Strategic Planning Analogy #543: Starving Artist

THE STORY
I love writing music. I’ve put together 16 CDs worth of music. The problem is that I have odd tastes in music. As a result, almost nobody else likes my music.

I suppose I could write a different kind of music—in a style more popular with the masses. But that would be less satisfying to me, both from an artistic as well as creative point of view. So I continue to write my music in a way that brings me great personal pleasure, even though it means that others find it difficult to listen to.

It’s a good thing I’m not trying to earn a living with my music. Otherwise, I’d be one of those “starving artists.”

THE ANALOGY
It’s one thing to get great personal pleasure from what you do. It’s quite another thing to provide great pleasure to your customers/audience. Quite often, what gives you great pleasure does nothing for your customer and vice versa. I painfully learned this lesson with my music writing.

For a hobby, that’s not such a big deal, but for a business, that can destroy you.

I know that there is a lot of writing out there about trying to make the work environment enjoyable for employees. Many go further to talk about making the work projects themselves enjoyable and satisfying for employees.

This seems particularly important when companies want to hire a lot of great engineers, for which there seems to be a perpetual shortage. For example, Google has all of its exciting “Moon Shot” projects in part as a lure to get great engineers, who want to work on cool things.

But at the end of the day, businesses must ultimately provide some sort of excitement and pleasure for their customers. If they don’t, those customers will go somewhere else. Happy employees can be a great thing, but happy employees producing unwanted stuff doesn’t get you very far.

I may be content to be a starving artist with my music writing hobby, because I’m more interested in my hobby pleasing me than pleasing others. But you don’t want to have a “starving artist” company, since starving companies eventually die.

THE PRINCIPLE
The principle here is that long-term success in business requires receiving an income from what your company does which exceeds its costs. Ultimately, the ones who buy what you’re selling determine your income. Therefore, if you are not offing something which people want to buy, your business is in trouble.

This sounds pretty obvious and you would think it does not need to be said. However, in the January 1, 2015 edition of Fortune magazine, they quote a study by CB Insights which caught my attention on this topic. CB Insights analyzed 101 failed startup companies to determine why these firms failed. Their conclusion? The number one reason these startups failed was “no market need.”

In other words, we’ve got tons of companies out there built around a strategy to create something that people don’t want. Incredible!

How did we get to a point where companies no longer think that they have to deliver something desired by customers (or don’t do enough work to find out what they really want)? I think it boils down to three things:

1. Easy Start-Up Funding

First, there is a lot more investment capital looking for great start-ups than there are great start-ups to invest in. With all that investment capital looking for a place to invest, you get money pouring into poorly conceived business models.

Why worry about getting money from customers when you can get all the funding you need from private capital? In a sense, capitalism gets distorted to the point where the private capital funds become the “customer” of the start-up. As long as you please them, you don’t have to worry about pleasing the true end customer. I spoke more about that in an earlier blog.

Living off equity funding may work for a while, but eventually the investors want to get a return on that investment. This requires either: finding more, bigger investors (sort of like a pyramid scheme), or getting the real customers to pay up. And it is the time gap from start-up to pay-up that allows businesses to get a bit lazy about staying laser-focused on pleasing the customer.

2. Disconnect Between Payer and User

Second, a lot of the startup business models have the user pay virtually nothing to use the product. Instead, the money is to come from advertisers or a small subset of “premium” users (the “Freemium” model). By disconnecting the user from the payer, one can get confused about who the customer is and how to please them.

In the advertising model, you have to please the advertisers in order to have a winning business model. They are the ones who pay, so they are your customer. However, many firms have taken the path of Twitter, and spent so much time making the users happy that they failed to figure out how to make the real customers (the advertisers) happy. That is a losing long-term model.

In the end, you typically get what you pay for. If you pay nothing, then you are less attached in your usage. Look at all the free games out there. To survive, the game businesses need to convert many of the free gamers into premium gamers who are willing to pay extra to get tokens or weapons or powers or whatever. It appears that people get bored quickly with these free games and often switch to another free game rather than pay in order to continue in the old game.

It seems the game wasn’t as good as the developers thought. It was played because it was free, not because it was good. Without the discipline of getting the user to pay, it is easy to build something that is not satisfying enough to ultimately produce income.

  

3. Building what the Builders Want

The third reason why we see companies not building what the customers want is because many of these businesses are more interested in building what the builders want to build. This seems especially true in engineering-driven firms. The engineers want to work on interesting challenges, cool features, and be the first to do something that will impress other engineers. Add to that the fact that the millennial generation (who tend to be running these startups) are more interested in attaching social causes to their business aspirations (sustainability, helping the less fortunate, etc.).

