Sales Channels for Product Managers

Companies are usually founded to eliminate some type of problem the founders care about. The product the company makes solves that problem and in return for customers pay the company. In other words: a company sells a product.

How exactly the selling happens is extremely important to the company because it shapes the product and the company and consequently if the shareholders of the company are happy. But, it is very rarely explained what criteria to use when choosing a sales channel.  

What follows is my best understanding these criteria. The focus is on the mechanisms more than on the exact numbers. As per usual, this is written fast and the result of my mistakes

Types of Selling for Product Managers

If you look at sales channels or method, there are a variety of methods. The grouping here is between direct and indirect. Indirect is anything where you are not selling directly to the customer but selling via some other party.

This is an example of self service

Direct sales (where you can engage with the customer directly) are divided into self service, inside sales team and a field sales team.

As an end-customer you deal mostly with self service type of sales environments - i.e. you do not talk to a human before purchasing.

A direct sales approach. Vorwerk vacuum cleaners.

Sometimes you will talk to a human on the phone, for example in the case of insurance or just before your mobile phone contract runs out - this is called inside sales team.

An outside sales team, i.e. people who visit you, are unfortunately not called outside sales teams but field sales team or field reps.

In private life I have only met field sales teams from Jehovahs Witness’ and expansive vacuum cleaners - the picture on the left is in fact from the company presentation of Vorwerk.

Vorwerk calls this "direct sales", I call it "field sales". The world ultimately does not care what you call things but how you understand them, so below you find the summary and description. 

Types of Sales

Sales for Product Managers

We will take too approaches to get to the question. First, bottom up: i.e. starting from the cost of a Sales Person. Second, top down, understanding the same question from a company strategy perspective.

Bottom-up: what can you afford?

Before I go further here, I want to admit that I have limited experience selling. I have done both on the phone selling (really badly in my own start up), technical sales support in b2b and field sales but I am in no way an expert and have done each for less than a year.

A salesperson, both inside and field, is compensated through commission. The commission is determined by three things:

• a) how many customer interactions do I have

• b) what is the likelihood of a closed sales

• c) what is the commission for the sales rep at each win

Let’s build the case backwards. Market rate for a high performing sales rep (regardless of inside or field) is 30k Euro fix and with another 40k variable on hitting the sales quota.

The math checks out like this:

How leads convert to commission

Leads: those are simply the amount of people the sales rep engages. For an inside rep I just assumed 30 leads per day and 20 working days. (That means your marketing needs to generate 600 fresh leads per month!). For field sales I assumed 10 leads per day (think about what product Vorwerk is selling).

Win Ratio and Wins: This is just the assumed ration from the interactions. It will depend on your product and qualification but 7% is rather high. Wins is just the the % of the leads.

Commission per Month on Target: as we have discussed before, we need to be able to pay a salesperson 3.3k$  commission per month (40k/12 Months) because that’s the the market rate for this type of labour.

Commission per Sales:  this is simply 3.3k$ divided by the number of wins. That gives us how much commission we need to pay per win.

Check and Balances - Unit Economics

So, can we pay commission of 79$ or 238$? Well, this depends on your unit economics.

First, let’s assume we are selling software. Our target gross margin is 65% (See damodaran gross margin tables). That means producing and selling the product is <35% of the price.

If we set the cost of making the product and generating to 0 than the minimum price is: (commission) * (1/0.65). Obviously, that is a crazy assumption because we are not not spending any money on  lead generation which will be key to maintain your sales team. Plus there is no budget for running the product, for example AWS fees, etc. This is a crazy assumption used to make the point.

Margin and product price

The answer:

In short, given the above assumptions if you product is below 122$ then inside reps make no sense. If you product is below 366$ then field sales makes no sense.

Cour product margin or conversion rates need to be higher or your sales people need to be cheaper to make it a good business.

But Customer Lifetime?

The lazy way out of this debate is to argue - once I have a customer, he will stay until infinity (e.g. in case of Netflix) or he will buy more stuff from me. That is a lazy argument and not valid until proven otherwise. 

Top-Down Sales Strategies for Product Managers

This part begins with the interest of the shareholders. If you own the company yourself than obviously you can do whatever you want. But, let’s assume you are venture capital backed and need to grow a unicorn.

The product is still software, so we know the enterprise revenue to sale multiple. It is about 7 times revenue. To be a billion dollar company we need to do about 1 billion / 7 = 150m $ revenue.

