascoigne knew he was on to something.

We’ll see more and more of this, as social media makes it ever easier to test your product. Even when it doesn’t exist. As Ryan Holmes (CEO of Hootsuite) demonstrates, you can simply ask Twitter.

 

This list can go on. But I’ll stop here with an anecdote. A friend told me a couple of weeks ago that he had a great business idea. He’d planned it in detail – he already knew the 12th feature he’d introduce in month 22. But he hadn’t launched yet – seemed too daunting. So this is what we did – we took one of these to-do books (check them out – the irony is delicious), and made a list of starting tasks. It wasn’t that long – only three items, one of which was finding a name – which he had, so we ticked this with a glorious flourish. You’ll hear from him soon.


I hope to build many MVPs over my career, so any lessons from your experience would be quite handy. Mail me at gt.jithamithra@gmail.com, tweet at @jithamithra, or comment here.

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What strategy consulting for big businesses taught me about… starting up?

[This article first appeared in YourStory.]

Presentation

Strategy consultants are a much maligned lot in the startup and business world. Over the five years I spent at the Monitor Group (a strategy consulting firm started by Michael Porter), I heard various complaints:

  • How can a young consultant say anything useful to an industry veteran?
  • What’s the use of a plan that’ll take five years to execute?
  • Consultants don’t do anything except make slides.
  • You don’t know how to make decisions. Sure, you can advise people…
  • You never put your money where your mouth is. (I think Paul Graham meant this, when he called management consulting a version of ‘gaming the system’).

I heard many such comments during my tenure, from friends, relatives, and chatty fellow travelers on long flights. And seeing how we addressed these complaints at Monitor – while advising large conglomerates in established industries, paradoxically enough – prepared me for starting up.

1. It doesn’t matter who you are or what you know. You need to have a hypothesis, and be ready to learn.

When I started in strategy consulting, the first thing that struck me was the novel, hypothesis-based approach.

Hypothesis-Based Approach

Hypothesis-Based Approach

Coming from an engineering background, I was used to the deductive approach – start from what you know, and proceed towards conclusions. But a hypothesis-based, inductive approach starts from the other end – you make some predictions, and then proceed to test them (and modify them as needed). This data-driven learning approach is a great complement to industry understanding. That’s why companies hire strategy consultants – to hold up a mirror to their beliefs, test them, and help company executives understand how the industry’s evolving.

Performing this process – of making predictions, being proved wrong, and correcting them – repeatedly over multiple projects gives you a healthy appreciation of your own ignorance. I’ve found this invaluable when starting up – I may not know the right answer, but I know how to test my beliefs and work my way there.

2. You need to be OK with uncertainty.

One of the differences between strategy and operational consulting is the timeframe – strategy is more long-term. The industry trends you bank on may play out over 3-4 years – some may not have even started yet. So there will be ambiguity. But you still need to make some bets, and find creative ways to validate (or invalidate) them – talk to industry experts, observe trends in related industries and evolution of similar economies, etc. But none of these will give you the perfect answer – you need to ‘satisfice’. Thus, not only do you not know the answer starting out, but you also may never know the answer with certainty.

And it’s the same at my startup – I don’t know if my product is going to be loved, hated, or worst of all, ignored – first by early adopters, then by followers, and then the rest (if I get that far). But I’ll keep plugging away, and figure out ways to run small tests often to ensure I’m on the right track.

 

3. Serving your clients’ needs is your foremost objective.

Ignoring the double entendre for a bit, client service is the priority in consulting – I heard this all the time from Partners at Monitor. Whether it’s sudden weekend work or an ill-timed field visit, you do it if it benefits the client.

Today, I have a consumer-facing Android app. Every once in a while I get a caustic review, or a needlessly harsh 1-star rating. But it’s not my place to rail against unreasonable users – if I focus on serving them well, then I hopefully won’t have to worry about these ratings in the future.

 

4. Brevity is the soul of communication.

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Naysayers are true when they say consultants make a lot of PowerPoint slides. Boy, did I make a LOT! But the thing about slides is that, unlike a Word document, there’s limited space. So you need to make your point succinctly. And you need to say first up why that message is important (or as they say at Monitor, you need to bring out the ‘so whats’).

I’ve done my 10,000 hours of slide-making. I’m still far from a genius at it (Gladwell was wrong), but knowing how to deliver the key message upfront and in as few words as possible is a very useful skill at a startup. Whether it’s in crisp emails to potential clients, high-impact copy for Facebook ads, or elevator pitches to investors with short attention spans, brevity is invaluable to startups.

 

5. Ideas are worthless. Execution is key.

I know this sounds very ‘global’ (and it is – I won’t lie), but project after project has taught me that the best-articulated strategy can stop making sense once you start implementing. There was one case where we designed the strategy and left, and the client came to us after a few months saying everything is shot to hell and can we please come back and help them. We could definitely have done better – it was our responsibility to devise a plan that the client could implement, and explain it to the client’s team.

But the larger learning for me was that your plan doesn’t matter so much; it probably wasn’t rocket science to begin with. But you need to be able to execute on it effectively. It needs to be ‘actionable’.

In the same article where Paul Graham says that management consulting is gaming the system, he also mentions the similarity to college. And while I may not fully agree with his first comment, his second is spot on. A strategy consulting firm is one of the best finishing schools you can go to, if you want to build a business of your own someday.


What do you think? Did these learnings resonate with you? And did I miss anything? I’d love to hear what you think – mail me at gt.jithamithra@gmail.com, tweet at @jithamithra, or just comment here.

 

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The Barbell Strategy, or how you can have your cake and eat it too.

[A version of this article appeared on YourStory last week.]

One of the tenets that stock market investors live by is diversification. As their advice goes – if you invest in several (uncorrelated) stocks, you reduce the risk of a sharp fall in one stock damaging your income significantly. An extension of this argument is that traders should maintain a mix of low-risk and high-risk assets in their portfolio; even if the risk materializes and your high-risk assets blow up, you still have some income. This is called the ‘barbell strategy’.

This is a very useful concept in stock investing. But can we take advantage of this in other businesses?

 

Before we try and answer this question, let’s understand the ‘barbell’ concept a little better.

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The reason this investment strategy is called a ‘barbell’ is that all your investment goes to the two extremes of low risk-low return and high risk-high return, much like the weight of a barbell is concentrated at its ends.