As mentioned earlier, many of today’s businesses focus on pleasing the employees over pleasing the customers. As a result, we end up with a lot of interesting challenges solved, a lot of jealous engineers, and some social good—but unsatisfied customers. We need look no further than the Amazon Fire phone. It did some cool stuff, like making a 3D screen without the need for special glasses. Unfortunately, customers weren’t looking for these things, so the phone was a flop.

Just because an offering does some cool stuff does not mean it is doing stuff people are willing to pay enough for to justify the cost of the feature. Truly “cool” stuff is stuff the customer wows over, not what the engineers or geeks wow over.

I read an article recently about how many retailers were spending all of their development money on building cool apps, when what the customer really wanted was just an easier way to sort through the inventory on line and easily make a purchase. Sure, inventory and purchase don’t sound as cool to an employee as building a lot of snazzy apps, but that’s what gets the customer excited…so it should be what we focus on.

Getting Back to The Customer

So although making employees happy is a good thing, the better thing is to make the customer happy. Happy customers pay the bills that keep you in business.

Don’t fall into the trap of forgetting the customer because you have tons of investor cash, a free offering, and happy employees. Eventually, the business needs to create income and the sooner you figure that out, the better. The idea of “we’ll build the cool thing now and figure out how to monetize it later” is what leads to that earlier finding that most startups fail because “there was no market need.”

  

SUMMARY
Successful businesses need a business model where the money coming in ultimately exceeds the money going out. That only happens if you are offering something so pleasing to the customer that they are willing to pay more for it than what it costs to deliver. Therefore, the key to any business strategy is to please customers enough to make this happen. If you forget to focus on pleasing customers and instead focus on pleasing investors, employees or non-paying users, you can end up with a broken business.

FINAL THOUGHTS
There may be some creative satisfaction in being the starving artist, but you’re still starving.

Strategic Planning Analogy #371: Strategy by Spying

THE STORY
Back in December, I visited the Museum of Communism in Prague. It was a very interesting museum. One display talked about all of the spying that was done back around the 1950s. The Communist governments in those days did not trust the loyalty of their people, so they continually spied on their citizens in order to assess their loyalty.

The museum showed examples of some of the spying devices used back in the 1950-60s. There was a special camera mounted onto a rifle frame for taking long-range photos. There were also all kinds of tape recorders. However, the most common form of spying was by just getting people to talk to officials about their neighbors.

This was a very expensive and labor intensive program, and the results were usually not very meaningful. Therefore, the spying on citizens by the Communist governments was eventually scaled way back.

Today, it’s a lot easier to know what’s on people’s minds. All you have to do is go to their Facebook page, listen to their Tweets on Twitter, or visit their blog. People today seem willing to volunteer all sorts of intimate details about their lives and their passions—for free. Burglars know exactly when it is safe to break into people’s homes because it is so easy to track where people are.

With data so easy to obtain, it kind of takes away the fun of being a spy.

THE ANALOGY
The communist governments did not get a very good return on all the investments they made into spying on their citizens. Yet today, many businesses are following a similar tactic. They are, in essence, using internet tools to “spy” on their customers. It may be wise to ask if the returns on those investments are worth it.

In fact, customers are so willing to share a dialogue with businesses that it can hardly even be called spying anymore. This has led to a business strategy approach I call “Do Whatever The Customer Says.” The reasoning behind the approach is as follows:

1) Companies succeed by serving the needs and wants of the customers.

2) Customers know what they want.

3) Technology makes it easy to find out what they want. It’s hardly even spying anymore.

4) So use the technology to find out what the customers want and then give it to them. In other words, the strategy becomes “do whatever the customers tell you.”

Unfortunately, these premises are wrong. As a result, the conclusion is wrong. And just as the communists eventually figured out that managing a county by spying on their countrymen was not very effective, companies will eventually figure out that managing a business by spying on their customers is not very effective, either. Just because it is easier does not make it better.

THE PRINCIPLE
The principle here is that although much benefit can be gained by staying close to the consumer and listening to them, this is not an effective way to create company strategy. There are two basic flaws to the “Do Whatever the Customer Says” approach to strategy.

First, companies do not succeed merely by serving the needs and wants of the customers. Instead, they succeed by having a viable business model. As we will see in a minute, these are not the same thing. Second, customers do not always know what they want, particularly when it comes to new and transformational ideas for which they have no prior exposure.

Therefore, if serving the customer is not necessarily the core of success, and the customer is not always knowledgeable about the best way to serve them anyway, then why put them in charge of determining your strategy?

Let’s dive into this a little bit more, to explain this in more detail.

1) Your Goals and Your Customer’s Goals are not Necessarily the Same
Customers’ goals tend to center around things like solving their problems, increasing their enjoyment, or enriching their sense of self-worth (status issues). By contrast, a company’s goals tend to center around things like making a profit, providing its investors with an adequate return on investment, or providing a great income (or status) for its management, etc. As it turns out, you can focus on meeting those customer goals (and succeed wildly), yet still not achieve the company goals.