The math looks like this:

Market Size for Product Managers

Let’s assume you can do 10% market share. Whatever you are selling, is the market size at 50$ for your product 30m customers? Be critical about this, even when you are selling something that costs 500k per year you will need 300 customers to achieve the returns you promise to achieve.

The rest of the math stays the same. Pay market rate and control for unit economics margin.

Conclusion:

Why are mobile phone contract sold with inside sales reps? Because the cost of a mobile phone contract is essentially 0 - except for the cost of the sales person. A 2 year contract at about 50$ a month is worth 1,200$ and the likelihood of buying is high because everybody needs one.

Also: make conscious decisions about your price and sales mechanism.

What is a company? A Product Management Perspective

Since I haven't studied business, my business knowledge is pieced together. For things like cost of capital, public and private equity, tradable vs. non-tradable debt or "alpha" the basic mechanics plus why they exist make sense. (Also the beauty and creativity of the concept of a legally limited entity is clear - e.g check out this piece)

But, it took me a long time to understand the relationship between product and company - from an operating business perspective. Not, for say a holding company.

An operating company generates revenue from the selling of products. That is why a product is the starting point and the unit of analysis to get to the core of it.

What is a product? Whatever has a price.

We define a product as what brings revenue to the company. For example, the product of Facebook is a click on an add. The product of a bank is the fee or interested charged on a loan.

A feature - in contrast to a product - does not have a price but is a characteristic of the product. For example, "groups" in Facebook might bring more people to Facebook or make them spend more time on Facebook which increases the odds of people clicking on a link. But, the number of groups on Facebook is irrelevant for it is not directly tied to the price per click Facebook charges it's advertisers.

A feature of a loan might be that repayment starts only after 5 years. If for example the loan is targeted at people starting a 5 year doctorate program. So that repayment start date is a feature, but does not directly change the revenue. (Yes, I understand time value of money but that is accounted for in the interest rate).

Another way of formulating what a product is, is (number of product) * (price) = revenue from that product. The product is whatever has a price and therefore generates revenue.

The two features of a product

Basic product costs...

Now, since the unit of analysis is the product we split costs between "costs per unit of product" and "overhead". 

This obviously depends on what you are selling and how you sell it. For example, if you are McKinsey & Co. your product is a consulting contract. The costs are the salary of the people making the analysis and travel expenses. The cost of sales is maybe the membership of a partner in a high level working group, the golf club membership, travel and hosting expenses. 

If you make iPhones, than the product is one phone. The costs are the components to make (< 400$ check out this analysis), and other cost associated with production and sales and marketing. 

In our example above, if you are Facebook, the major cost is having the users that click on the advertisement (which is the product because it has the price money).

From an accounting perspective, this is akin to the variable costs. The logic of the variable costs is that they increase with additional output. So, if you build a car, than you got to buy 4 tires for every car. So the more cars you sell the more tires you need. 

... and more tricky product costs

The accounting perspective on product cost is much more straightforward than it is in reality.

Say, you offer the customisation of a hardware product at a low price. The customisation price either exceeds the labour costs of doing it - than it is its own product.

If it does not than it is either "overhead" or "unit costs".

But which one - this depends on two questions:  "Would you sell less units if this feature was not offered?" - if yes, than it is product costs and part of customer acquisition costs. If not, than it is overhead. If it is overhead, than this is part of company strategy either implicitly or explicitly.

A similar case are support and service teams - from experience we can see that the "does it increase units sold?" test often determines service quality. Either:

• it has price, than it is a product

• it increases volume sold - than it is part of customer acquisition costs

• it is neither, than it is overhead

Products that operate in a low competition world - Internet, mobile phone, telephone - have low customer support/services. This is because having it will not drive units sold or would be an extremely expensive way of doing it. You need an internet connection. Once you have it you are in a long term contract so spending money on support is pointless. 

The alternative is true for a company like Zappos. Retail depends heavily on customers buying repeatedly. Hence, every support interaction can be associated with volume increase, so it is a cost that drives volume sold and therefore accounted to the product in the customer acquisition cost bucket. A metric to use could be: "share of customers that order in 6 months after a support request" - compare this to the general re-order rate and you have a first meaningful piece of data.

Contribution margin

The difference between the price of a product and the cost of that product is the contribution  margin. Revenue per unit of product - Cost per unit of product

What is a company? The sum of its products

In this framework of analysis, a company is simply a collection of the products that it sells. For a company to exist, it either needs to be profitable or get funds by taking loans or selling parts of itself (= investors on board). In the short and medium term investors might sometimes care more about revenue or user growth than they care about profits - but in the long run profitability is king, because cash is.

