Tag: business model

NBA’s broadcast innovation dilemma

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Disruption theory (2:00 minute YouTube HBR explainer) describes how leading companies serve their customers through product improvements rather than invention.

Keurig’s innovation was capsule coffee and sustains their company with ideas like Brew ID which “recommends recipes with easy step-by-step instructions.”

It’s an innovation dilemma because sustaining innovations makes the money printers go brrr, like at ESPN.

These sustaining innovations fail when the customer Jobs-to-be-done changes.

“We started doing it for free,” Nate Duncan said on Wharton Moneyball in December 2022 about his NBA Strategy Stream show, “with the idea of eventually doing something like this back in the 2016/2017 season. We did it pretty much unpaid – our Patreon subscribers would throw us a few bucks but they weren’t obligated to – and we just built up a lot of reps doing it in the bad old days.”

Think about that. Duncan and his partner Danny Leroux worked “pretty much unpaid” to broadcast NBA games.

But they found an audience. They found an adapting JTBD.

Disruption theory also describes how leading companies can create both sustaining and disruptive innovations. One aspect is a separate P/L. But that takes financial, temporal, and status capital. Within any organization, what executive is going to suggest an unprofitable bet to create something people might want? No way.

But that’s disruption theory.

Build or Buy and a Better Approach

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‘Build or buy’ choices are everywhere; from ordering take-out to business acquisitions. Bob Iger started to ‘buy’ when he noticed that the most popular parade characters weren’t from Disney but from Pixar. 

The first-level question may be ‘build or buy?’ but each has an important second-level angle. 

Build – what do we hope to learn from this experience? In Acquisitions Anonymous #148, Jesse Pujji talks about a supplement brand. 

Successful DTC brands have a successful product, distribution, and marketing system. 

Most of the product innovation, Pujji explains, is gone. Supplements are an established part of many production facilities. You could start one in thirty days. That part of the learning advantage is gone. 

So too is the distribution thanks to Amazon, Shopify, and 3PL

Common products delivered in the same way make it a game of good messages to profitable niches. That’s something a person learns by doing. The only built solution is social ads – which have become expensive. So rather than buy a supplement brand, Pujji suggests, to build one because you can’t buy the knowledge. 

Buy – what are the opportunity costs? Humans are generally bad at considering what else? Ask people about not buying a Ford and they say they’ll buy a Honda. It’s part of our mental accounting. 

Hack this system by making the choices explicit. Think like The Price is Right. It’s a choice of this or that. Did Disney debate their options? To be a fly on those walls….

Bob Iger had to buy Pixar, Marvel, and Star Wars because Disney could not build those things. Though many brilliant people could work on that project, Disney faced the innovator’s dilemma. Creation is rowdy, rambunctious, and most important to Disney – unprofitable. 

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We’ve the tendency to think this or that and if this is good then that is bad. Life’s far more complicated. The opposite of a good idea may be another good idea. So ask why, ask about the second level aspects, and what else might happen here. 

Why is this so cheap?

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Our simple business model is a product, distribution, and marketing. 

  • Sex toys (product) sell better thanks to Amazon’s anonymity (distribution). 
  • RX BARS (product) sold better with a packaging redesign (marketing).
  • Catalogs, department stores, big box, and online (distribution) seeded DTC (products). 

Why is this so cheap?

One thing low-cost airlines got right, says Rory Sutherland, is they “magnify the things you didn’t get like a meal, pre-allocated seating, free checked luggage, and so on. And they had to do that to explain where the savings were taking place. Otherwise, you assumed it was worse trained pilots.” 

Yes! “People don’t just believe, here’s the price but you can get it for this,” agrees Marcia Kilgore, “you have to tell them how and you have to tell them why.”

According to Kilgore, beauty product is no longer differentiated. Everyone sells the same thing – and anyone can sell it. This is a problem for people like Kilgore. 

Hers is the ‘explain where‘ approach – we cut out the middleman. But with so many new entrants (thanks to easy products) it’s hard to communicate that message. 

“Instagram and Facebook have become the new landlords. We’re trying to get away from having to ‘pay retail’ and now you have to pay that same cut to Instagram.”

If the product is constant among beauty brands and the distribution channels are limited to retail and DTC what kind of levers exist in marketing? 

1/ Change the CAC/LTV. If Instagram is the new rent, then only acquire customers once. Kilgore’s company Beauty Pie uses a membership model like Amazon Prime. Founder Jeff Bezos said, “Our goal with Amazon Prime, make no mistake, is to make sure that if you are not a Prime member, you are being irresponsible.”

2/ More organic & less paid marketing. Instagram ads may be bid up but Instagram posts are still free. Beauty products have inherent characteristics that make how-to and before-and-after content successful. 

3/ Offer extras. The Beauty Pie boxes are nicely designed but not expensive. The message is “just as good but nothing extra”. The brand has good communication. They’re using alchemy.  

