Chick-fil-A and Amazon-orders

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Amateurs talk strategy, General Omar Bradley said, professionals talk logistics. The placement of a product affects the business model. Each method has strengths and weaknesses and trade-offs to make.

There are a few aspects of placement:

The TiVo problem is one aspect of placement. Can innovators gain distribution faster than distributors can gain innovation? White Claw did it. Five Hour Energy did it. TiVo did not. Amazon is hard to compete with because of their placement advantage.

For consumer products there have been four eras of distribution: rural homes and mail, city centers, suburbs, and the internet. When the distribution era changes the incumbents lose some advantage.

In Nomadland, Jessica Bruder writes about the nomads that move from sugar beet harvest to national park service to – at the end of the year – Amazon warehouses. These ‘workampers’ are “fascinated” by “America’s appetite for sex toys” Bruder writes.

Thanks anonymity! Sure, a warehouse picker at Amazon knows Ken Jacobs in Tulsa orders this, but Amazon is so large and Jacobs’s mail is opaque that products with ‘social restricted action‘ have never sold better.

The second is the first Chick-fil-A Manhattan location.

When you think about a restaurant in Manhattan, location ties you down to specific systems that you have put in place. If you have a location with three stories you have to figure out how to split a kitchen in half. Or, how do you refrigerate trash? People don’t usually think abut that. When do you see trash? At night.

For us the biggie was upstream ordering: How do you take a line of people that stretches from 6th Avenue to 5th Avenue and get them through in a fast way? You don’t do it the same way as a suburban location.

Steve Nedvidek, Manage This – The Project Management Podcast, July 2017

Make something sell something is not business. How and where a product gets to the customers matters too. Both sex toy retailers on Amazon and Chick-fil-A in Manhattan had to choose among trade offs when their distribution model changed.

The Morgan Housel side effects

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Software companies have a great business model: spend a lot making something once, but each sale costs almost nothing. Google took a bunch of effort to create but takes much less now. Movies are like this too. Businesses with low marginal costs and high sales are very profitable.

That structure applies to decisions too. 

Rather than make a decision each time, we can design decisions. Atomic Habits, James Clear’s best-selling book explains this (and embodies it, books are low marginal cost too!).  Decisions with low marginal costs and accumulated effects are very beneficial. 

Google’s advertising is golden because many people use the service many times. But payoffs also come from one person facing the same design many times or from many people facing the same design once. Framing tradeoffs is one design decision: 

Tradeoffs work because they shift the important information. This ad is great because it forces us to think about what we don’t get and is important relative to the first. Part of the reason we want a new phone is to take and share awesome pictures. 

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Imagine we go back to March of 2020, Morgan Housel told Derek Thompson. The Federal Reserve Chairman, the White House, and the Treasury Head go on television with this warning: We are about to enter the second Great Depression, it is that bad, if not worse. We can prevent that. However, in 2022 there is going to be 10% inflation as a consequence of avoiding thirty percent unemployment.

That would have worked. 

We know there are tradeoffs, we just don’t try to think of them. But highlighting the exchange shifts how we think, and maybe how we act. 

Glad, not sad, well clad dads and grads

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I do not like these words and frames, I do not like the discount games, I do not like the way this stands, I do not like this ad’s brand. 

Apologies to Dr. Seuss, but this dad and grads ad from Twillory in the Money Stuff newsletter is just sad. 

(I’ll stop now)

The problem with a ‘Dads & Grads Sale!’ is that people don’t really want to save money on these gifts. Father’s Day and graduation are special. There’s nothing people get for their dads that reflects their role. A coffee machine or picture frame or dress shirt doesn’t say ‘Thanks, I love you’ for all the conversations, miles, and smiles of our lives. But we try. 

Except deals. Dads and grads shopping is a ‘you get what you pay for situation’. Reframe it. If Mother’s Day flowers were half off would you still do it? It’s different, right? 

Unless they’re a deal finder (Hi Uncle Frank!) there’s no utility in the discount. Discounts do push action – but there’s already a deadline, Father’s Day! 