That means, all the costs of a company that are not part of the product costs must be carried by the contribution that each product makes. 

In other words: you have to pay everything that is not directly linked to a product from the contribution you get from other products. 

The amount of money available simply is the contribution margin multiplied by the number of times you sell that product. 

Given this scenario, two things become apparent. The goal of the overall management (on the left) and the goal of a product manager.

Product management: Increase the contribution

Given this approach to a company, the role of a product manager becomes relatively straight forward as well.

Essentially, increase the contribution of the product to the company. There are just three tools to do that:

• increase the price,

• decrease the costs

• increase the volume sold.

Product Management is increasing the contribution of the product to the company

(Besides discussions about launching a new product. Separate piece coming on that.)

In this light, a typical discussion, for example, if a certain feature is worth it can be discussed in a useful framework: Will it increase the volume? If so how?

• By reducing lost deals? (how many do you loose right now because you don't have the feature?)

• By bringing in new potential customers? (does marketing know?)

Hope this is useful!

Disruption theory applied: Bluetooth low energy vs. RFID

This is an edited version of similar articles I have posted on LinkedIn and Medium previously. If you have read those than no need to re-read this one but I am happy if you share it. 

The starting point for this piece was trying to apply disruption theory forward looking. Because, the strength of a theory is its ability to forecast the future.  

What is the internet of things?

At the core of the Internet of Things lies the challenge of getting information from sensors to the internet. The requirements for the underlying communication technologies vary widely on the common criteria of power consumption, latency, throughput, distance covered and resiliency.

However, one thing is clear: wireless technologies are leading the charge both in the retrofit market as well as the integrated market.

This article seeks to apply disruption theory to the competing connectivity technologies in the internet of things. I look at the competition between active RFID (typically the frequency bands 865–868 or 902–928 MHz) and Bluetooth Smart (or Bluetooth Low Energy) — both means of transferring information wirelessly. Active RFID has been around since the nineties, and Bluetooth Low Energy has been part of the Bluetooth Standard since 2010.

Conceptual frame: jobs to be done

The frame of analysis: jobs to be done

In order to frame the analysis appropriately, the realm of evaluation is described using a “jobs to be done” approach.

Job one: Knowing where things are at what time. Tags (for Bluetooth, these are often “beacons”) built on either technology send out a signal that allows the reader to estimate where the tag is. This is done by comparing the strength of a signal received with the strength of which it was sent out and using the difference to approximate distance. For example, if a tag is stuck on a forklift and the forklift enters an area with a receiver — say, a loading dock — the location of the forklift can be approximated.

Job two: Transmitting sensor data from a tag to the receiver. For example, a tag attached to a conveyer belt with a temperature and vibration sensor that transmits the information to a receiver. From this, valuable conclusions could be drawn: for example, whether the conveyer belt is overheating or running at an inappropriate time.

Different types of disruption

Disruptive technologies are divided into two: “low end disruption” and “new market disruption.”

Different views on the disruption theory. Read: https://en.wikipedia.org/wiki/Disruptive_innovation

Low end disruptions work in a similar pattern. The initial entry point is a group of underserved customers, typically at a low price point that makes these customers unattractive for incumbents. That is why these customers are typically underserved in the first place.

Then, as the technology continuously improves, it moves to more complex and higher value applications replacing the incumbents. Classic Clay Christensen examples include the Mini-Steel Mill or the Digital Synthesiser. The same effect Mahatma Gandhi describes in “first they ignore you, then they laugh at you, then they fight you, then you win.”

Since RFID and other technologies which do comparable or similar jobs to Bluetooth Low Energy and have been around for quite some time, this is not “new market disruption.” For the sake of argument, we’ll exclude the technological advancement of a wireless technology working natively with the ubiquitous smartphone.

Does Bluetooth Low Energy fit the low-end disruption theory?

As the Disruption Theory suggests, initially Bluetooth Low Energy served customers that have not been served by incumbent technologies. Indoor wayfinding is possible with RFID tags and dedicated handsets. Consumer applications like Bluetooth key fobs are similarly functionally possible with existing solutions. But both are on the bottom of technology applications and not profitable.

The key question is whether Bluetooth Low Energy will move up the performance stack and endanger incumbent technologies, in this case active RFID.

Job to be done 1: Location

Arguably, the current performance of active RFID and Bluetooth Low Energy is relatively similar. The question is whether and if Bluetooth Low Energy will improve significantly and move up the stack. Today, from a technological perspective, this seems very likely for the following reasons:

First, integrating additional sensors like acceleration and inertia at a low battery cost will enable much better contextual interpretation of the Bluetooth signal, resulting in higher functional accuracy.

