“It’s about having a conversation with the consumer,” said advertiser Linda Kaplan Thaler. In their language.
Legibility affects our understanding. In the alpha erosion, words mean competition and market mechanism posts we looked at this idea from a producer’s angle. If a business earns excess returns it attracts competition. It’s the non-repeatable processes that allow a business to remain dominant. That is, are the advantages legible to competitors?
Another application of this idea is product development. Customers hire jobs to be done to make progress in their lives and successful product development follows the legibility of customer wants.
Thaler recalls one night on The Johnny Carson Show when an actress commented about needing her camera for a “Kodak moment”.
I looked at my team and asked if we had used that before. No, everyone said, that’s brand new.
Bingo. That’s customer language. Linda’s team had the Kodak account and making Kodak moments legible is what they sold.
Successful businesses hide legibility from their competitors and find legibility in their customers.
Can someone become like you now Guy Raz asked Marques Brownlee?
It’s different today. “I’ve noticed that in polls of younger people their dream jobs used to be firefighter or movie star, but they all say YouTuber now”, said Marques, “this is fascinating to me because when I started that did not exist.”
If something is legible it’s something to compete on. But illegible things – becoming a YouTuber before it was a thing – make the competition harder.
Legible means playing according to the rules of the game. Illegible means making up the rules as you go. “I just wanted to make the kind of videos I liked to watch,” Marques notes. Illegible also means there’s time to find your rules. Brownlee spent years making videos. He admits that the early ones are hard to watch because they’re so bad. That’s fine!
With value comes competition, and the market mechanism whirls to life. “Your margin,” Bezos believed, “is my opportunity”. Alpha erodes.
Except in some places like the new, the foreign, the unaccounted, the unfavorable, the silly, and so on. Not every new thing ‘works out’ but every new thing has less competition.
Every business has stakeholders. Each entity in “the supply chain” is a stakeholder. There are supplier stakeholders: credit card companies deciding who or not to service. There are customer stakeholders: voting with their feet. There are government stakeholders: adjusting the dials of the economic system as if it were an aquarium.
There are also employees as stakeholders.
“I think of Masterclass, I think of Coda. I think of a company that we just invested in. They’re very clear and upfront about their culture and the process. And I think that A, attracts people who are excited about that type of culture and B, by the time that somebody has actually gone through the process, it’s very clear to them what working in the company is like.” – Roseanne Wincek, Invest Like the Best, August 2021
The LTV/CAC idea applies to all stakeholders. There are many ways to lower the CAC, and it’s one of the more interesting business questions because the lower the CAC the better the business model.
But even a CAC of one doesn’t work if the LTV is zero. The most important part then is getting the right stakeholders, and the best way to do this is clarity. We are the kind of people who do this sort of work.
This isn’t easy. It’s not like a business can say: this is our business model, because alpha erodes. And, it’s not just competitor stakeholders that affect how an organization runs. Any stakeholder can change the rules. Landlords raise rents. Suppliers vertically integrate. Life changes!
Zappos once ran a campaign with a CAC of $18,500. That was inefficient. But a company who does more convincing that clarifying will have the same results: a lot invested and little to show. For instance, Ottawa Canada is a phenomenally good place to built a software company?
“If I hire someone through this very intricate hiring process that we have, there’s an understanding the chance of us still working together in ten years is really high. It’s a commitment from both sides. The company needs to be worth working for in ten years, but because of that, we can have a very different relationship than in a place where the expected tenure is eighteen months.” Tobi Lütke, The Tim Ferriss podcast, June 2020
Shopify filters employees through an “intricate hiring process.” Investment managers filter limited partners through ominous letters. Brands filter customers through advertising.
Maybe flexibility is the best way to think about stakeholders. How much do your stakeholder restrict your range of motion, and is there a way to increase ones flexibility?
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Erik Jorgenson calls analogies our mental ‘sporks’. Brilliant!. The credit card companies were top of mind because the OnlyFan payment situation was news around the same time as the episode. Visa and MasterCard have stakeholders too. Sometimes it’s situations like this that provide opportunity for a business. If someone won’t “do X”, that’s a smaller market and more of a chance to avoid alpha erosion. Lastly; CAC, alpha erosion, and stakeholders are all on the list of my favorite ideas.
The first breakthrough in swimming was imitation. Like with high jump, seeing a new way to do things helped. The second breakthrough was underwater footage. What’s next?
Adi Wyner asked, is there anything beyond video helping with swimming improvements? It’s a good question. Let’s get some sweet advanced analytical fruit from the random forest up in here!