The wasted space on ‘discount’ should focus on value. The Twillory reviews have good wording for this: breathable, my old suits don’t cut it anymore, my new favorite work shirt, most comfortable shirt I’ve ever owned, great for road trips, stretch and comfortable, these products now dominate my wardrobe.  

That language is what the ad should say. 

Follow the link and there’s a two for X sale. That’s good. It could have been the messaging: buy for you and dad. That’s a way to rewrite the ad. Another:

October 27, 2021: @Twillory amazing customer service.  Performance pants I ordered were too short. Within a day, and before receiving my return, you shipped out the new size. No company of any size has ever done that. Always told I need to wait. Trust your customers like Twillory!!!

Just copy a tweet. This uses the language of the customer and reduces hesitation about a new brand with a new fabric. Or:

Sponsored Content: Father’s Day is June 19. Dads and Grads need help looking good. Don’t buy whatever polo and pants – buy something nice. Whether for the graduate’s first job, internship, or six weeks backpacking Europe or for dad’s round of golf, Sunday service, or dinner with mom – buy something nice. Order by June 24th for free shipping on orders of two shirts or more. 

The angle here is that the customer is not the consumer. Also, the discount shouldn’t be for the merchandise directly. Free shipping or socks or gifts work better because they retain the product’s value. 

All of the parts of the ad are true, but they could be better (copy)written. Second consider the ‘job’ of the gift giving (don’t be cheap, buy something nice) and of the gift (wear this in these circumstances). Happy early Father’s Day to all the dads out there. 

This could be wrong. Their strategy may suggest this copy. But it feels inferior and stiff unlike their shirts.

Netflix DVD JTBD

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If I listened to my customers, Henry Ford lamented, they’d have asked for a faster horse. Let’s peel back this meme.

Superficially, Ford noted, customers do not know what they want. It takes visionary God-given insight to make things for people. Maybe.

What’s happening is that customers share a suggested solution. Ask the right questions to find the problem.

Prior to streaming in 2007, Netflix mailed DVDs. The business worked better than Blockbuster because movies came right to the customer, who returned them whenever they pleased. Life was good.

Mostly. People told Netflix they wanted new releases faster. That was the suggested solution. Instead, Netflix asked questions. If some customers got their newly released movies right away and others did not, would customer churn differ between the two groups?

And it did!

But not by much. At least not by enough to justify the extra cost of 2004’s The Machinist.*

But people wanted more new movies. Right?

Here Netflix got into the problem part of Ford’s words. Customers ask for one thing but what do they really want?

What the Netflix customers really wanted was any movie faster. To address this JTBD Netflix did two things.

First, they built more shipping centers so more movies were geographically closer to more people. During this expansion, Netflix went from ~20 centers to ~100.

Second, they changed the website so ‘local’ movies were presented on the homepage. A customer might log in to see Shrek 2 rather than The Incredibles.

Customers said they wanted newer movies, but what they wanted was faster movies.

*That’s another Netflix find. We tend to like Adam Sandler movies more than Drama/Thriller

Framing costs

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Three stories about framing costs.

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In college, our ultimate frisbee marketing wasn’t table tents like everyone else, but t-shirts. It seemed superior to subsidize the extra shirts, Mike C. bought four, than pay for paper adverts. It was an accidental Influence via social proof. Robert Cialdini writes, “there are three main optimizing conditions (for social proof): when we are unsure of what is best to do; when the evidence of what is best to do comes from numerous others; and when that evidence comes from people like us.”

So maybe the shirts were the better advertising route. But that’s hindsight. At the time the thinking was: why not use the money to get something that advertises the club but also which we can wear. It allowed our marketing budget to stretch into our uniform budget too.

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Though cleaning Airbnb rentals, residential homes, and apartment turnovers seem the same, the unit economics are not. The rentals required extra work like stacking pillows and sorting silverware and the homes required return visits to address distress and missteps. Plus, the rentals and residences were “times are good” businesses. George wanted something that would cover when times were not good too. That left apartment turnovers.

