Billion Pound Learnings

I was recently at an event from a founder of a multi-billion pound business, who gave a very entertaining and thoughtful presentation on his learnings. I would normally quote him, but given it was off the record...

• Be Hungry Like The Wolf - the mighty wolf is a strong & crapricous carnivore, but it is not too proud to eat the lichen off the rocks in winter when it can't find enough food so it can survive another day.  So be proud, but not too proud to change the plan when an opportunity presents itself so you can survive for another day.
• Too much money means too little focus. A number of start-ups need loads of financing and this can sometimes be their own downfall, as the less money you have the less options you have to focus on.  This means that you prioritise behind the things that will really make a difference.
• Rip Up The Business Plan - If you need a detailed business plan to get funding, then once you have the cash, rip up the plan and learn.  Look for capital funders who are happy to have a company learn rather than stick to the plan.
• Beware of doing it properly - basically understand why things have to be done "properly" or why things are done the way they have always been done and if nobody can truly explain the reason why things are done "properly" or the way they've always been done.
• Take a gun to a knife fight - ensure that if you are competing, that you have a clear, differentiated & unfair advantage.  And don't get into a gun fight if you only have a knife!
• Don't get drawn into it rusty - a reference to a Gary Larsen Far Side cartoon and basically means not to get drawn into a fight on somebody else terms.  Always fight on your own terms.
• Focus - get the 5 things done that need to be done, then go home!
• There are no rules for innovation.  Innovation is about breaking the rules. So therefore you can't learn the rules of innovation.
• Take a risk, especially with people. Look for people who are different and develop a true meritocry.
• Create urgency - speaks for itself!
• Allow the space for things to grow. But also once you've given it the time, if it's not growing, stamp on it. Basically use a Disney Creative Technique.

Occasions

On a recent innovation project, we hit the often ignored element of occasion - basically, when were the target consumers going to use our new product and how could we reflect this occasion in our Brand Essence Wheel / Key Brand Benefit.

This is the biggest opportunity area for a marketeer - understanding when the consumer is in need of the product and look to expand that opportunity with an extended occasion.

The client initially viewed the occasion opportunity as lunch and weekends, with some consumption in the morning. This was pretty straightforward and based purely upon the current consumption patterns of the generic category.

That is to say, that unprompted by advertising, consumers enjoy this category at two distinct times-  lunchtime and over the weekend. All well and good.  Now the choice becomes do we want to fight a share war just over these two occasions with generic offerings that can compete better on price because of their lower quality or can we bake a bigger cake and take the largest slice of that cake

Well by looking at the occasion of consumption we can start to see opportunities where with a little prompting, consumers can start to see how a brand can be relevant in these other specific occasions, and what's more, the brand will own that occasion, as opposed to sharing it with every other brand in the more generic occasions.

A good example would be Diet Coke.  Back in the day, Diet Coke's consumption occasion was pretty much limited to lunchtime, especially by female office dwellers.  So how could Diet Coke look to expand its occasion (and therefore its marketshare)?  It could look at other meal times, since consumers had already associated Diet Coke with food for lunch, but it was highly unlikely that Diet Coke would offer an appetising choice at the breakfast table.  It could offer an opportunity for the evening meal, but given the choice of drinks in the home (from tea, coffee, water, cordials, fresh fruit juices, never mind the array of wines & beers available) or when out for dinner (more likely than not to be an alcohol occasion) it probably seemed quite a limiting opportunity area. 

They hit upon the idea of owning "the break".  The time in the day when people need a physical refreshment but also a emotional refreshment.  And the great piece of news was that we all need a break EVERY day and Diet Coke can credible offer refreshment during a break. Thus was born the Diet Coke break moment.

So using Diet Coke as an example with my client, I have been able to lift their sights above just the existing generic consumption occasions and find not only a time that fits with the physical requirements (e.g. thirst) but also emotionally (e.g. refresh).  This means that it reinforces the brand's identity and creates a powerful connection moment for the brand in the eyes of the consumer.