Second, Bluetooth 5 is mesh ready which means that the cost of receiver nodes drastically drops. The mechanism is this: Bluetooth nodes can act as both a receiver and a broadcaster of a signal. As the cost of Bluetooth hardware is extremely low given the economies of scale of the smartphone supply chain, it is possible to find affordable (sub-50 USD) battery powered receivers capable of forwarding information to a central hub via mesh networks.

Job to be done 2: Sensor data

Transferring information from a sensor to a receiver is a commodity job. In the large majority of use cases, latency requirements and throughput volumes are low. Bluetooth Low Energy boasts a convenient entry point due to the low costs of the sending device. This is accentuated by its integration into smart phones.

First of all, this means that data retrieval from sensors can be handled through smartphones without the need of an external infrastructure, further reducing costs.

Second, lower energy consumption per data volume transferred increases the potential for sensors.

Finally, sensor information and location information can be easily combined in use cases where the receivers are mobile devices.

Starting at the low-end, will BLE move up the stack?

Right now, there is no question that Bluetooth is still far from the advanced industrial solutions offered by RFID across verticals and specialised use cases.

The key question is: why should Bluetooth Low Energy not move up the stack and disrupt the incumbents? Given the affordability, capability and growing popularity, the only unknown factor for Bluetooth’s disruption in the Industrial IoT is time.

About me: formerly core technology lead, now a strategic advisor to Kontakt.io. In the past, I have worn many hats including growth manager, advisor, and board member. 

Pricing and Discounting - Introduction for Product Managers

It appears that price reductions and discounts are often done without a clear understanding of the goal. Of course, as consumers we see discounts nearly every day from clothing, to plane tickets and other products. But, this does not explain if and when discounts makes sense and when they don’t.

In this post, I am will go through an example both of potential goals as well as do the math on whether a price discounts is the right tool to approach that goal. 

From a strategic perspective there are 5 potential goals:

Strategic reasons to drop a product price temporarily

This is a football net.

To make these clearer we will be working with an example. I'll be using a company that sells footballs. I think everybody know what those are. 

Also, football nets will play a role. Football nets are those things you can carry balls in. See picture.

If you are interested in the excel from which I am taking screenshots, you find that here.  

Example Set-Up

• Price per unit: The price a customer pays for one ball

• Cost per unit: The cost of making the ball, shipping it to the customer, with packaging, shipping and everything else associated with one ball.

• Units sold: Number of units sold

• Fixed costs: Costs associated not with selling one ball but with the business in general, like the rent of the office or the tax advisors. This does not change with the number of footballs sold.

• Revenue: That is simply (price per unit) x (units sold). In this case: 25$ x 5,000

• Costs for all units: (costs per unit) x (units sold). In this case: 10$ x 5,000

• Fixed costs: Explained above, so in this case $15,000

• Profit: Revenue - fixed costs - costs for all units. So in this case: 125,000$ - 50,000$ - 15,000$

• Profit margin: (profit)/(revenue). So in this case: $60,000 / 125,000 = 48%

Goal 1: Reduce prices to increase revenue

The question is this: if we decrease the price by 16% and our demand increases by 16% does our revenue increase? (Yes potentially there could be an increase in demand higher than 16% - check out the excel to model that yourself). Let's look at the numbers.

First, we drop the price from 25 or 21 USD, that is line A. This is a 16% drop (4/25 = 0.16). Now, let’s increase the demand by 16%. Our new number of units sold is 5,000 x 1.16 = 5,800 units, which you find in line C.

This just means: our price dropped by 16%. Our volume increased by 16%. What are the effects:

• Revenue: decreased from $125,000 to $121,000. We have not achieved our goal of increasing revenue because revenue has dropped.

• In addition, we have eliminated $60,000 - $48,800 = $11,200 in profits. That is also not good but does not concern us strategically because we want to grow revenue and not profits.

First conclusion: if we drop price by 16% and demand increase by 16% we don't achieve our goal of increasing revenue and we also loose profits. You can do the math based on the excel linked above, in short - you would need an increase of demand by 20% in exchange for a drop in price by 16% to increase your revenues. 

Goal 1 - Increase revenue. Additional considerations.

Besides the simple numbers we have just done, there are other consideration when looking at decreasing price to increase revenue. Let’s go through a couple of them.