Kinko’s JTBD

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When asked if he worried about Xerox vertically integrating, Kinko’s founder Pual Orfalea said ‘HAAHAHAHAH. No.’

It’s obvious with distance, hindsight, and present best practices that’s exactly what Xerox should have done. Move down the market, get closer to the customers, and let their purchase decisions drive product innovation. But Paul Orfalea just laughed.

And he’s right.

Xerox couldn’t have acquired Kinko’s because Xerox and Kinkos are two different businesses.

“We aren’t in the copy business. We are in the emotions business. We help people get jobs, make sales brochures, and celebrate the major moments of their lives.” – Paul Orfalea, founder of Kinko’s

People don’t want quarter-inch holes, the expression goes, they want to hang their damn vacation photos.

Orfalea figured that out and designed his organization around the idea. He empowered counterworkers to solve problems immediately. When customers came in worked up and stressed out about an errored order, the last they thing want to hear is ‘let me talk to my manager and see what we can do.’ No! An immediate refund and rushed redo was the solution, and it’s what Kinko’s did.

“Our customers didn’t particularly care how the work got done either,” Paul writes in Copy This,” But they cared passionately about obtaining relief, symbolized by the finished product.

Job to be done is a great theory for product development but it only works holistically. The Panera job is food and place. If either is ‘a mess’ then neither works. The things have to fit together as homeotelic systems. Actions A and B work toward the same goal.

Kudos to Kinko’s and Xerox for using the Rich Barton “Scrabble Letter” naming system. Orfalea credits the name of Kinko’s to his kinky hair and his mom noting that people don’t forget hard consonants, as our first is GooGoo Gaga.

Alice and Bob own soccer teams…

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Alice runs her team conservatively and finishes with 17 wins, 17 draws, and 4 losses. 

Bob runs his team with more variance and finishes with 19 wins, 11, draws, and 8 losses. 

Which is better? 

Let’s reframe, like the ball bet. Is it better to exchange 2 wins for 6 draws and 4 fewer losses? 

Haralabos ‘Bob’ Voulgaris bought a soccer team because he knows these answers because he’s seen these questions. 

After Moneyball but before Morey-ball, Haralabos discovered and gambled on basketball inefficiencies. The best known now is the three-point shot. Voulgaris thinks that soccer is similar. Teams earn three points for a win, one for a draw, and zero for a loss. Rather than three or two points in basketball, it’s three or one points in soccer standings.

Soccer’s business model is like the music business model. Artists lose money recording an album, break even touring, and profit from the merchandise. This had to be Pixar’s business too. Division three soccer teams lose money, division two teams break even, and La Liga or Premier League teams “print money”. 

Soccer teams can move up (promotion) or move down (relegation). Bob’s team, CD Castellón is in the third division and they need about sixty-eight points for a chance at promotion. 

Both Alice (17/17/4) and Bob (19/11/8) earned sixty-eight points – but they don’t seem equal. This is Bob’s point – it’s worth risking more for wins than less for draws.

The big question is: What are the right metrics for this system? 

  • Hurricane wind speeds are probably the wrong metric. Though easy to measure they don’t convey the potential storm damage which comes from the rain, surge, and flooding. Moneyball and Morey-ball are both descriptions of systems where the important metrics shifted.
  • ‘Draws’ is a wolf in sheep’s clothing. It seems fine – splitting the difference between a win and a loss – but the unique point system shifts the weight. 
  • Risking more – Bob’s approach – focuses on what matters. It’s the points stupid.

Humans are loss averse but the soccer standing scoring rewards bucking this trend. Alice and Bob own soccer teams, let’s see what happens.

Open 24 Hours

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What do you want? is the wrong question.

Customers speak in the language of problems.
Businesses speak in the language of solutions.

When Netflix asked customers what they wanted, the customers said more new releases. So Netflix bought more. Then they looked at the data.

Engineers compared churn rates for customers who got new movies quickly with those who didn’t and the results were indistinguishable.

What customers wanted were faster movies. If customers got a movie within a few days of returning the previous they were less likely to churn out than customers who had to wait longer. Bingo. Netflix’s solution wasn’t more new releases, it was shorter shipping times.

Good for Netflix – but what about us? What about businesses that don’t have data engineers?

“From 1984 to about 1987, I proselytized about the wisdom of staying open for 24 hours,” Paul Orfalea writes in Copy This. Orfalea was a unique manager.

Rather than spending time at the office, Orfalea was on the road talking to Kinko’s partners, customers, and anyone who found something that worked.

“I’d met a convenience store owner who found his overall sales jumped 50 percent when he decided to stay open for 24 hours. At first, the increase seemed like a mystery. His foot traffic wasn’t great during the overnight hours. But his customers liked knowing they could patronize his stores any time day or night. They never had to worry when he was open or closed.”

Bingo.

Kinko’s business wasn’t selling copies – it was managing emotions. Customers needed help. Kinko’s helped them get jobs, celebrate moments, or create the brochure that needed done yesterday. Being open 24 hours helped.