Twenty Minutes A Day

Last night I attended a networking event for "ideas" people hosted by the author of Screw Work Let's Play.

It felt like I had found my community, but I had discovered it in a different way to the people that had arrived there as they had mostly arrived there after reading the book, I had arrived there by my own experience.

I left the event in two minds.  One mind slightly hacked off, for reasons I won't go into here.  But I was also struck by the energy that just doing gives to an idea.

I will now attempt to spend 20 minutes a day on getting a couple more of my ideas up and running over the next month or so and see what difference that makes...

In A "What" vs "How" Fight, What Needs To Win in NPD

Back in school we were always told to show our workings when doing "sums", just in case we got the number wrong by simply overlooking an element of the calculation.  We were rewarded in part by the "How" as much as the "What".

But recently while working with a client on a new product, I realised how easy it is to fall for the "how" over the "what".

I know from my years of working on new products that the functional benefit (the what) is vastly more important than the emotional benefit (the how), as users have to establish the use & credibility of the new product's usage claims before they will buy into it. But the client & I spent too much time getting excited about the how and didn't answer the what sufficiently.

But what do I mean by the what (functional benefit) & how (emotional benefit)?  When developing a brand, the classic tool used is the brand essence wheel, which details the functional benefit on the top half of the wheel, asking questions like what does it do and what does it look like.  The BEW then asks what backs up the functional benefit, what makes the what credible by looking at the facts and symbols.

A classic example is the launch of the Gillette fusion in 2006. The functional benefit is not the five blades as they are the product features (the what it looks like) but that is gives men the most comfortable shave, because of its five blades which don't tug & pull.

The emotional benefit of the BEW (the lower half of the BEW) asks about how it makes you look and how it makes you feel, backed up by the personality of the brand.  The feel of the brand is very important to the longevity & profitability of the brand.  As an example, look what happened to Tango when they moved their "feel" away from edgy urban kids playing street hockey underneath the A40 (How many people actually remember that ad?!?!?) to the "You Know When You'Ve Been Tangoed" with the orange "portly gentleman" slapping the drinker on the chops with a football TV pundit style commentary - sales rocketed!

But the problem is not getting sucked into the trap of trying to create a sexy, glamorous TV commercial with the feel before the what is stuck into people's minds. After spending a fun afternoon developing a song platform for the launch of the brand, I realised that I had too fallen into the trap by focusing too much on the sparkly shinny bit of marketing and not the important "Ronseal" test element of marketing...

So with that, I'm going back to the client and challenge them to describe exactly how their product meets the functional needs of the consumers and how we describe that on the packaging...

Tomato Soup is Tomato Soup

I recently placed an order with Ocado for my groceries and it struck me when looking at the vast array of Tomato soups available and the difference in price for each type of Tomato Soup, that surely Tomato Soup is Tomato Soup? Well I thought so, but now I'm not so sure...

Here's a chart with the different soups and the price per gram. I was amazed at the variation...

Ocado's Tomato Soups

So why is there such a variance for simple Tomato Soup?

Well it's all to do with the Price Value Equation, I mentioned before.

Basically people perceive that each of these soups has different levels of perceived benefits, and each benefit (and subset of benefits) is valued differently. The more benefits the soup has the higher the price, although I guess a  couple of soup manufacturers have probably got their pricing wrong...

Its no surprise that Waitrose Cream of Tomato Soup is the cheapest both per serving but also per gram as it's own label and positioned as no frills, despite it being from a recognisable and (arguably) strong brand. I'm not surprised to see their Tomato & Marscapone higher up the scale as it has a higher perceived value because of its raw ingredients and its packaging.