For example, look at companies like Facebook and Twitter. Both are wildly successful at meeting an aspect of consumer goals. Large sectors of society love them and use them all the time. However, neither company is providing an adequate return on investment. And unless these companies change their business models, I highly doubt they will ever achieve an adequate return on investment.

At the current time, the Facebook and Twitter business models are broken. They will not lead to the types of returns necessary to pay back their investors at an adequate rate relative to the size of their investments (particularly the latest investments in Facebook brokered by Goldman Sachs). And, for the most part, the users do not care about the fact that Facebook and Twitter have broken business models. In fact, they like many of the reasons why it is broken, because the lack of adequate monetization makes the businesses “free” and more consumer-friendly.

Many of the ideas which have been thought of to “fix” the business models of companies like Facebook and Twitter require monetization schemes which the customer does not want. And the consumers have made it clear that if the business model is tweaked too much against them, they will bolt, en masse, to an alternative which does not impose those negative constrains on them. With all the cash-rich investors out their looking for the next “Facebook” or “Twitter”, a start-up with the old broken business model will be well funded and replace them, leaving Facebook and Twitter in the dust if they monetize improperly.

The point here is that just pleasing the customer is not good enough. Pleasing the customer does not necessarily lead to a long-term successful business. Businesses need a viable business model in order to succeed. And since customers really don’t care all that much about your business model, they are the wrong people to ask to develop that business model for you. Their advice will lead to a business model which maximizes their concerns, not yours. And that will lead to financial ruin.

Yes, a successful business model depends upon having customers willing to patronize it, so you cannot ignore their needs and wants. However, if your business model is solely based on doing whatever the customer says, it most likely will not succeed over the long haul. This is because their goals are not the same as your goals.

In other words, you cannot abdicate business model development to the consumer. You must control it internally. You need to make the tough decisions—the difficult tradeoffs—which balance the needs of the customers against the needs of the company. You cannot always give the customer everything they want, because they will want it all and they will want to pay less for it than it costs you to deliver it. These are tough issues to deal with, and require sophisticated strategic planning (and serious thinking time) to resolve. The answers will not come from a quick question broadcast to your customers.

2) Customers are Poor Sources for Transformational Ideas
The second problem with abdicating strategy to your customers is that fact that they are not the best source for creating something new within the unknowns of the future. Customers, for the most part, are focused on near-term concerns. The problems of today are more than enough to occupy their mind.

If you ask a customer what you should change to be better, most of the answers will be incremental improvements to what already exists. In other words, they can tell you how to tweak the status quo. However, they rarely have the insight to create the next great paradigm shift. Consumers have almost never begged for what became the next big revolutionary thing before it occurred. Consumers didn’t beg in advance for the Apple iPod business model or the iPhone Apps Store. Consumers didn’t beg in advance for the Google search algorithm. Consumers didn’t beg in advance for Facebook. They only reacted after it was presented to them.

Why? Customers are great at telling you what bothers them about things they have experienced. However, they are not that good about discovering things for which they have no prior experience. They have not yet experienced the future, so they are not good at articulating the best way to approach the unknown.

Consumers are too busy trying to live today’s life and cope with the current crisis. Their lives are preoccupied just trying to stay afloat while swimming in the current red seas. They are too busy to imagine for you some yet-to-be discovered blue ocean. If you find it, they may follow, but they will not find it for you.

Their job is not to preoccupy their time pondering revolutionary new ways for you to make money off of them in the future. They do not have the time nor the inclination to do so. That’s YOUR job. YOU need to devote the time and energy into envisioning a better future. You can use the customer as a sounding board to evaluate your visions, but don’t use them as the primary source of your vision.

Envisioning a radical new future takes the time and effort that will only occur if you proactively devote meaningful amounts of internal resources to that effort. It will not come by merely asking a question to your customers.

SUMMARY
While it may be true that it is impossible for a company to succeed if it does not please customers, it is equally true that it is impossible to succeed if all you do is what the customer tells you. First, the company’s needs are not identical to the customers’ needs, so if all you focus on is the customers’ needs, you may not fulfill the company’s needs. Second, customers may be good at providing incremental improvements to the status quo, but they are not well equipped at inventing a radically new paradigm for you. Therefore, Strategic Planning should not be abdicated to the customer. This is your responsibility and you need to be proactive at it, devoting sufficient time and effort to the cause.

FINAL THOUGHTS
The Museum of Communism showed that even with all the power behind the communist system, it could not endure, because it was a flawed model. Similarly, all your power will not save you if you have a flawed business model. Eventually, you will fail like Communism. This task is too important to be left entirely to the consumer.