Survivor Games

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December 13 is the Survivor finale and a chance to highlight the different ideas of the blog.

Sampling. These people are not “representative samples“. Survivor hosts a casting call for people with good stories. Like Bob Iger’s big lesson, entertainment isn’t about reporting so much as stories.

Incentives. Like the many games of Jeopardy, Survivor has layers of games. When there are layers of games it’s difficult to judge actions. Is someone trying to win the game or claim later fame?

Business models. Thanks to MTV in 1981 and then Real World in 1992, one entertainment business model is to create value by editing rather than crafting (unlike Seinfeld). Put regular people with backstories (hence sampling) in interesting situations and things will happen. Edit a month of island living to a few dozen hours and viola.

Customer acquisition costs. Sequels – it’s season 43 for Survivor! – have lower CACs. Consumers don’t need to be educated.

Your product is the feta on the salad

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This is from the Daily Entrepreneur, sign up here.

Operators live in their business. It’s nights, weekends, holidays, birthday parties, and vacations. 

Customers don’t care. 

To a customer, a business is just mustard on a sandwich. Nice, but not their life. To a customer, life is nights, weekends, holidays, birthday parties, and vacations. 

Hamdi Ulukaya immigrated to the United States when he was twenty-two years old. He signed up for an English class – Hamdi spoke Kurdish and Turkish – and was assigned a ‘how to’ paper. Hamdi grew up shepherding sheep in the Turkish hills, so he wrote his paper about making cheese. 

His teacher loved it. Not for Hamdi’s encouraging English, but for the content. She owned a farm upstate and needed help making cheese. Hamdi agreed to help. 

It paid enough to get by and continue his studies. Hamdi’s cheese was good, it was “old world”. Americanized cheeses, like feta, didn’t taste like the cheeses of his youth. After working on the farm, Hamdi opened a cheese factory with his brother. 

People liked their cheese, it was good, but the restauranters didn’t care. Pricey but good feta from a regional supplier wasn’t what operators wanted. It was just a salad component. Restaurant operators ordered from the major manufacturers because the price was low and the quality was consistent. That’s all they needed. 

Hamdi worked nights, weekends, holidays, and birthday parties, and didn’t take vacations. Hamdi lived cheese. He was a shepherd, a farmer, and a manufacturer. There was no one in the world better equipped to run a feta cheese business. 

But it was just ‘mustard’ to his customers. To Hamdi, it was his life. With a lot of hard work, he grew the business to be a regional success. 

In 2005 Hamdi got a letter about an adjacent business for sale. It was in Ithaca New York and the last owner couldn’t make it work. Let me take a look, Hamdi thought and he called a friend to tag along. Are you crazy, his friend marveled when they arrived, this factory was owned by Kraft and they couldn’t make it work! What makes you think you can? 

Hamdi thought he could, this time with yogurt. Like with feta, he made a great product. Unlike feta, people cared. His first distribution deal was with ShopRite. After two weeks, his contact said, “I don’t know what you put in this yogurt and I don’t want to know – but I cannot keep it on the shelf.” This new, thicker yogurt was a hit. Within five years Hamdi’s yogurt company, Chobani, passed one billion dollars in sales and was the leading American yogurt company. 

Businesses service customers and fit in their lives. No one cares as much about your business as you do. Customers want to live their lives with their mustard, cheese, or their Chobani yogurt. Entrepreneurs live the mustard, cheese, and Chobani yogurt.

Make up business model

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Homeotelic responses are the most important type of action. Introduced here, someone who wanted to lose weight and save money would learn to cook for themselves. Cooking (homeotelic) satisfies both goals.

Harry’s and Dollar Shave Club used homeotelic approaches. Their first goal was cheaper razors and their second goal was easier razors. Online subscriptions achieved both goals.

Competitors like Gillette were forced into heterotelic responses. They couldn’t move towards easier because of their existing retail goals.

Makeup company Trinny London’s CMO Shira Feuer spoke with Rory Sutherland about how she manages the brand in a homeotelic way. Here are three ways.

  • Trinny London uses real people not models as their models. This is a good bit of differentiation. We’re like you the ads state.
  • The branding is like the models: nice but not fancy. The copy isn’t polished and the images aren’t photoshopped.
  • The company uses gifts, not discounts to extend value. Gifts are CAC Trojan horses.

If the Trinny London brand goal is nice and friendly, then not-models, simple copy, and free gifts all work toward that.

Feuer also worked at Burberry and tried to bring that aesthetic to the makeup world. But it was too polished. What works at Burberry does not work at Trinny London. Feuer also consulted with companies and remembers being told you should never pay full price for a Domino’s Pizza because the discounting is built into the pricing model. What works at Domino’s Pizza does not work at Trinny London.

The Domino’s Pizza turnaround was built around changing the culture, improving but not perfecting the pizza, allowing social media, and building their data prowess. That’s a great homeotelic plan – for DP.

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Really, this is one of my favorite books.

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.