“We don’t have any tools to calculate instantaneous velocity, which would be the most helpful. It (the tool) also can’t be something that burdens the swimmer because if equipment is hanging off of them it changes how they are interacting with the water.” – Russell Mark, USA Swimming, July 2021
It’s the classic question: how do I know what to do?
It could be that baseball was uniquely suited to analytics: lots of data, one-v.-one matchups, less cultural importance (relatively). Swimming, Mark explained, has a lot of different body types and so there’s less data and fewer answers for “what to do”.
But it’s not completely empty. USA swimming for instance hosts the Olympic trials three weeks before the games. The thinking here, explained by Wyner, is that individuals vary in their performance but not too much during this competition window. If variance runs ‘in chunks’ then a proximate trials-games window makes sense. This theory might work, it is showing some alpha erosion as for the 2020 games Australian swimming has copied this schedule.
Luckily most of life is not the Olympics. The greatest athletes in the world looking for improvements “at the margin” is not the model. Most of life is answering questions like a 15 or 30 year mortgage? Most of life is just choosing from the good options, not finding the best one to the nth degree.
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It feels odd writing about luck without mentioning The Success Equation by Michael Mauboussin. There we go, it’s mentioned.
Wharton Moneyball is a great podcast. The intersection of sports and business doesn’t do justice to the topics covered. Two events Moneyball does not overlook are the Kentucky Derby and Nathan’s Hot Dog Eating Contest.
During the July 2021 episode, co-host Shane Jensen asked if
it’s Joey Chestnut’s technique or some god-given gift that allows him to eat a record seventy-five hot dogs in ten minutes. Eating expert and co-host Eric Bradlow explained :
“They all do the same thing. Eat multiple hot dogs followed by buns dipped in water. Eat multiple hot dogs followed by buns dipped in water. Everybody, since Kobayashi started this strategy in the mid-2000s, uses this strategy.” – @EBradlow, Wharton Moneyball Podcast
Kobayashi’s creativity (and success) invited competitors. Alpha erosion is the idea that valuable advantages degrade with imitation. What was once scarce and valuable, is now abundant and worth less. Daryl Morey said that in the early days of basketball moneyball it was easier to draft players. By 2017 Morey noted how many other team’s draft boards looked a lot like the one in Houston.
But knowing alpha erosion exists and seeing it occur is not fait accompli. There are at least two paths: innovation and restriction.
Innovation occurs when an organization can deliver better products each year as judged by their consumers. Find the JTBD. The capacity for this is dictated by an organization’s culture. Does an organization allow for exploration, does it allow for an Innovator’s Solution. 
Restriction occurs when an organization can gain an advantage by acting in a way the competition cannot. Part-of-the-reason Dollar Shave Club and other DTC companies succeeded was because the distribution advantage of legacy companies was also a weakness. Gillette could not compete (as judged by the consumer) without upsetting the retail partners.
Restriction for an individual is to remove ego, which often opens new paths for competition success. Movie Producer Jason Blum demonstrated the success of the low-budget horror film and hasn’t suffered much alpha erosion. Part-of-the-reason, said Blum, is that people in show business like the rewards of the show part more than the business part. There are huge advantages for a person if they can look stupid.
Shoveling as many hot dogs into your mouth may not seems like a good idea. It’s probably not. But the lessons we get from it sure are tasty.
There are few basketball commenters more thoughtful than Zach Lowe and Kevin Arnovitz and they paired up for an episode of ‘most interesting’ NBA teams. We’ve looked at one of their conversations from 2017 that asked, ‘What if Jeff Bezos were a GM?‘
Making predictions is difficult when we extrapolate linearly. Lowe said, “With (Celtics’s) Brown and Tatum we do this thing where we expect linear development and it doesn’t happen and then we get down on them and one of those guys is going to pop this year.”
The same reason people get down on athletes for bad years is the same reason Jason Blum is in business. Blum says that he likes directors with good past movies despite their last. This is Blum’s version of Moneyball, he explained:
“My Moneyball approach is that this guy writes and directs Saw for $800,000. He does two movies for fifteen and twenty million dollars that aren’t good. He can’t get hired. He birthed Saw, a cultural phenom and he can’t get a job. My Moneyball approach is instead of looking at the sexy statistics to look at the work.”
People over-index on recent and optimistic data instead of the more accurate base rates. In his conversations with Lowe, Sam Hinkie explained this idea.
Metrics only matter if we measure the right stuff. Why, for example, Arnovitz wonders, do the Portland Trailblazers exceed their projected win total each year? Why is some data down on them this year? “What is it that these metrics are seeing about the Portland Trailblazers that I’m not seeing?… I still see a hyper-competent team that understands how to orchestrate a hundred possessions a game of offensive basketball.”