Barbell SpectrumThus, you deliberately plant your feet at both ends – low risk and high risk; low payoff and high payoff; short-term and long-term.

Sounds like a great investing idea – limit your potential losses, even while pursuing high-risk investments. But, you may ask, how does this help those of us not in the financial sector? If you’re not a trader, how can you take advantage of diversification in general, much less a ‘barbell’?

 

There are several different avenues of business where a barbell approach can help cover downsides, and allow you to test new channels of growth.

1. Startup Marketing: There are several different channels through which you can market your product (Traction, an excellent book on the subject, lists 19!). But not all of them are equal – channels like TV advertising, SEO, and viral growth have a high ceiling on saturation (i.e., you can acquire millions of users through these channels), while others (PR, social media, community emailing, etc.) are far less scalable. But there’s a flipside – the former ‘moonshots’ are also more expensive, far more risky, and take longer to optimize.

When you’re selling a new product, you should definitely explore some of the moonshots – if any of them work, they can make your company’s destiny. But you should also invest in the more near-term, less-scalable channels, to ‘keep the wheels turning’ with a small flow of users. This also gives you time to perfect your product and plug the leaks in your user acquisition funnel, so that when one of your moonshot experiments suddenly delivers a deluge of users, you are able to effectively retain them.

Andrew Chen has written an excellent article on this. And Paul Graham refers to a similar concept when he says, “Do things that don’t scale.

 

2, Short vs. long-term value propositions: Sometimes, startups also need to bet on a combination of short and long term opportunities. Your product vision may be very ambitious, but you often can’t offer that proposition from day one. In fact, the more ambitious your vision, the longer it will take to start delivering it. So, if you want to survive long enough to achieve your dream, you need to sell something else till that happens.

A great example of this is Zomato – they started as a pure-play information source on restaurants around you. Gradually, as the user base grew, they began overlaying restaurant promotions. Now, they’ve just started an even more lucrative food delivery service. And I bet they’ll add other services soon – allowing you to book a table, pay for your meal through the app, etc. (I predicted this in an early March blog post, maybe 10-15 days before they started the food delivery service :P).

 

3. Multiple product lines: More mature businesses also employ the barbell strategy. They often have one-two cash cow product lines, which they can milk till the cows come home (I had to take the metaphor to its conclusion, didn’t I?). This gives them the freedom to invest in potential breakthrough products – many of these will fail, but a few will succeed and make up for all the losses and more.

Think of skincare brands – they all have some stable products like fairness creams and face washes, and periodically introduce more cutting edge products (e.g., anti-aging elixirs) to test the market.

 

4. Your own entrepreneurial career: The above examples are at a company level. But even individuals can employ a barbell strategy. For example, I have a startup, and have been working on a couple of products for 2 years now. At the same time, I also do some freelance consulting, and am about to run a taxi on Uber / Ola. Not only does this small but steady income give me the staying power to explore more opportunities at my startup, it also gives me a reserve to tap into, should any of my experiments work and I want to step on the gas. You may say I’m hedging. I don’t disagree, but I’ve found this safety net invaluable – I can apply myself to my venture in the best frame of mind, without worrying about a fast-falling bank balance.

This is similar to the entrepreneurial system that Scott Adams talks about in his book. And James Altucher has often spoken about how rich people have 7-10 different income sources.

 


 

Thus, you can employ the barbell strategy in several different situations, to reduce your risk even as you take on high-risk opportunities. And that, ladies and gentlemen, is how you can have your cake and eat it too!

I’d love to hear what you think of the barbell concept. Can you think of any other applications? Comment here, drop me a line at gt.jithamithra@gmail.com, or tweet at jithamithra.

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Have a great business idea? Don’t quit your job yet.

A friend called me out of the blue a few days ago, and said he had a great business idea. Before I could get a word in edgeways asking him what it was, he blurted “And I’m quitting this Friday.” As I controlled my surprise and readied to respond, I flashed back to the time when I quit my job, two years to the day.

I Quit

I first got an idea for a new venture about 6 months before I quit. My co-founder and I spent a couple of months testing the idea with friends working in the target sector. Once we got feelers that we may be on to something, we spent another 2 months finding a good guy to helm product development. And then we started building the product. By the time I quit, we had a prototype ready, and our website also went up the same day – I could proudly mention it in my farewell email.

Less than 6 months later, we shut the business down (surprised you with the shock ending, didn’t I?). As we pitched the offering to prospective clients and started a couple of customer pilots, we saw severe structural limitations to the idea, and decided to shelve it. As the military saying goes, “The best laid plans seldom survive first contact.” Or to quote this generation’s premier philosopher, Mike Tyson – “Everybody has a plan, till they get punched in the face.”


 

All of this is to say – there’s a lot of uncertainty when you’re starting up. And while the uncertainty will never go away, there’s a lot you can do while still at a 9-5 (or 9-8 in case of this friend) job to answer the most primary question regarding your startup – is there a paying customer who’ll find value in your service?

Before you quit

1. Build out the product concept

Outline clearly what the product will do. This will be very useful later when pitching customers, but it is also important at the initial stages to make sure you’ve thought of all sides of the idea. If you have a co-founder, then it helps make sure you are on the same page.

You also need to think about the concept at different levels – now that you’re going to execute on an idea and it’s not just a castle in the air, you need to descend from your 20,000ft view. I found it useful to do these three things:

  1. First develop a 30 sec elevator pitch
  2. Then dive a little deeper, and think about a 2-3 min description of the product and its benefits
  3. Develop a 5-10 min presentation on the product – at this stage, you’ll start detailing how you plan to successfully and scalably deliver your value proposition.
    1. This can be in any format, but I find making a PowerPoint presentation an incredibly useful cure for a muddled mind.
    2. You can use the template below to sketch out your product concept and business model – it ensures that you think through all the elements of your business model.
Based on framework from strategyzer.com

Based on framework from strategyzer.com

2. Test the product concept with prospective customers

Unless you’re building a visionary product that people don’t yet know they want (are you the next Steve Jobs?) or there are strong reasons to be in stealth (e.g. Siri), you must absolutely talk to a lot of customers or industry experts. You’re not selling anything yet – this is more about validating the idea itself and ensuring that this is something people would pay for.