Price discounts only work for customers you lose because of the price

If you make 100 sales pitches per month, have 100 people visit your website or have 100 people come into your store - a price discount does not increase this number per se. If only affects the sales pitches you make and which you lose on price.

Simplified win/loss analysis results to understand what pricing drives

If this is the split of the results of your 100 pitches, you can only expect an effect on those 15 pitches that are lost on price. That is the number marked grey in this table.

Without massive advertisement (which has a cost) you will not increase your revenue through a decrease in price. In other words: if you do not reach your customer, a price of 0 does not change the number of customers you reach.

Combining this with the above: the 16% increase in units sold we assumed above does not just happen. It still needs advertisement. Most important customer need to know what the price is in order to buy because of a lower price. 

Alternative: spend the money to generate more leads

If we need to spend money to broadcast our message of lower prices. We could also spend the money on increasing without lowering the prices.  In other words – increase the number marked yellow.

Why not spend the money you spend anyway without dropping the price?

Alternative: spend the number on training/improving sales

Another alternative use of the cash you will spend on telling people that you dropped prices is to spend it on the conversion rate. You could spend the money on inviting all your existing customers to lunch to understand why they bought. You could hire a store assistant or spend the money on training your sales team or update their tools and systems. Or you spend the money on new packaging so that the potential customers you do have understand the benefits and are persuaded to buy.

In other words, change the number in green by improving your sales game. 

What if price is not actually the reason why you loose business?

In short: first understand the reason why customers are not buying. If that is the price, there a discount might help. If it is not the price, a discount won’t help and you might end up only loosing money. 

Goal 1: Give something for free instead of decreasing the price

An alternative to dropping the price is adding something for free. For example, if you are selling footballs you might add a free ball net.

For example, The Economist is currently adding a free USB stick. Certainly not because the average Economist reader does not have the money for a USB stick.

What about something for free instead of a cheaper price?

But why is this a good alternative? There are obvious strategic reasons – you do not train your customers to expect discounts. You can add variety to your campaigns by adding different stuff but discounts are just discounts. As an idea, you could add an hour of “free consulting” from your CEO/Product Manager/Head of Sales and so actually learn more from your customers.

Of course, this “soft stuff” is not enough. Let’s look at the example numbers. Our goal is still the same: to increase revenue.

What happens when you give something for free?

Our price stays the same, $25 (Line A). Our costs increase by $2 because we have to buy the ball net (Line B). We assume that our units sold go up by 16% because our customers really like the ball net.  That assumption is basically on the same level as assuming demand increases by 16% if you drop the price by 16% - both need to be tested. Let’s look at the effect:

• Revenue: revenue is up. We have achieved our primary goal!

• Profits: Increased by $400 as well. Our profit margin is a bit lower but since we are looking for market share, not profitability that is alright.

This alternative of giving something for free seems to be much more appealing than dropping the price! Of course, it hinges on the % increase of orders but it is not obvious that people like free stuff less compared to reduced price. 

Goal 1 - Summary

First, understand why customers are not buying. Second, consider adding a free gift but keeping the price.

Goal 2 – Increase units sold

Now, our goal is to increase the number of units sold. This is only different from revenue because sometimes this is a better reflection of the stage of your company.

For example, for Uber the number of signed up drivers might be the key metric because it is an indicator of market power. Similarly, netflix regularly reports the number of subscribers as a key metric. The assumption probably is that once you have the customer subscribed you will turn a profit at some point.

In these scenarios a table like the above makes less sense because you have to take into account the available capital. Business like Uber and Netflix are able to raise the money to finance the growth even at a per unit loss because the monetisation is assumed to be possible

A meaningful way to think about this is not the revenue calculations we did above but understand the reasons why customers are not buying.

If we look at the same table as before, we see a 5 people actually buy the product out of 100 we pitched.

Why uber and netflix don't care about prices

So, in a business where the potential base is extremely large (like becoming an Uber driver or subscribing to Netflix) you likely focus on the other reasons why customers are not buying.

Your whole focus is the customer acquisition and the price is only a small part of this. A bigger problem is getting everybody to know about Netflix rather than lowering the price. That’s probably why Netflix initially did not care about customers using the accounts of their friends. In general the problem is not the price of netflix, especially when customers get older, but that everybody needs to know about it.

Unfortunately, your market is probably to small to justify this strategy. 

Goal 3 – Clear inventory

A case in which price discounts do often make sense is clearing inventory.  Inventory can be seats on a plane that flies anyway, empty hotel rooms at the end of a day or clothing from the previous season. While the cost of clothing obviously does not go to Zero, it is looked at in comparison to the new season stuff. At the end of the Winter season, it is cheaper for H&M to drop the price drastically for customers to buy it rather than the alternative. The alternative would be to throw away the stuff to clear the retail space for new season stuff which does have a higher price.