What I was surpised at is Heinz's pricing strategy... The Organic, Farmer's Market and Touch of Basil which all appear to have more product benefits are actually cheaper than other standard Heinz Cream of Tomato formats, except the multipacks. This is the first and only time I can recall having ever ever seen Organic cheaper than the standard offering... Perhaps Ocado and Heinz have to take a look at their pricing, by either contacting me or reading some books...  Search Amazon.com for pricing strategy

How to be a great account manager

I was recently asked to help a young account manager develop their own account management skills and rather than spend hours inflating my own ego about the capabilities I have and the behaviours I exhibit in being a good account manager, I chose to put my recent coaching expertise to good work.

We started our conversation, helping him understand for himself what was important about being a good account manager and what he thought a good account manager was. To help him, I asked some straightforward questions, to help focus his attention towards his particular area. It was during that part of the conversation that I saw a light bulb go on in his head - what he thought was a good account manager didn't tally with his buyer's idea of a good account manager or indeed what his boss or his managing director actually thought a good account manager would do.

So he committed to ask a colleague who once worked as a buyer for a large retailer in the UK what she thought it would take to be a good account manager. The answer he got from her was pretty simple in it's boldness - understand my business! The buyer had been targeted on profit, waste and sales in his overall category. She was also targeted on other small areas, but she thought they were particular to her and her category.

Now he had realised that he had been potentially annoying his buyer as he was always talking about his brands' performance and not on the category and not looking at wastage or profit for her. This was a pivotal moment for him as it brought into focus what he was potentially doing wrong and how he could change it to be compelling for his buyer. Despite being on courses before about account management, it was only now that he could see for himself what success looked like, rather than all those PowerPoint slides that told him what a great salesperson should focus on.

He than started to take the same approach for his boss and his Managing Director and came to the conclusion that their goals were not aligned, as the boss wanted to achieve his sales targets (volume only) with the least amount of effort and that the MD wanted to increase profit in the short term. He felt he was a bit of a piggy in the middle between the goals of the buyer, the boss and the MD's. He felt that he had to play them off against each other...

I reassured him that this was in essence "the game" that everybody played as all parties are fighting over the contents of the table and want their biggest cut of the contents. I asked him how he could win at this game and he started to think about what behaviours it would take to be a winner in this game.

After another session he developed his own list of behaviours he felt would meet the criteria of all parties (including himself) in being a good sales manager. We then went through each of them and the sub-components, scoring himself against his standard as we went. We then discussed how he could improve his score to become a better account manager. Was it better to focus on improving every criteria or to focus on key ones? If key ones, was it better to focus on improving the score from a 8 to a 9 of from a 4 to a 6? The answer to that question is his alone and differs with every criteria, as quite simply his success will only be down to what he has the appetite to improve.

We left with the next session being about constructing a good proposal to a buyer and also to prepare for the moves in the game, between the buyer, the boss, the MD and himself and I think that session will be equally interesting, if not more so, given the frameworks around proposals and negotiating we both have...

These sessions highlighted to me a few things...

Firstly, the power of self-discovery - when that moment of awareness by one's self clears up all confusing thoughts and allows one to focus on what needs to be done. Numerous courses or people telling you what to do won't help you gain insight or confidence about what needs to be done, only by understanding yourself will that discovery be gained. That sounds a bit zen like, but it is so true.

The second thing I noticed is that his confidence in himself increased dramatically. His behaviour started to change from being a person seeking permission for his every action, to taking the actions on for himself. In short he had gained a great deal more confidence to be self-autonomous and responsible for his own actions.

The third thing, I noticed was how much I enjoyed the sessions. It wasn't about me - funnily enough I could have told her all of what he discovered himself, and to tell him that would just be me boosting my ego (just as I'm doing now!). It was all about him. I felt honoured (and humbled) to be able to witness somebody be willing AND able to take their own development seriously and develop further than in any way I possibly could alone...

The Price Is Not Only Right, But Omnipresent & Omnipotent

Price. Getting it right terrifies most people and yet it is critical to business success, not just because it drives the income but also because it perpetuates a perception about your business.

Price is omnipresent and omnipotent. Everybody and everything has it's price. Sometimes price is monetary, sometimes it is non-monetary, but it always corresponds to value.