I would hesitate to put a number to these interviews – it really depends on the space you’re in and where in the value chain you’ll play. But, roughly speaking, let’s say at least 50 customers in case of a B2C product, and 5 in case of a B2B one.

The aim should be to rapidly iterate on the idea and improve it. For instance, when we were validating our idea, there were times when we would meet one person, return home and change the pitch, and then go to the next meeting. Such early conversations are invaluable in refining your idea significantly, before you spend a single penny on development.

Customer Feedback

You should also use these conversations to test your financial assumptions. How much would people pay for this product? How much would it cost to acquire the customer – distribution costs, marketing costs, etc.?

 

Let’s stop for a bit – at this point, all you’ve done is understand your idea, and test it with a bunch of people. No need to quit yet. But let’s move on.

3. Design a strawman / prototype

Once your customer interactions show that your idea has legs, and you refine your idea with customer inputs, it’s now time to design the product. You’re not actually building it right now – you’re just giving your product concept some form and shape. You can use Just in Mind for this – this tool allows you to draw out your product’s different features, and create the usage flow (I used this tool to create the first design for my current app). For example, if you’re building a mobile app, you can create a series of screens with the rough functionality you envisage. You can also map buttons to specific other screens – so that when you’re showing the prototype to someone, you can also demonstrate how the app transitions will take place.

Doing this can be challenging – it’s the first time you’ll be doing something concrete about your idea (and even more so if you’re a first-time entrepreneur, like I was). But if you don’t start enjoying it soon, then that’s a valuable learning too – maybe you’re not yet ready for the uncertainty and vagueness of starting up.

4. Test the prototype with customers

Once you’ve built the prototype, you hit the road again. Test it with the same or different customers – would they actually use this product? How much would they pay for it? You’ll learn a lot – just like creating a concrete design helped you clarify your own thinking on the product, users will give more actionable feedback when they can actually see the product in some form. All of which will improve the first version you launch significantly – without quitting your job yet.

5. Build out your initial financial model

I’m biased towards drowning in large excel models, and therefore I hesitated to put this down – is it really necessary so early on? But on second thoughts, it absolutely is. Not only does it help you acknowledge your assumptions, estimate the cash burn rate and plan your runway, it also gives you one more concrete element to test in the market – running this by customers can again help you verify that your business is attractive. And as long as your assumptions reconcile with user opinion, you can continue to the next stage – developing the product itself.

6. Start developing an MVP

Assuming the previous steps went well (i.e., people liked the product and you liked the experience), you then start building the Minimum Viable Product, or MVPthe most basic product that fulfils your core value proposition.

If you’re the technical lead, then this may be the time to quit your job – but only if you can’t manage this in addition to your regular job. And if you’re not the technical lead, then there’s still not enough for you to do at the venture to justify quitting. Spending your weekends working with your team and meeting customers is more than enough. In my case, our tech lead worked closely with a couple of freelancers to build an MVP – while it wasn’t ready yet by the time I quit, we were more than halfway there. (There may be divergent opinions regarding using freelancers / outsourcing initial tech, but let’s leave that for another day).

An advantage of hacking together an MVP quickly is that you can validate and refine your product much faster, which brings us to the next point…

7. Test the MVP with initial pilot / alpha customers

Testing

The next step is to share this MVP with some of the customers you spoke to in the previous steps, and see how they use the app. You’ll find that if you did the previous steps correctly and the customers are indeed captured by the product vision, they’ll forgive a lot of UI issues, buttons that don’t work, etc. – as long as the core value proposition is delivered satisfactorily.

Only once this MVP works do you really need to quit – before this, there’s more than enough time on the weekend.


 

Thus, there’s a lot you can do to get your product off the ground before you even quit your job. In retrospect, I think even I quit too early. I could very easily have continued working till the time we found that the idea didn’t work!

Now, delaying your resignation is certainly easier said than done. I had a very supportive employer, and I could keep my boss in the loop from the very beginning. As long as I fulfilled my responsibilities at work, no one had a problem with my moonlighting. But other companies may be different, and I can easily imagine cases where this may be frowned upon.

Another factor that could make juggling everything difficult is the intensity of your day job. If that itself requires you to burn the candle at both ends, then you may not have any energy left to fuel your own venture. In such a situation, you may need to take a leap of faith, and take a short sabbatical (if you have a great equation with your bosses) or quit with the confidence that you’ll find another job if your venture doesn’t succeed.

And of course, there is the mental angle – most of us, to begin with at least, can’t compartmentalize our different roles. In such situations, one may feel that cutting a bond, however tenuous, with the previous employer is critical to fully seizing the new opportunity. So it’s definitely not as simple as I make it sound.

 

But to tilt the scale yet again, there are a few more underrated benefits of quitting later.

  1. If your entire career thus far has been a salaried job, a clock will start ticking in your head the day you quit – especially if you’re paying a salary to your team. It makes a difference whether you’re paying this salary out of your (paltry) net worth, or from your own monthly salary. This happens to the best and best-paid of us – there’s no escaping it. Delaying your exit till a time when your product value proposition and customer validation are more solid can do a lot to assuage those frayed nerves.
  2. This cash in hand aspect is particularly important early on, when you’re still experimenting. Having a fixed cash inflow gives you the staying power you need to try different value propositions, business models and consumer interfaces. Otherwise, every next experiment will pinch you – not the best frame of mind to unleash your creativity. In my case, I had already quit when my first idea failed! So I went back to working as a freelance contractor for 1-2 days a week, to fund my next product and keep me in the game.
  3. You’ll have to work very hard initially, juggling your job and startup. Those few 100 hour weeks, working yourself to the bone, will tell you whether you’re really passionate about your venture, or just interested in the hype!

What do you guys think? Do you feel it’s hard to work on your business idea while also doing a day job? Would love your perspective – mine’s based on only a few sample points. Comment here, email me at gt.jithamithra@gmail.com, or tweet at jithamithra.

Thanks to Abhishek Agarwal for providing inputs on an earlier draft of this post. And for sharing this excellent article, on the same theme. Just as I was ready to publish this post 😛

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Yes, rewards motivate people. To get more rewards.

Hello! I’m finally back to blogging, after a short hiatus to focus on my app’s launch. It’s been a topsy-turvy few weeks with several delays, but we’re now only a week away from launch. Hopefully.