The difference to the example given at the beginning is that the “marginal costs” are close to 0.

The equivalent would be where the next football does not cost $10 but maybe $0.5. That would mean you are turning a profit whenever you sell higher than $0.5. Typical examples: 

• plane seats (the plane is flying anyway)

• hotel rooms (hotel is built and rooms are equipped)

• clothing from last seasons (the space needs to be freed up to for the next seasons)

Goal 4 – Increase Profits

As we have seen above it is quite difficult to increase revenue through price reductions. Increasing profits is even harder because profits are: (price) x (units sold) –  (units sold) x (cost per unit) – fixed costs = profits.

If you are dropping price you first need to sell more to get to the same revenue. Next, because the difference between price and costs per unit has been decreased you need to sell an extra amount more to increase your profits.

What you need to increase profits through reduced prices

Blue (Column 1) is our base scenario. Red (Column 2) is what we looked at before. Violet (Column 5) is what we look at now.

The question is: if we drop the price by 16% (row A) by how much does the demand need to increase in order for profits (row H).

I have played around with the demand figure until I got the profits above $60,000.

The answer is: for a discount of 16% sales need to grow by 38% for the profits to increase. That is massive increase in demand, possible but unlikely.

I would claim that unless your whole reason of being is to cut costs, like Ryanair or Aldi it is extremely difficult to grow your profits through cost leadership.

Goal 5 - Attack a competitor

Included for the sake of completeness - I don’t know much about this so I will not comment deeply.

Only one thought: if you drop prices - the opponent either follows this move or does not follow.

If the opponent follows by also by reducing pricing, you want to make sure that they leave the market. Because if not, you might just end up with the same market at lower prices. That would the worst outcome.

Now, if your competitor does not follow but stays in the market with a higher price point and you don’t win over customer from the competitor you know that the problem is not the price. It is the product.

Summary

Unless you are clearing inventory, price reductions rarely work. Re-visit the goal you want to achieve and consider the alternatives.

Review: Pricing Strategy Optimization Specialization on Coursera by BCG and Darden

This is a  review of the Coursera specialisation Pricing Strategy Optimization hosten by the Boston Consulting Group and the University of Darden. I looked at this course because one of the first Coursera I have done was the Introduction into Strategy course - also by the University of Darden.

Plus, I am always interested in

• teaching (interested in how BCG does it)
• learning
• pricing 

I am extremely interested in pricing. This is for three reasons:  Next to the number of units sold, the price of a product is the most important element from which the distribution (marketing and sales) and production and design decisions flow. It determines the market size and the profitability of the enterprise.

Having completed week 1 and week 2 of the first course my recommendation is simple: definitely start the course and see what you take out of it. The content is dense and excellent. The focus is on understanding concepts but includes some light but powerful explanations. 

That is it - just test the course for free. It is very much worth to understand a bit of pricing, the most important number in business from my point of view.

37% Rule and Maximiser vs. Satisficer

The following was triggered by "A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market". The book is super fun, very similar to “You are Surely Joking, Mr Feynman” if you read that.

It is also based on constant experience where group decision making are annoying. Usually, these are joint trips. I tend to want to make decisions (i.e. define the date, book the hotel, book the plane) as fast as possible. My argument is that most things don’t really matter as long as the people are fun. If the people are not fun than the best AirBnB in the world does not change shit.

That's somewhat uncorrelated but still a trigger for this piece.

All this is obviously not my own thinking but a re-cap of what I read somewhere else. The primary texts are below. I have not read those but a mixture of Wikipedia and what I found online.

• Rational choice and the structure of the environment (Herbert A. Simon)
• The Mating Mind (Geoffrey Miller)

Decision Making Types

There are two types of decision maker.

Scenario:

We are looking at a an apartment for a short trip. The factors are simple: how far is to the beach and to the Theater. Plus the some apartments are nicer than others, the placeholder for this here is a balcony to make it binary. The price ranks from low to high.

These are the options:

Satisficer:

The Satisficer defines a basic criteria and takes the first options that meets the criteria. So if the criteria here is to be close to the beach and pay a medium price, he/she would take option 3 and stop evaluating and get on with life. 

That saves time but leads to the satisficer missing option 5 which is the same as option 3 but has a balcony. Yet - crucially - the search costs are higher for the satisficer than the benefit a balcony brings.