Then George did two other things. First, George brought all the rental turnover services in house, “one throat to choke.” When a tenant leaves, property managers need to make one call. George’s crew cleans the carpet, patches the walls, and fixes what is broken. Bundling these services is a better solution to the JTBD.

The second thing George did was to hire a quality control manager. This person follows the main crew, addresses small misses, and coaches the crew on the larger items. This, Acquiring Minds host Will Smith, sounds expensive. Yes, George replies, if you look at it only as a cost. But it’s not just a cost in the sense of apartment preparation.

You see, George explains, this is my marketing. It’s through word-of-moth referrals that people find George. The quality control is part marketing. And if that wasn’t enough, the quality control changes George’s LTV-CAC calculation.

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Product packaging strategy

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Strategy is coordinated actions. In the 3P model it means the product, promotion, and placement depend on each other.

Recently I was in a mall which is a collection of “try things on” stores. The 2022 mall is the placement of items, the products are clothes, jewelry, and food. That’s coordinated actions, here are three more examples.

RXBAR switched from (left) an original design done in PowerPoint to something simpler. The new design communicated what the bar was and helped it stand out on the retail shelves.

Aldi cereal has long barcodes because the Aldi aim is affordability. The company sells white label products with long barcodes to speed up the check out.

Haven’s Kitchen offers QR codes on the store boxes. Founder Alison Cayne learned this lesson when she taught cooking classes: teaching people what to eat did not help them figure out how to do it. The QR codes offer extra communication.

Via Modern Retail

Packaging strategy does not mean product will sell but it makes it more likely. This isn’t just sampling bias either.

First, we can think like an economist and look at the market: what works? If for many years many products across many categories have optimized their package design then it has some importance.

Second, we can think like an investor and invert the question: can packaging be bad? Yes!

Great packaging is overrated but packaging strategy is not. The product, placement, and promotion have to fit with each other’s tradeoffs.

All of the Product, Placement, and Promotion posts.

Return sequence

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If you invested twenty dollars a week how much money would you have? 

Well, it depends. When did you start? 

The start is important because the sequence matters. Let’s follow the advice from Richard Zeckhauser and think in extremes. 

If things were ideal, an investor’s early years would have low (or even negative) rates of return and their later years would have high ones. Would you rather double your net worth at fifteen or fifty-one? 

The most favorable market returns transform 30,000 into 3,200,000 after thirty years. Wild. 

But the worst conditions cede only 300,000. Real-life, as often the case, is somewhere in the middle. 

$1,000 invested into the Wilshire 5000 each year.

Each of these graphs is the actual returns of the Wilshire 5000 (16%, -5%, .01%, etc.) but arranged in different sequence. A random ordering (yellow) offers an extra 40% over real life. It’s a luck of the draw as they say.

But this isn’t a what if you invested in ___ at ___ post. 

The point is to practice Maxims for Thinking Analytically. Extreme examples reframe how we understand and here we understand sequence matters. 

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We touched on this idea in the Maximizing a 401k post and considered the tradeoffs between a 401k and a 15-year mortgage too. 

Psychic CAC

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CAC can be a ‘hard’ expense: Zappos, college students, or Peloton. CAC can be ‘soft’ too: F1 racing or American Pickers merchandise. Another ‘soft’ form is take rate. The take rate on Amazon is 15%. AirBnb hosts pay 3%. Psychics pay 75%! That’s huge!! Maybe.

Huge relative to what? Mills Snell smartly asks just that. “Like AirBnb, a two sided marketplace opens up monetization. Before someone puts their house on AirBnb they aren’t making any money. I think to the psychic it’s something similar. Their customer acquisition is people driving by and word of mouth. Maybe they’re willing to lose 75% of the revenue because they’re turning on so much potential revenue that they did have access to otherwise.”

Marketplaces are great businesses to own especially when they compete with non-consumption.