Delays beyond your control can be quite deflating when you’re waiting for the culmination of months of effort. But it’s at times like these that it’s most important to keep your shoulders to the wheel – even when things are not fully in your control, you need to do everything you can.

In this sense, the last few weeks have been a microcosm of the entire starting up experience – unless you’re Elon Musk, luck and other external factors will play a significant role (often more than your otherwise significant efforts) in success or failure. What you can do, is stay on the field. And that requires motivation.

Hard at work

Motivation is a strange beast. I used to think that decent pay and bonuses are good motivators, but here I am, grinding away with no income. And I’m enjoying myself. Clearly, there are some intrinsic factors at play that keep struggling entrepreneurs in the game (hopefully not foolhardiness though).

I’ve wondered about this quite a lot over the last 2 years. But a lot of my questions were answered when I read Drive a few weeks ago. This book, written by Daniel Pink, explores what really motivates us, based on findings from scientific research. [Hint: it’s not money and bonuses]. I’d recommend this book to everyone – understanding what motivates people has pretty direct implications for how we manage our employees, our bosses, our customers, our families, and everyone else we interact with on a regular basis.

 

But this isn’t a book review or summary. Ever empathetic to the busy reader, Pink himself has included summaries (both Twitter and cocktail party variants) at the end of his book. Instead, I would like to dwell a little on one aspect – his discussion on extrinsic motivation. I found it fascinating to understand some of the pitfalls of extrinsic ‘carrot’ rewards like money and bonuses.

Pitfalls_Extrinsic_Motivation

1. Money drowns out intrinsic motivation and performance.

Research shows that even if you innately like a task, being paid for it actually reduces how much you like it. I was surprised by this result, but some others intuitively get it. For example, one person I know loves baking in her free time, but doesn’t want to do it full-time – she feels that the pressure of earning money will reduce the pleasure she gets from baking.

Rewards perform a weird sort of behavioral alchemy – they can transform an interesting task into a drudge, a fun assignment into a bore, and play into work. And by reducing intrinsic motivation, they can send your performance and creativity toppling like dominoes. What’s more, you’ll now only do these tasks if you’re paid for them. [Note to parents – don’t pay your kids for household chores]

2. Extrinsic rewards give a short-term boost. Like a jolt of caffeine, they’re particularly useful when a deadline is looming. But like the energy crash that inevitably follows a post-coffee frenzy, long-term motivation and performance will also fall.

3. ‘Carrots’ can become addictive.

Offering an extrinsic monetary reward for a task signals that it is undesirable (if it were desirable, would you need a carrot?). And this, to resort to cliché, is a slippery slope. Offer too small a reward, and they won’t comply. But offer a reward that’s enticing enough the first time, and you’re doomed to offer it forever.

But the bad news doesn’t end there. Once the initial money buzz wears off, this will feel less like a bonus and more like the status quo. You’ll then have to offer ever-larger rewards to get the same task done, just like the nicotine addict falls into the vicious cycle of more and more cigarettes to get his ‘hit’.

 

4. Rewards promote short-term thinking

Donkey and a carrot

Once there’s a carrot in front of you, that’s all you’ll see, at the expense of more long-term objectives. Just like the auto mechanics who conduct unnecessary repairs to meet their sales quotas. Or, more terrifyingly, Delhi’s monster Blueline buses which went on a killing spree, all because of an innocuous incentive to ply their routes quickly.

5. However, extrinsic rewards aren’t completely useless. If the task at hand is process-oriented, like filing documents into folders, then an incentive can speed you up and reduce your Facebook / power nap breaks. But if a task is creative, then monetary rewards have the effect of narrowing your thinking – when what you require is the exact opposite.

6. When you attach a bonus to a target, you may increase the probability that it will be hit (at least if the task is process-oriented). But you almost guarantee that the target will not be surpassed. Your teams will work hard to meet the target. But no further.

 

Thus, over a basic threshold of the amount needed for basic comforts and happiness, monetary incentives can work negatively. This has deep implications for how we manage our teams, employees, families, etc.

Team

 

We could now talk about what does motivate people. But why don’t you read the book for that? Let’s do something more interesting instead – let’s predict what these findings mean for some of the trends in our economy.

a. E-commerce: If your value proposition is ‘lowest prices’, don’t expect any loyalty once that becomes untrue. Case in point: Deep discounts in Indian e-commerce today are themselves hurting brick-and-mortar discount retailers.

b. Many heavily funded startups are spending equally heavily to acquire employees and customers. But these efforts may have a short shelf life.

    1. If you’re throwing money at employees, you should expect that you won’t retain them over time, and that performance will suffer in the interim. Unlike large companies, work at startups is not algorithmic and process-oriented – you need someone who reigns in (and reins in) chaos.
    2. In their bid to conquer the mobile space, many companies are incentivizing app downloads by the millions (yes, users actually get paid for downloading apps). Even if these investments boost vanity metrics today, results will tail off very quickly, as users begin to install apps just for the rewards, and then never use them again.

Throwing away money

c. If you do have to use incentives, design a mix of long- and short-term targets, and make them harder to game.

    1. App marketers could incentivize use of the app over time, and not just installs. Give a bonus on the first major activity, rather than on ‘Install and use for 30 seconds’.
    2. In a corporate sales scenario, bonuses could be driven by both new sales and customer churn, to promote longer-term customer management vs. one-time discounts.

d. But even when promoting use, a monetary incentive is bad news. Just like Drive showed, if you create incentives around specific targets, people will work hard just to meet them, and no more.

A case in point is the Indian government’s drive for rural toilet construction (a strong interest area of mine – see this). Over the last 15 years, the government has given ever-increasing incentives for toilet construction – starting with Rs. 200-400 in the early 2000s, to Rs. 12,000 today. But they’ve seen large numbers of toilets being used as anything but – often as store-rooms or an additional room. People have just constructed ‘toilets’ to pocket the incentive.

Yes, this is a toilet!

Yes, this is a toilet!

Many stakeholders are now trying to move the incentive towards usage – e.g., a part of the reward comes to you only if you’re still using the toilet 3 months after construction. While this idea sounded great the first time I heard it, I now fear it may also be doomed to fail. This effectively destroys intrinsic motivation to use a toilet (which there otherwise would be – it is indeed far more convenient than open defecation). People will feel they’re being paid to defecate at home because that’s the less comfortable thing to do. When the incentives stop, use will fall too. Bringing us back to square one.