Maximizer:

The maximizer also starts with a baseline. Say, the criteria are the same as above, so distance to beach = medium or low, price = medium or low.

Once these criteria are fulfilled, the maximiser continues to maximise utility. So trying to take the get the best value for money. That has the issue that the options in the real world are nearly endless which in essence means that the only limit is the time spend in generating alternative options. That leads to unhappiness for Maximizers in general as the best value option cannot actually be obtained.

Extremely expensive ketchup for maximizer

Other than the cool word “satisficer” and that one can recognise people who fall in either category it is not obvious what the benefit of this concept is.

One story of how the concept is operationalised is very expensive ketchup. The suggestion is that supermarkets should add an obviously expensive version of a product in each category. A maximiser consumer considering different choices of ketchups with marginally different prices will not be able to make a decision because the time to choose would be too long.

But, as soon as there is a very expensive option the consumer is happy by “not taking that product”. Relative to the expansive option all the other options are good and hence the consumer can make a decision and be happy about them.

The point of the expensive option is not up-selling or a higher price. The presence of that option is entirely to increase the absolut sales of the the other options compared to a baseline without the expensive option.

I have no idea if this story is true, but it certainly sounds cool and it might as well be true.

The 37% Rule 

This is also expressed in something called the secretary problem, the marriage problem or a variety of other names.

The set-up is this: you have n applicants. You interview them sequentially. You take a decision after each interview and cannot change it. Other key assumptions: having interviewed people you can judge the quality perfectly. The decision to accept or reject compares the quality of the current candidate to the past ones but ignores future ones.

The goal is to maximise the priority of selecting the best candidate. Since you cannot go back and accept rejected candidates and you can only “accept” a candidate who is better than the past the question is when to stop looking for a better candidate and take the next one who is better than all the ones before.

The answer is crazy: take the candidate qualified for acceptance (i.e. better than the previous) after n/e. At “reasonable” numbers 1/e which is 37%.  

In other words: estimate your pipeline of candidates. Start interviewing. Stop at the best candidate after 37%.

(It is amazing that e would express itself here - I don't know enough about e to thing about this today)

Is Michael Porter wrong?

This is a new way of writing - I am live commenting (minimal editing) the piece The Gospel According to Michael Porter from the Institutional Investor magazine. This is of a lot of interest to me as I have read the key chapter of "Competitive Advantage", sometimes when looking for a strategic way out. It is also interesting to note that reddit has a good thread on this article: https://www.reddit.com/r/SecurityAnalysis/comments/7btb25/the_gospel_according_to_michael_porter/ 

Here we go.

Porter vs. Graham

The argument is that Porter claims returns are generated through power, whereas Benjamin Graham argues those that going against the consensus leads to outperformance. 

Notes: 

The take-way is obvious - writing while reading does not work. I do not want to end up re-writing the piece to comment on it. But, I leave up this post anyway, maybe it is still interesting. These comments are quite random, this is not a deep assessment of the piece.

• Power drives the need for market share in pricing

The author argues that the drive for market share is a result of the five forces theory. That is because power is equated with market share. This to me is very interesting since my preference outside extrem growth cases would be to manage on cashflow. Simply because I imagine it very, very difficult to run a large organisation successfully without clear metric. "Growth" is a much less clear metric than free cash flow because it also needs definition of growth in which sector and at what cost. Besides this more managerial point, the author argues that even if growth works, i.e. high market share is achieved this does not translate into profits. Interesting!

• Power as the methodology for anti-trust

It is quite fascinating that business and economic power sometimes does end up in front of a legal system. That is in the case of antitrust law cases. Here without going deeper into the issue which is fascinating, it is ruled that market share in and of itself is not proof of negative influence on the consumer (which would result in excess returns to the company). Read more here: https://www.justice.gov/atr/competition-and-monopoly-single-firm-conduct-under-section-2-sherman-act-chapter-2

• The author

Realising only after the fact that the author is Dan Rasmussen who has an interesting investing strategy by himself. Listen to a good podcast where he explains that here: http://investorfieldguide.com/rasmussen/ 

Win/loss Analysis for Product Managers

I have come across Win/Loss analysis late. I believe it is the most powerful tool to operate and analyse a product. Since a business is just a collecting of products, it is very helpful to analyse businesses too.

In a business, there are infinite number of issues one can discuss. For example: should we change the packaging? Hire in a Social Media person? Change the CRM? Buy forklifts instead of leasing them?