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Every business approaches the CAC crossing. One way to pay the crossing tax is to advertise. Another is the marketplace take rate.

But there’s also the elusive word of mouth bypass, which like actual unicorns is quite rare.

The positive externalities of Eminem

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And I probably ruined your parents’ life
And your childhood too
‘Cause if I’m the music that y’all grew up on
I’m responsible for you retarded fools
I’m the super villain Dad and Mom was losin’ their marbles to
You marvel that? Eddie Brock is you
And I’m the suit, so call me—

Eminem, 2021, Venom

In complex systems you can’t do one thing. When he was chief economist of Uber, John List and his team ran an experiment to see how tips affected drivers. They rolled out the option to tip in four cities and collected the data. Tips, List wrote, work. When drivers earned more they drove more. But you can’t do just one thing. When tipping expanded to other markets other drivers drove more too. With the increase supply of drivers but the same demand, total earnings with tips were about the same as before. But the drivers ended up working more. It was more per ride but fewer rides.

As a teen I remember big concerns about what music teens listened to. In 1990 the parental advisory label started to appear on CDs. In 1997 Eminem release The Slim Shady LP. That music was for my car only, not the house. Eminem gets this. “I’m the super villain Dad and Mom was losin’ their marbles to”. It was NOT GOOD that we were listening to this.

Maybe?

List’s Uber experiment explains an externality. Do one thing and this other thing happens too. Eminem’s other thing is health. Venom is my favorite workout song and Eminem is the 13th most popular artist on Spotify with fifty-three million plays. A month! That’s 100k hours a day. If one-fourth of those hours are someone exercising, that’s 14,000 pounds lost each month.

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Behavior change starts with easily understood stories. Tell someone a story they agree with, or understand, or can tell to others (which raises their status). Eminem’s explicit lyrics are something to warn against. But telling a positive story through some Fermi thinking sounds good too.

3P Placement

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There have been four eras of modern retail. 

Catalog era. In 1888 the Sears catalog begins. In 1896 the United States begins rural free delivery. Companies can mail catalogs directly to their customers and customers could mail their orders. It’s an important step in the Reconstruction Era. In 1908 the Sears kit house appeared. By 1915 the Sears catalog peaked in size. 

City era. By 1929 half of Sears’ orders are retail rather than catalog. Americans migrate to cities. Stores like Sears and Montgomery Ward get in front of them. Sears buys radio station WLS and locates stores in downtown areas. “Window shopping” begins. 

Suburbs era. Americans move again. Following World War II, Americans seek space and the automobile allows it. At the time Walter Cronkite noted, “When [Eisenhower] approved and pushed through Congress this great interstate highway network that we now have, he changed the entire face of America.” Sam Walton opens his first store in 1945. The American mall begins in 1950, a decade later there are almost five thousand. By 1975 malls account for 33% of all retail sales.

Internet era. In 1994 K-mart reaches its peak store count and Amazon.com begins. Though digital, early websites are niches of catalogs or newspapers: classifieds, shoes, clothes, used goods, and so on.

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How a business distributes to customers affects how a business succeeds. The four eras of modern retail demonstrate how the placement of goods and services changed over time. 

A niche of the internet era, DTC, is a modern example of how the terms change. The DTC placement is, or used to be, quite cheap. Businesses warehoused goods away from expensive city centers or suburbs. Or dropshipped across the Pacific Ocean. They didn’t worry about fighting for shelf space when public and private and last-mile couriers were happy to work for them.

DTC brands also succeeded because they chose good products. Glasses, rings, clothes, razors, and makeup are all easy to ship, similar in scope, and don’t expire. They’re also products with favorable margins. 

Lastly, the internet provided unique promotion opportunities. The internet allowed cheap websites and cheap – though growing expensive – advertising on social media sites. There were no gatekeepers and they told their story on podcasts and in videos. 

What’s the next era? No one knows. What’s the question to ask? That’s easy. Where are my customers and how do I talk with them? 

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There’s a longer look at the four eras here: From farm to city to suburb to circuit.