 


Extrinsic rewards are undoubtedly simpler to design – what’s easier than throwing money at a problem, in these profligate times? But Drive serves a timely reminder that as in most other areas, only the hard work of creating intrinsic motivation will bear fruit.

Hope you found this post interesting. Can you think of any other implications of extrinsic ‘carrot’ rewards? Do share in the comments. You can also email me at gt.jithamithra@gmail.com or tweet at @jithamithra. Until next time, then!

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The reading list that transformed my professional life

Bookshelf_Small

6-9 months ago, when everyone was posting lists of the top 10 books they read, I was unfortunately busy with work. And then, when I wanted to post my own list, it was much too late to do so – people had moved on to sharing Upworthy articles instead.

Nevertheless, what’s far more useful is to talk about the top things I learnt from books – the ideas, insights, stories that changed how I think about life and work. After all, that’s why you read books – to improve yourself in some way – isn’t it? Well, at least all books apart from the Twilight series.

So, here are the 5 ideas that transformed how I think about life and work, and the books I read them in. Rather than describing these ideas in detail, I’ll also share links to articles that offer a short version. But I would definitely recommend you read the book themselves too!

 

1. System 1 vs. System 2 Thinking – Thinking Fast & Slow

An understanding of psychology is, in my view, an essential skill for anyone whose daily life involves interactions with other people to get stuff done. The human mind is not only not rational, it is also irrational in a few consistent and repeatable ways. Understanding these cognitive biases and fallacies that we suffer from can go a long way in helping you get what you want in interactions with people.

One of the key concepts I’ve come across in this area is that the human mind is really two distinct personalities – let’s call them System 1 and System 2. System 1 is the more automatic, quick-and-dirty, heuristic based, lazy thinker – get to an answer quickly by applying habits and patterns, often at a subliminal level. System 2, on the other hand, applies more careful, overt deliberation to any problem, coming to a solution in a more considered manner.

At any time, you’re thinking in one of these two modes. For example, when you’re doing math, you’re carefully thinking of the problem and solution – that’s System 2 in operation. When you’re tying your shoelaces, you’re usually not thinking about the loops and knots actively – you just do it. That’s an example of a System 1 task.

Now, at most times, the mind defaults to System 1 – which tries to recognize and apply patterns without thinking too much. And the result is that it can get tricked in fairly predictable ways – what we call cognitive biases. Two examples of these are anchoring (where an initial number suggested to you often influences your answers to a numerical question) and availability bias (you tend to overestimate the probability of an event if you can remember examples – this sometimes results in people paying more for earthquake insurance than insurance for natural calamities – even though the latter includes earthquakes!). Won’t go into detail on these biases here – you can read the articles I’ve linked to, and the book. But I’ll blog about them soon too!

Another interesting implication of the dominance of System 1 is that you can trick your brain into certain emotions. For example, you know that when you’re happy, you tend to smile. But did you know that this can work in reverse – that you can trick your brain into happiness, by simply smiling? This was a ridiculously amazing insight for me – to know that causality works both ways, and I can control my emotions. I’m a ‘moist robot’, in Scott Adams’ words.

Book: Thinking Fast & Slow – one of the best books I’ve read – and I actually prefer fiction.

Further reading: 15 Lessons from Behavioural Economics – Slideshare, Scott Adams on Programming the Moist Robot

 

2. Making Skewed Bets – Fooled by Randomness & Antifragile

When I was in business school, I read Fooled by Randomness, by Nassim Taleb. At that point, I thought it was the best book I had ever read – so many brilliant ideas, one after the other. I read it again recently, and while I’m a little less effusive, it’s definitely worth a read – it’s long-winded and unnecessarily complicated in parts, and the language is often self-absorbed – but if you can look beyond that, the insights will hit you at an unrelenting pace.

But the most important insight for me – in that it almost exclusively governs my world view since I read it – is that of making skewed bets. The world is innately random – your success depends far more on your luck than on your ability. At first glance, this seems to encourage laziness. Why work hard when your destiny doesn’t depend on it? But looking deeper, the implication is that you should try and expose yourself to ‘positive’ luck as far as possible, while limiting the impact of ‘negative’ luck. In simpler terms, expose yourself to very high upside, while limiting your downside as far as possible.

This is called making a skewed bet – where if you win, the gains are a windfall; but if you lose, you don’t lose that much. A lot like financial options or a startup – if you make it, you make it. And if you fail, then your losses are limited – the cost of the option, 1 year of salary, etc. Of course, the probability of a loss may be 90%. But if you make 10 skewed bets, then you’ll make a windfall gain on 1 of them – and that may be more than enough.

Another important way to keep yourself open to good luck is by simply staying on the field. Thomas Edison got the light bulb right on his 1000th attempt – and that happened only because he kept trying different things, and didn’t give up after 999. To surf a ‘killer wave’, you need to first be in the sea, navigating the 100 tepid waves before.

Book: Fooled by Randomness. Antifragile, a subsequent book by Taleb (even better), actually takes this one idea and distills it far more.

Further reading: The hard part about surfing

 

3. Goals vs. Systems / Success as a process- How to fail at almost everything & still win big

Taking the previous point further – success, then, seems to be a process rather than a brilliant idea, inch-perfect execution or just good luck. Try a lot of different things, observe, learn, and iterate. So that you slowly, over time, collect all the right materials for the magnifying glass of luck to ignite. You do all the right things and keep improving, so that when Lady Luck knocks, you’re ready.

Success is therefore a system (take several skewed, high-reward/low-cost risks), rather than a goal (I want to get rich). Now that’s at a macro-level, but this makes sense even at the micro-level – rather than adopting a goal of doubling your user base and throwing money at it, take a systematic approach of trying different things, observing, and then betting the farm on the 2-3 marketing techniques that work.

Scott Adams (of Dilbert fame) carefully charts out this approach in his book.

Book: How to fail at almost everything & still win big. I would venture that this is one of the best and most actionable books I’ve read. But read at your own peril – as they say, one should be careful when taking life and business advice from a cartoonist.

Further Reading: Goals vs. Systems – a short blog post applying this concept to life in general.