Upfront an example from booking.com:

Win/Loss Analysis by Booking.com

These are nice debates where everybody has an opinion but they are irrelevant as such. Your problem is know what you are solving for. It is not discussing the Pros and Cons of Social Media interns vs. an Agency unless that turns out to be the real problem.

So, we define our goal as knowing: what do we need to do to increase revenue?

Win/Loss Analysis - The Sales Process

Looking at selling a product backwards, there are three steps:

1. Customer either buys or doesn’t buy the product

2. Customer understand what the product does and it’s price

3. Customer is aware of the existance of the product

The product that I buy most often is books. For the absolute majority of books I do not know their existence. That is to say, if I’d search for books on “Australian folk dances” I would not recognise a single one.

The steps to purchase

Other books, I am aware of  and know what they are about, for example if I take the non-fiction section of the annual “FT/McKinsey” Book award list, I’ll know about half of the books on there.  But have probably bpught only one or two.

Lastly, there are the books that I actually have bought. Those are the three steps that exist, obviously what they they are varies wildly by industry. The essence of the first step is that success at this stage is what you recognise as revenue.

For example, a free trial of a product is not completion of the last stage. It is the second stage because the customer has not bought the product. A customer walking buy your shop in a pedestrian area of a town is not in the second stage, because the customer does not know your products do and how much your charge for them.

Ignore the wins, look at the losses

Your goal is to sell the same product a more often. When you talk to customer who bought the product, they say things they need other than that. Does that help you sell the existing product more often? No. It helps you sell more to existing customers.

Do you want to increase the ticket size per customer or do you want more customer for the same product?

To find out how to sell more of the same product - you want to talk to customer who have not bought that product! The will tell you why they have not bought the product.

Let’s look at this example. You got 240 potential customers to the point that they know what problem your product is solving and how much that costs. Now, 12 people buy but 228 did not buy.

Simplified win/loss analysis

If you now look at the reasons why customers don’t buy it appears that the majority thinks whatever they are using is good enough. Since that is 72% of the losses you focus on that. Not whether you should hire somebody for social media because nobody is not buying because the lack of a social media presence. For those 72%, there are three options:

• Your product is actually not much better than the alternative (product management problem)

• You are unable to communicate the value (product management problem)

• You pitch the product to the wrong people (product management problem)

Getting to the heard of this problem is what you need to spend your time on.

Digression for example at the beginning: discussing packaging as such is pointless if your customers buy online.  It is only relevant for one goal: increase word of mouth business or improve rating to be listed higher as competitors. Word of mouth and reviews are not relevant than this is time wasted. Good for your ego and nice to discuss but not relevant for the business.

Win/Loss Analysis - What is your competition?

A key mistake is the perception of the competition. You probably think that your competition is Google, Siemens, SalesForce, Zappos, SAP or some other fancy company. Because of that, you think you need to offer stuff that Google, Zappos have - like massive customer success operations, be at expansive conferences, have a big twitter team. 

This is a mistake and it is an expensive mistake. Your competition is whatever the customer are using to achieve what they want to achieve. Nothing else. For example I buy a lot (too much) clothing at Uniqlo. Quite often I try something on and consider. In the absolute majority of the cases where I do not buy a new jumper, I do not go over to H&M or Zara and buy the same thing there. I fall back to loads of existing jumpers or some free start-up hoodies that constantly gather.

Uniqlo is not competing against H&M and Zara for my Euros but against free start-up hoodies and something bought abroad for memory.

This holds true in B2B as well. For example, let’s say you build tools to collect 365 Degree Reviews from team members in order to improve promotion in companies (made up example).

When you are selling this to companies you believe you compete with any of the tools that exists for that. But your biggest competitor is probably the fact that people don’t actually do 365 Degree Feedback.

This is usually the case. The competition is the status quo or non-consumption. People don’t actually have the problem you are solving.

What DO you need to do to increase revenue?

You need to do one of two things: reduce the reason why customers are not buying or make more offers to potential customers.

If you cannot reduce the reason why customers are not buying, while keeping unit economics sustainable, you probably want to exit this business. If the ratio of bought/not bought is healthy and there is a large available market you probably want to focus on getting your product in front of your customers. If you can’t do that your market size is the problem and you either want to build a nice boutique business or exit this business. (As for example happend to  www.die-masterarbeit.de of which I co-founded).

Operationalising win/loss analysis

Doing win/loss analysis is inconvenient and not pleasurable. The problem is who does it. In my personal opinion it should be a key metric for the all product managers to consistently understand the win/loss rationale.

Also see my article on OKRs for Product Managers that touches on the same point.