Why Hank Aaron’s father didn’t want a better house.

“I tried to get my father to move to a house I bought for him. There was one morning he was outside, trying to crank start his car,” Aaron recalls what his father said:

“Listen. I know what you’re trying to do. You’re trying to get your mother and I to move to that house you just bought. But we’re not going anywhere. All these people here, there’s not that many, maybe five or six families, these are friends of mine. I can wake up in the morning. I walk down. I can say hello to Stella, or whatever. These are friends of mine. I’m not going anywhere. So, you can take that money you paid for a house and get a refund.”

Aaron’s estimated net worth was twenty-five million dollars when he passed away, but this comment from his father shows value.

Jazzercise? Job-ercise?

“I was teaching in the morning, which tends to be a time when a lot of stay-at-home moms take a class. They would come and take a couple of classes and then I’d never see them again. I wondered what in the world was going on. I went and talked to some of them and they said they like it but they said I was teaching it like they were going to be professional dancers. They didn’t want that, but they did want to look like professional dancers.

That is Judi Sheppard Missett on the How I Built This podcast.

There are a few ways to find the JTBD. One is to talk to current customers. Another is to talk to previous customers. Bob Moesta says to talk to both. What the previous customers told Judi was that they wanted to look great and have fun doing it.

The whole episode is good because it highlights a systemic need: non-weight lifting exercise. People wanted a thing, and as is often the case, couldn’t articulate it.

Everything in our life seems obvious now but there’s always a change around the corner. Phil Knight wrote in Shoe Dog that runners were considered weirdos. Nobody exercised. There was a need there, and Knight and Missett both filled it.

Moesta says that he likes to see things as sets. Jazzercise then might be the set between fitness-fun-novelty-and-groups. Whatever your customer’s set is, follow Judi’s steps and go ask them.

The TiVo Problem (trailhead 1)

This post will act as a trailhead for the TiVo problem. Coined by Alex Rampell, it’s the contest between incumbents and innovators. As a question: can incumbents get innovation before innovators get distribution.

Examples:

  • Netflix innovated to distribution before Blockbuster distributed innovation.
  • White Claw innovated to distribution before Budweiser distributed innovation.
  • Tim Ferriss innovated to distribution before Known-Media-Personality-A distributed innovation.

In the Netflix example, Mario Cibelli spoke about how Netflix fixed many small problems that accompany innovation. That work on a small p, large N problem helped Netflix stay ahead of Blockbuster.

But it’s not easy.

Kara Swisher joked that Evan Spiegel (of Snapchat) is the chief designer of Instagram; an ongoing contest between the distribution of Facebook/Instagram and the innovation of Snapchat. Bill Abbott, CEO of Hallmark complained about the distribution advantage that Lifetime has, as a Disney owned company, riding along on sister-site Hulu.

One of the more interesting instances ‘cheating’ on distribution. That’s the case of 5-Hour Energy, whose founder Manoj Bhargava noticed that getting in the convenience store coolers would be a tall order. But getting on the cash register counter was much easier.

For Innovators, there appear to be at least two techniques:

  1. The weak/strong dichotomy. This was the 5-Hour Energy plan. Coca-Cola’s manufacturing and marketing strength was also their weakness. Innovators then should go where Distributors can’t because of their established business.
  2. In his original assessment of the Innovation-Distribution race, Alex Rampell suggested to ‘Be Boring‘. This is unglamorous fixing of sorting machines at Netflix.

CAC Pack

Patrick O’Shaughnessy asked about clever customer acquisitions. The replies are pretty good.

In college, I played ultimate frisbee. Recruiting was kind of difficult. The traditional method was to buy card stock table tents and litter the dorm eateries. That seemed cluttered to me. I took our marketing money and subsidized t-shirts to $5 each. One guy on the team bought four. Did they work? Who knows. Was it better than table tents? For sure.

Customer Acquisition (Costs) strategies are not so easy to organize. Marketing? Samples? Scrolling through replies I settled on five. The whole stories are in podcast form: Overcast, iTunes.

The highlights:

  1. McDonald’s Kid Meals were created in Guatemala by a struggling franchise. The thinking was: kids eat less and different food. The Happy Meal was created in Chicago when an advertiser Bob Bernstein watched his son eat cereal for breakfast and read the box.
  2. AOL discs were everywhere because AOL had previously sent boxes to homes and saw a staggering conversion. At the time people had computers, but not software the getting people to try AOL was like a lot of other consumer products. Steve Case had worked at P&G and gotten shampoo distributed the same ways. (At one point AOL was half of worldwide CD manufacturing).
  3. “PS I love you, get your free e-mail at Hotmail.” was the original email signature. VC Tim Draper was an ’84 Harvard MBA and studied Tupperware. The I love you was dropped and the line worked.
  4. Netflix used coupons in DVD players in 2000-2002, a lollapalooza of technology, selection, and customer demand.
  5. When Rich Barton launched Expedia he asked Bill Gates for millions to buy TV ads and Gates said ‘Yes’. When Barton launched Zillow he asked Bill Gurley for millions to buy TV ads and Gurley said ‘No’. The difference was the business model. What might work instead? The Zestimate.