 

4. Power Laws, or why working hard is not enough – Zero to One

I’ve already blogged about this here, but it’s worth reiterating. Today’s business world is not a normal distribution, with most people distributed around average payoffs. Rather, it’s an exponential distribution – very few companies will make most of the money to be made. Therefore, success depends far, far more on what you do, than on how you do it.

random-vs-power-law-distribution-2

In a power law distribution, very few sample points account for a majority of the population’s value.

The power law will permeate all your decisions (e.g., one marketing hack will drive 90% of your traction, one product feature will drive 90% of repeat users, etc.). Won’t go into more detail here – definitely read the post!

Book: Zero to One

Further reading: The Power Law, or why working hard is not enough (my blog post, again)

 

5. Attractor States Good Strategy Bad Strategy

The previous three concepts have all been around the idea of work and success. This one is different, and is a tool that I’ve found quite useful in jump-starting creative thinking about problems.

Let’s say you’re trying to think of a startup idea in a given space. You could look at what users do now, what they buy, how they consume, etc., and try to find areas where you can add value. Or, you can look at how the industry will inevitably evolve in the future and see how you can accelerate that.

The author calls this concept an ‘attractor state’ – given industry trends today, what do you see as the logical next frontier over the next 10-20 years? And how can you participate in that, rather than making incremental changes to the status quo? To paraphrase Wayne Gretzky, the ice hockey legend – don’t skate to where the puck is, but to where it will be.

This is a slightly nebulous concept, so let me provide an example. Let’s say I want to create an offering in the payments space. One option is to join the crowded current market, and provide a mobile wallet solution, a payment gateway, etc. Another way is to think of where the industry will be in 10-20 years – its attractor state. I’m not a payments expert, but seeing how it has evolved over time (barter -> gold -> paper money -> credit cards -> mobile wallets), there’s a clear trend towards individualization. The reasons mobile wallets are a great innovation is that everyone carries a mobile today, and they don’t share mobiles – it is a unique identifier of a person. Taking this individualization further, the next wave of advancement has to be biometrics – where unique characteristics of your person (iris, voice patterns, fingerprints, etc.) are your identifier, based on which transactions can be completed from your account. You don’t need to whip out your phone or credit card – just staring at a tiny lens is enough to connect to your payment account.

How does this help an entrepreneur? With this end-game in view, entrepreneurs can think about how they can add (and capture) disproportionate value in the long-term – the products and services they can start building today, to accelerate the attractor state. In the case of payments, it could be future biometric sensors, systems for collating massive customer data, POS terminals for accepting payments, etc. – each of these possibilities could be game-changing.

Won’t go into much more detail here – but I’ll write a blog post or two on this concept soon. I find it an incredibly powerful way to improve your creativity when thinking about problems and solutions.

Book: Good strategy Bad Strategy. Apart from a discussion of attractor states, this book also has a great discussion of chain linked strategy and focus as a source of competitive leverage. I’ve blogged about this here.

Further Reading: Will write a detailed post on this soon!


These are the five concepts from books that changed my world-view. It may be asking too much to hope that they fundamentally alter your thinking too, but I hope you find these perspectives and books interesting. Do comment!

PS. Have you signed up for the Startup Weekly yet?

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Sometimes, good old focus can be a competitive advantage.

We constantly read about companies that have created barriers to entry – through technology, intellectual property, large-scale manufacturing, or sometimes even by throwing a ton of money at a problem. For startups, this barrier to entry is a constant refrain, especially in conversations with potential investors – “What’s your barrier to entry? What asset are you building that’s hard to replicate?”. And this is a hard question with no easy answers, especially for a young company that’s not building a high-tech, proprietary product – a bigger competitor with deeper pockets could appear at the ramparts anytime, and replicate exactly what you’re doing.

But what if just focus on a particular user segment could help you develop a competitive advantage? What if expending all efforts to serve a particular market niche or user segment could help you unearth a resilient barrier to entry?

Barrier to Entry

I read a book called ‘Good Strategy Bad Strategy’ last year and was struck by how insightful it was. I’ve revisited my notes from the book at least twice now, each time capturing a new nuance. It’s a must read for students of strategy, advisors on strategy, and practitioners. Having been all three (in that order, oddly enough), this is right up my alley.

The book had many great ideas on sources of power for companies – what gives a company lasting supremacy in its market. One idea that stayed with me was of single-minded focus – how focus on a particular type of user can be a sustainable source of power or competitive advantage. How would this work? Let’s dig in – this feels like another 1800 word post.

 

Any company’s business model has 9 different parts, as below:

Business Model

Source: Strategyzer.com

The author, Richard Rumelt, points out that to focus on a specific user segment, you need to make coordinated changes across multiple or all parts of your business model. Thus, your final offering to the customer is a sum of many moving parts that have all been finely configured – a sum that, as the cliché goes, is more than its parts. Applying such focus takes incredible coordination of policies, which, along with their interlocking and overlapping effects, can then confer unassailable advantages and make you a hard act to follow.

 

I know this seems very philosophical (a little like bad strategic advice!), so let’s look at a few examples to illustrate this better:

1. IKEA

IKEA

Rumelt uses the example of IKEA to illustrate this concept. IKEA is a furniture retailer that sells ready-to-assemble furniture. It targets do-it-yourself or DIY users, who love the feeling of putting something together. It has been hugely successful across multiple countries, but 70 years since its founding, no credible competitor has appeared or lasted. That’s sustainable competitive advantage!

IKEA has no secret sauce in terms of patented technologies for furniture, greater marketing strength, etc. The source of IKEA’s lasting advantage is, instead, the coordination between the different elements of its business model to serve its target segment. For a competitor to challenge IKEA, they don’t just have to sell ready-to-assemble furniture – they’ll have to change their whole business model.

  1. They’ll have to design new types of furniture;
  2. They’ll have to start carrying larger inventory;
  3. They’ll have to create their own, branded stores; and
  4. They’ll have to change their selling models.

Thus, copying IKEA is not a simple matter. IKEA’s policies are so different from the norm in the furniture industry that any competitor would have to replicate ALL of them to meaningfully compete for the same user segment. Adopting one or two of these policies and implementing them, even perfectly, would be useless – it would add huge expenses without providing any real competition.