What the metrics might be missing is the culture.
The Patriots don’t measure sacks as much as they measure pocket size. Kawhi Leonard didn’t interview well before the draft, should that matter? Only the first four-thousand of your ten-thousand daily steps make big strides.
In much the same way we make predictions using the first (and easy) things that come to mind we tend to measure the first (and easy) things. Baseball’s Moneyball began with walks but teams don’t rely on those numbers anymore.
Numbers are ‘cut and dry’ but the world they describe is anything but.
Market mechanisms set prices, and evaporate good deals. Lowe said, “Someone asked me what I’d pay for DeMar DeRozan’s contract extension and that’s not a fair question for me because he will immediately reach a market value that I would never pay.”
Investors like to ‘fish’ by themselves and venture capitalists love to visit college campuses to talk to students. Fewer people means less bidding.
‘Peak Uber’ was in 2012, before they had to compete with Lyft. Moneyball was published in 2003 and now those same advantages don’t work.
Lowe and Arnovitz are thoughtful and these first three points demonstrate the holistic mindset required. It’s never just one thing. The Celtics had to make wise predictions, measure the right things, and avoid the market to trade down to draft Tatum.
Alpha erosion is the cousin to market mechanisms. Once a rival is familiar with your advantage they’ll work to reduce it. Lowe said, “Last year the sheer speed of how they (the Sacramento Kings) caught a lot of teams off-guard. Everybody knows that’s coming this year.”
Both Annie Duke and Nate Silver rode the poker wave before it got too competitive. Daryl Morey annually complains to Bill Simmons that their draft board looks more similar to the draft order. Venture capitalists pile into companies once they see something that works. It’s just the name of the game.
Yes, we wrote that Katrina Lake had a good point about MBA programs, BUT I couldn’t help myself when this David Heinemeier Hansson (DHH) video titled “Unlearn your MBA” from 2010 came up on YouTube. This is our second post on DHH, the first is here.
Why should someone unlearn their MBA? For starters, it teaches you the wrong thing. In business school, you’re writing for professors. In the real world, you’re writing for customers. There’s a big difference.
DHH and his co-author Jason Fried are big on sharing their ideas via writing on their blogs and in their books. Josh Wolfe made the point that part of what makes a great founder is being a great communicator.
If that weren’t enough encouragement, writing well is a form of thinking well. Maria Popova put it best, “writing is thinking in public.”
Another problem with MBA program is the planning emphasis. Yes, DHH admits, planning is helpful for McDonald’s when they want to plan how many cheeseburgers they’ll sell in Q2 2020. But small businesses don’t need quite as much. MBA programs offer one thing, and rather than unlearn it we should reconsider it.
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Hanson has choice words for venture capital too. “It’s a time bomb…the most harmful thing you can do to your business.” Why is that? Money becomes a crutch. Instead of relying on money, strengthen your creativity. Constraints are an asset. “Sometimes restrictions get the mind going,” wrote David Lynch, “sometimes you come up with very creative, inexpensive ideas.”
Instead, Hanson says; build a product with a price that generates actual profits. When Marc Andreessen’s number one piece of advice is to charge more I wonder if it means the same thing. You need the market to respond to what you’re doing.
For Hanson, the sooner the market speaks, the better.
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Productivity advice. “Being a workaholic neither guarantees success or is a requirement for it.” Sure, Hanson says, there’s no such thing as an overnight success, but success comes from better choices, not more time.
Hanson lives in California and has co-workers around the world. “You can’t over collaborate seven time zones away,” he tells the class. He shared another smarter not harder choice with Lifehacker, saying his best time-saving shortcut was:
“Saying no. I’m always astonished by the tangled web of obligations most people manage to weave for themselves. I say no to almost everything. Then I can commit myself fully to the few things that I do truly choose to do.”
And about email.
“Most people’s inbox are overflowing because they waver, so they defer, which just makes the anxiety ever greater. Just make the call, which in my case is mostly “no,” then move on.”
Hanson also believes in being there. Basecamp is a flat-ish organization because they don’t want to “disconnect the deciders and the doers.” One feature of Dead Companie’s Walking was absentee managers.
That Hanson spoke at all is surprising. As he says at the end, he’s afraid of alpha erosion.
“The companies that I look to that are doing well rarely get any PR at all. Most companies that are run like us are smart, they duck, they don’t talk about how much money they make. They don’t want to attract any attention.”
Eddy Elfenbein reminds us, “Always be aware that these advantages are not permanent.” And success attracts interest.
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