The theme across these is that a business disrupted an incumbent (or itself) by taking something that worked in one area and applied it to another. The cleverer the angle, the less the financial cost.

Spring 2020 definitions

These definitions are a series.

If you really study it”. (expression) a signal someone hasn’t changed their mind but is willing to capitalize on the current trend.

Assumption (noun): To make a theory into a law. This is not an issue because of Moore’s Law.

Middleman (noun). (1) the person who facilitates a transaction (2) the person screwing you in a transaction (3) the previous person who screwed you in a transaction, not this new innovator, no-sir not this new person, I will NOT ever complain about this new person.

Sludge Audit (verb). Evaluating the red-tapes, hoops, and frictions in a process. I’m going to batch these customer feedbacks and see if there’s a theme, then I’ll conduct a sludge audit to see how our processes can be improved.

Performance architecture (noun). The design of “structures to make better decisions and perform at optimal levels.” The last thing I do each day is write in my decision journal because it’s part of my performance architecture.

Crash (verb). A drastic change in the market with negative effects due to one’s time horizons. The market crash means Bob won’t be able to retire in two years. See also: Correction.

Correction (verb). A drastic change in the market with neutral effects due to one’s time horizons. The market correction means Alice will be buying more Bitcoin and hodling. See also: Crash.

Franchise Fees (noun). Customer acquisition cost. Chipotle for example..

Jason Zweig (unknowingly) turned my attention towards this idea. His book is The Devil’s Financial Dictionary.

History through Industry (I)

The common way to learn history is commonly politics, including war. This is not that. Suggestions? Send them over. These are affiliate links. If you buy anything from Amazon I will earn a small commission. Quips and gripes? Send them too.

Cadbury [1824-Current] The Chocolate Wars. Chocolate. Simple right? Nope. It took a lot of work to get chocolate right. This book tells the chemistry and business side of the story starting with Cadbury but including Hershey. “Despite its long and colorful history of cultivation, by the mid-nineteenth century the dark cocoa bean was mostly consumed in liquid form, largely unprocessed and unrefined. The Cadbury brothers were still thinking along lines rooted in ancient history.”

Budweiser [1876-Current] Bitter Brew. The rise and fall of Budweiser. Runner up book.

Coca-Cola [1886- Current] For God, Country, and Coca-Cola. A hefty history, but really good. Probably no other book on this list covers history as much as this one.

Disney [1923-Current] Walt Disney. The Disney+ documentary is better, and possibly shorter than this tome, but this focuses on the person.

Volkswagen [1937-Current] Thinking Small. The founding of VW, the post war split of Germany, and the very interesting marketing which helped the bug sell in America.

McDonalds [1940-Current] Grinding it Out. Ray Kroc, in his own words. Kroc was selling an obscene number of milkshake mixers in this small California town: “the fact that this was taking place in San Bernardino, which was a quiet town in those days, practically in the desert, made it all the morning amazing.” Also how potatoes age differently in open California desert kittens and cold Chicago basements.

In-N-Out [1948- Current] In-N-Out. Riding the California population boom the story of Harry and Esther Snyder starting the burger chain.  The three expansion tenets: The Snyder Way, Location, No Debt.

Walmart [1962-Current]. Made in America. Sam Walton’s story, in his own words. “At the very beginning, I went along and ran my store by their (that is, Ben Franklin’s franchise system) book because I really didn’t know any better. But it didn’t take me long to start experimenting – that’s just the way I am and always have been.”

Nike [1964-Current] Shoe Dog. How did Nike survive? Phil Knight audited other shoe companies and saw what made them thrive or die?

Amazon [1994-Current] The Everything Store. Gates was “flabbergasted” about Amazon. “Amazon’s culture is notoriously confrontational, and it begins with Bezos, who believes that truth springs forth when ideas and perspectives are banged against each other, sometimes violently.”

Honorable Mention. Books which highlight a moment but don’t quite tell a longer story.

Stroh’s Beer [1850-2000]. Beer Money. More shirt-sleeves-to-shirt-sleeves memoir than business book.
Lockheed [1966] Skunk Works, and the Blackbird.
Chez Panisse [1971-Current] Alice Waters and Chez Panisse. The California cooking revolution.
Seinfeld [1990-1996] Seinfelda. Possibly peak mass culture.
Beanie Babies [1993-Current] The Great Beanie Baby Bubble, Beanie Babies comprised 10% of eBay’s sales.
Pixar [1995-Current] To Pixar and Beyond. How do movies make money?
Oakland Athletics [2002] Moneyball. One of, maybe the, first data impact books.
OkCupid [2004-Current] Dataclysm. Lots of good early data on online dating.
YouTube [2005-Current] Videocracy. Lots of good early data on YouTube. Gangnam 1st 1B+ views.
Zillow [2006-Current] Zillow Talk. Lots of good early data and findings on home sales.
IBM [2011] Final Jeopardy. Can Watson defeat Jennings?