2. Apple

Apple

Apple is another example. Over the years, Apple has targeted its products at premium customers who want a superior experience – well-designed products that just work. They’re not interested in the most technologically advanced products with the most bells and whistles – they want products that do their job simply and well. Oh, and there’s snob value too.

Apple has made several interdependent decisions to target this group:

  1. Complete ownership of the product: Take the iPhone. Unlike its closest competitor, Android, Apple controls the entire product – the OS, the hardware, user interface, etc. This allows it to deliver a very coordinated and quality user experience.
  2. Complete ownership of computer ecosystem: Moreover, Apple coordinates the experience across all its products. The Apple ecosystem can satisfy all your computing needs – desktop, laptop, tablet, phone and music player. All of these products follow the same design language, and work together seamlessly – they sync with each other very easily, without any need to fiddle with system settings.
  3. Branded retail stores with a luxury experience
  4. Marketing mainly to premium customers who don’t mind spending more – this not only raises product revenue, but also increases the long tail of revenue from app store downloads, music downloads via iTunes, etc.

The reason Apple’s position in the market is unassailable is that a competitor can’t just copy one or two things to start selling to the same group of customers. The competitor would have to copy everything, a formidable task even for very nimble companies. And copying sequentially won’t work – you can’t begin to deliver the Apple or IKEA value proposition without copying everything from the outset, in a coordinated manner. Which is why, even though Android and its partner OEMs have copied a lot of product design elements from Apple (in fact, the first Samsung Galaxy S was an iPhone in all but name), they haven’t been able to displace Apple from its position as the proprietor of all things cool.

Thus, the business models of IKEA and Apple are like a chain – multiple independent elements interlock to engineer a truly durable value proposition. As for a competitor, the flipside of a chain-linked model applies – your proposition is only as strong as your weakest link. Focusing on strengthening just one or two aspects of your model won’t increase your ability to compete even one bit – you need to strengthen everything, all at once.

Chain

 

Let’s try and apply this mental model of a chain to a few other sectors. Are there other companies as well, which have used focused, chain-linked business models to derive competitive advantage?

3. Wal-mart: In the 60s and 70s, Sears and Kmart dominated retail. But they mainly served large towns or cities that could ‘support’ a large retailer. Wal-mart changed the game by creating large-format stores away from cities, allowing enormous spaces at lower costs. It positioned itself as a ‘discounter’, something other players avoided like the plague. And it was able to make money while offering deep discounts, through several interlocking innovations:

  1. Extremely wide product portfolio with deep discounts on some products, cross-subsidized by other high-margin products
  2. Cutting-edge technology to track customer purchase behavior, and tailor portfolio accordingly
  3. Agile supply chain, keeping its stores well-stocked with the right products very efficiently

Thus, several innovations, all focused on offering products at the lowest prices, gave Wal-mart lasting competitive advantage. By 2002, Wal-mart was the largest retailer in the world, and Kmart was bankrupt.

4. Dell: If you wanted to buy a desktop in the US in the 80s or 90s, your only options were to either buy a standard configuration through a retailer, or buy individual PC components to customize the machine yourself. Unless you built the PC yourself, you did not get much choice in the product or configuration you wanted. Dell saw an opportunity to change this by offering customized configurations, and thereby targeting the more technologically adept consumer.

Dell took a number of hard decisions to make this happen. It created an easy to use online / phone interface for users to configure computers of their choice. It delivered this promise through a mass customizing production process, and built a direct-to-customer distribution channel. None of these decisions were easy to replicate even singly, much less in lockstep. The result – a lucrative business model that stood unchallenged during the PC boom of the 90s.

 

OK, these are standard business school case studies. Let’s look at a few newer companies.

5. Innocent: The British healthy drinks / smoothies player has built a strong position in its home market. Innocent offers health-oriented users very fresh fruit-based drinks – their promise is, zero preservatives, only natural fruit. Offering this focused proposition means a number of business model decisions – sourcing the best fruits only, producing for short shelf life, faster cold chain logistics to get the product to retailer shelves very quickly, and so on. All separate decisions, coordinated to deliver user value. Competitors have found it very hard to replicate this – Pepsico, after years of trying to compete in this market, finally bought a smaller competitor to gain a toehold.

6. Zara: Zara has carved itself a preeminent position in the ‘fresh fashion’ space. Zara’s stores are always stocked with the latest trends – Zara gets clothes from design to outlets in 10-15 days flat. And it has done this by tailoring multiple parts of its operating model to accentuate this speed:

  1. Much larger design team than other apparel brands – its 200 designers ensure a steady flow of new designs, taking advantage of the latest trends and feedback from customers.
  2. While most apparel brands manufacture in China, Zara manufactures in Europe close to its main markets – this gives it a head-start of at least 1.5-2 months.
  3. Short production runs, with limited quantities – Zara doesn’t run more than one production cycle for most of its products. If a particularly striking outfit runs out at its stores, that’s it. You won’t see it again. From a user’s point of view, this drives a purchase decision faster. If you plan to come back tomorrow to buy a dress, it may not be there.

Putting these aspects together, other brands find it very difficult to catch up with Zara – all of these are major business model revamps that are difficult to pull off, whether alone or in coordination with each other.

 

These and several other successful companies show that focus and coordination can create a massive barrier to entry and lasting competitive advantage, keeping challengers at bay for years to come. It’s a telling reminder to businesses – you don’t need cutting-edge technology or a massive fund-raise, just good old-fashioned customer service will do!


What do you think? Are there any other consequences – positive or negative – of focusing your business model on a specific user segment? Would love to hear from you – mail me at gt.jithamithra@gmail.com, tweet at @jithamithra, or comment here on this blog. And do subscribe here – I post roughly once a week, on startups, business models, consumer behavior, etc.

PS. I’ve just started a newsletter called The Startup Weekly with Abhishek Agarwal, a close friend, curating the most interesting articles, case studies, etc. for startups that we come across every week. Would be a good addition to your inbox (so much for conquering it). Sign up here – first issue goes out this Saturday!

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How Uber solved its chicken and egg problem (and you can too!)

What comes first? The chicken or the egg?

What comes first, the chicken or the egg? An idle question on which children (and sometimes adults) can spend hours shooting the breeze. The question is, however, not so innocuous when it comes to businesses.

Some of the most exciting ventures today have a unique characteristic – they’re multi-sided businesses. What’s a multi-sided business? It’s one which connects two or more distinct user groups that provide each other with benefits. Think of Uber – it connects cab drivers and passengers, who benefit each other. E-commerce marketplaces are also examples – they connect buyers with sellers.

Such companies, once established, have a high barrier to entry. While that’s wonderful, it also means that they’re incredibly hard to build. Users on one side of the business model find the platform useful only if the other side also exists. For example, people buy video game consoles only if there are games they can play. And game designers make games for a console only if there are enough people who own it. The proverbial chicken and egg problem. How do one solve this impasse?

 

I face this problem too, in the product that I’m building – connecting advertisers with consumers (launch coming soon – watch this space!). How does one break the deadlock between the two sides? Unlike the philosophical question of which comes first, here the only right answer seems to be both!

There are four ways in which successful multi-sided platforms have overcome this stalemate.

  1. Slow and steady: Build the two sides together in lockstep
  2. Jumpstart: Get one side up quickly, and then build the other
  3. Fake it till you make it: Build one side gradually with a makeshift offering, and then bring in the other
  4. Bait & switch: Start with a single-sided value proposition to build one side, and then introduce the multi-sided offering

 

1. Slow and steady

Need both cab drivers and passengers at the same time

In such a model, your offering needs to be valuable to your very first customers on both sides. One way to achieve this is to start small – very small – at a level where it is possible to get both sides onto the platform and provide the necessary cross-network effects. Focusing on a single city, area or even a neighborhood first can help you prove the model to both sides. Once that happens, you can expand gradually, building the two sides in lockstep one neighborhood at a time.

This is what Uber did in San Francisco – getting the model going in one city, and then applying it to other cities one by one. Going small could also mean focusing on one specific customer or product segment before expanding to others. Amazon, and more recently Flipkart, started with selling just books, building a user base and brand recall before expanding to other products.

Tinder, the dating / swiping app, built initial traction in a very creative manner. In its early months, the marketing lead toured several college campuses. At each campus, she first convinced the girls to download the app. After that, when she showed the app to the male fraternities, they quickly jumped on, seeing the number of girls they knew on the app.

 

2. Jumpstart

Growing both sides of the business slowly in sync is great, but what if you want to speed up growth? Speed is often critical initially – given the high barrier to competing in this space, multiple people with the same idea would try and hustle into pole position. Maybe you don’t need to have both sides up and running from the get-go?

There are many ways one can quickly get one side of the value proposition up, and then build the other gradually.

Get one side of your platform up first, and then build the other.

a. Partner with someone who already has a large user base

One way to break this stalemate is to opportunistically partner with someone who already has a large user base on one side of the platform. This could be another product with mass acceptance in your target user base, or someone who has strong existing relationships that could be leveraged. Once one side is thus engineered into being, you can then build the other.

Google hacked its way to an initial user base using partnerships. It partnered with Netscape to become its default search engine in the late 90s, and also tied up with Yahoo! to power searches on that platform.

b. Make it easy, low-cost and low-risk for one side to come on board

At the same time, you need to make it as easy as possible for one side to say ‘yes’. Drivers are much more open to trying Uber when all they need to do is accept a phone from Uber and keep it on. It’s simple, and it’s low-risk – there’s plenty of upside if any ride requests come on the app, but there’s no downside at all!

Belly, a loyalty program for small businesses, did the same. It gave retailers a very low-risk, easy to install and low-friction loyalty solution. Once a critical mass of retailers had it, localized network effects began to take shape – customers and other retailers, noticing this in some shops, started demanding it of others.

c. Subsidize initial adoption for one side

A subsidy or ‘free’ offer always helps give the initial nudge. This is what video console companies like Xbox or Sony PlayStation do. The console is sold at a subsidized rate to users, and the company takes royalty on the flurry of games that follow. Uber subsidizes both users and cabs initially, to speed up adoption.

Game companies subsidize consoles, to speed up user adoption

3. Fake it till you make it

Sometimes, it’s difficult to obtain one side of the model quickly enough. In this case, you have to build one side gradually with a makeshift offering, and then get the other.

a. Be the counterparty till the real counterparty appears

Most large e-commerce marketplaces started with an inventory led model, where they stocked products themselves. Once user base was built, they found it easier to make the shift to the more lucrative marketplace model, connecting product suppliers to buyers.

b. Use existing systems or services

Sometimes, you don’t need to build the entire solution for all sides of your platform – winging one side of the platform is an option, at least until you demonstrate user traction. I’ve heard the story, possibly apocryphal, of how the Flipkart founders would actually go buy books from stores to fulfill their initial orders. Look for a repetitive, non-scalable way to fulfil one end of the bargain initially, rather than investing in building service infrastructure, supplier base, etc. for a model that is yet unproven – not only is the latter risky, it also delays your product’s launch.

 

4. Bait & switch

A very nifty way to build a multi-sided platform is to first offer a single-sided service, that doesn’t need a counterparty. Once a user base is built, you can layer on the multi-sided service. Sounds complicated?

a. Build a user base on one side with a focused (different) offering, then introduce the second side

Square Reader

Square is a payments solution for small businesses in the US. It’s really cool – a small chip-sized device that plugs into a mobile’s headphone slot and allows you to start accepting credit card payments. At least this is what it was initially. Once it built a sufficient scale of retailers, it added a second business model. Today, Square also runs a discounting app offering consumers great deals at its partner retailers, card-less transactions, etc.

LinkedIn also did something similar. It started as a pure play network for professionals. Today, a huge user base allows it to be much more – it now offers unique solutions to recruiters, job seekers, and professionals.

b. Start as an information portal

Another way to do this is to start as an information portal for one side of the platform, offering users a directory of information about the other side. Zomato started as a pure-play information source on restaurants in your neighborhood. Gradually, as user base grew, they started overlaying restaurant promotions. I bet they’ll add other services soon – allowing you to book a table, pay after your meal through the app, etc.


These are the four different approaches that companies have used to resolve their chicken and egg deadlocks. What do you think? Have you faced chicken and egg situations of your own? Would love to hear from you – mail me at gt.jithamithra@gmail.com, tweet at @jithamithra, or comment here on this blog. And do subscribe here – I post roughly once a week, on startups, business models, consumer behavior, etc.

 

PS. In the actual chicken and egg problem, the egg comes first (there’s absolutely no doubt about that).

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