Large N, small p (cancer, Netflix)

In addition to the first post, we can add two more ideas of small probability times a large number yielding a significant result.

In the first instance, our large N is t (time), and the small probability event is genetic mutations which lead to cancer. Jason Fung writes about mutations: “This small likelihood of success explains why cancer often takes decades to develop, and why cancer risk rises sharply in people over the age of forty-five.”

The second is an idea from Mario Cibelli about accumulating advantages. Cibelli told Patrick O’Shaughnessy that he visited a Netflix distribution center during their DVD heyday.

“I think what we saw essentially was an operation that was very, very hard to replicate. They had years and years of finding and bumping into bottlenecks and eliminating them, and getting more and more and more efficient. That would range from how labor was used, the lack of storage of DVDs. They actually didn’t store them anywhere, they always remained on the desks. The manager explained to us how the DVDs were always looking for a home. They weren’t trying to find the DVD that the home wanted, they would have the DVD in hand and say, “Hey, which home wants this?” To a bunch of machines that they bought that sorted the material that didn’t work, that destroyed a number of DVDs, and that they had to customize.”

Each obstacle was small, take many small improvements and you’ve got a business. Netflix’s small p large N effort was how they won the TiVo Race.

3 prompts to being Bayesian

How much should new information matter? Or, is this time different? Because sometimes it’s not.

“Merlin (Heidemanns) said that essentially the polls gain more weight. It’s not that we construct a model and weight the polls. We don’t take a weighted average of the polls, we estimate latent parameters and the polls are data. That said, you can roughly approximate the estimate as a weighted average.”

Andrew Gelman

According to Gelman, priors like “the economy, stupid” never exit the model. According to Nate Silver, the final poll removes all prior data.

In college sports priors matter more than Gelman allows for politics. Nearly two-thirds of college basketball teams who start a season ranked in the top-25, finish in the top-25. College football is the same.

How much new information should matter is a tricky question, but it’s helpful and why the Wharton Moneyball co-hosts encourage each other to become more Bayesian.

At the start of a football season we can guess (or hope) on a team’s chances. With more information, each play, game, and season, we update our idea. Eventually our guess at the start of the year gives way to the information of the year.

It’s hard to do though because we don’t know is this time different. Most of the time it’s not different enough, and base rates work best. But there are three general frameworks which might help us become more Bayesian.

First is to ask a Marc Andreessen like question: is software eating the world? How has the system changed and what does that mean? From FAANG to Testa joining the S&P, it seems like a systemic shift toward technology. Ditto for passing in football.

Second is to ask the Michael Mauboussin question: how much of this was luck? There’s a lot more luck in a single football play than an entire football game. It’s always a mix of skill and luck, but in what ratio?

Third is to consider our identity: am I attached to a position for unacknowledged reasons? This category includes biases like sunk cost and personal influences like ego or status.

The 2021 vaccine rollout is a good instance of practicing Bayesianism. Start with the base rate for vaccines. Watch for evidence. Adjust accordingly.

How jokes, and all things, work

Here’s Jerry Seinfeld telling Tim Ferriss about an idea he’s got. It’s still early. We don’t know yet if it’s a joke. Seinfeld said, “I don’t know what to do with that”

“When you’re on a cell phone call and the call drops, and then you reconnect with the person, they’ll go, “I don’t know what happened there.” As if anyone is expecting them to know anything about the incredibly complex technology of the cell phone, they offer this little, I don’t know if it’s an excuse or an apology. They go, “I don’t know what happened there.”

After Seinfeld has an idea he writes it down (there’s a lot of good writing and creative tips in this episode) and he works at it. Seinfeld explores the idea like my mother-in-law explores the home goods stores. Is this a good decoration? Does this match what else I have?

Seinfeld writes on yellow legal pads until a joke is pleasing to the ear. Then, it’s time to see how it works. And to remember, nothing is above the laugh.

At a comedy club the joke thrives, it dies, or it suffers enough damage to limp home and recover to emerge stronger and better prepared the next time. The comedy club is feedback.

“That’s the paradise of stand-up comedy. You don’t have to ask anyone anything. Stand-up comics receive a score on what they’re doing more often and more critically than any other human on Earth.”

Jerry Seinfeld

All things work like this. From idea to iteration to feedback in the market. Stand-up from Seinfeld is the cleanest version of this. Jerry’s method is the IKEA instruction of comedy, down to the simple paper it’s printed on. A comedian can have a joke in the morning, work it over over lunch, and deliver it after dinner.

All creations follow this process, but comedy is the gold standard because it’s clear and clean and quick. Write a newsletter (neé, blog) and the feedback is slow. Create a product and after development, marketing, and distribution you might know if people like it.

Poker’s appeal is principally the same. It’s cause-and-effect world. It’s easy to see. We like that. Comedy too.

Life is messy. But this helps. Keep in mind that the same process underlies everything creative: idea, iterate, feedback. The loop may be longer, but the process is the same.