That last statement might seem arbitary, but it is precise as there is a relationship between price, value & benefits, known as Price Benefit Equation.

The equation is breath takingly simple in it's lay out, but sufficiently sophisticated to help explain and exploit your pricing.

V = B / P

V is for Value, and reperesents the relationship between benefits and price. This is an arbitary approach, one that goes on most in individual's sub-concious but is sometimes expressed, usually as "It's not worth it" or "That's a bargain".  Basically buyers will only see value when the equation states that perceived benefits outwiegh price.
B is for Perceived Benefits, in other words the elements of the product or service that best meet the thoughts of what thebuyer thinks he or she needs. The perception distinction is important as the benefits are solely related to the individual buyer and not homogoneous.  The more unique and the more beneficial the item or service is, the higher price that can be charged keeping the
P is Price, that is to say the amount you are willing to exchange in return.  This may be in the form of money, but Price can take on many other forms such as time, energy, academic grades, skills and other items or services you may be willing to barter for.



The funny thing is that each element in this equation is always open to change, every minute of the day, depending upon the perception the buyer has of the benefits and the price, relative to what is going on in the buyers life and what the competition are doing.  For example a tired parent may be more willing to see value in an expensive baby soothing product at 3am when the child is crying through the night, than it would be with a whimpering child at 4pm.

Also it depends upon the competition, and how they position their product / service benefits.  Any change by them can affect your market share, should their value equation change.

One rule of thumb to consider in all of this is that if and when you are able to demonstrate a change in perceived benefits, then you should also change the price, otherwise one of two things might happen.

The first is that over time, buyers think that any added benefit is "free" and therefore don't appreciate the added benefit as having extra value.  This may be a killer issue for you, if the added benefit is more costly to you than the previous product and without any increase in value, then you will be making less per unit.

This can be compounded by the second thing that might happen. If you don't change the price with an added benefit product / service, then you should see an increase in your market share as buyers start to see a "bargain" and jump ship from your competitor products.  So you could end up selling more volume of a product / service that makes less money. However, it depends on the elasticity of your product / service within the category (I'll bore you with that another time!).

So pricing isn't that difficult at the end of the day... just remember the more benefits you can realistically claim,  the higher the price you can charge...

The Implications On A Leaky Bucket Model

I recently started a project for a small and brilliant business which sells convenience to time pressed parents for their kids.

They have the classic "leaky bucket" business model because as the kids grow up, the product becomes less & less relevant to the parents – the parents' need it less. They basically have a window of 4 years to build awareness, drive consideration and develop an increasing loyalty with their customers AND turn a profit all at the same time.

So how can they build sales? Well let's continue the thinking of the leaky bucket by remembering the children's nursery rhythm - There's A Hole In My Bucket.

Then fix it dear Henry, dear Henry, dear Henry... - can we develop a broad range of strategic options to fix the leaky bucket that doesn't require straw, a sharp axe, sharpening stone or another bucket...

Option 1.
Fill the bucket right over the brim, so that they can maximise what is left in bucket. In the real world, this would mean driving more parents to consider and then buy this product. Simple to say, difficult and potential expensive to do... It relies upon a strong understanding of the target audiences needs (insight) and being able to communicate a strong & compelling message that meets those needs that only they can meet. One option to do this is to think about increasing advertising impact and reach - both of which require a bit of a gamble on how effective its going to be. Another way to consider increasing awareness & penetration is to look at similar products that target the same parents and piggyback with them, either indirectly (e.g. through usage association such as tonic with gin) or through direct link saves (such as placing tonic & gin in the same part of the store). Agencies such as dunnhumby can offer an understanding of what shoppers put in their baskets and utilise their coupon system to drive linked purchases. However, linksaves are not as effective in driving awareness as advertising or PR. Promotions can be another key way to increase penetration in store, but come at a high cost and are rarely effective in increasing long term loyalty.

Option 2.
Capture the waste water coming from the leak - in other words, capture the parents that fall out the bottom of the bucket by extending the proposition to include a new offering that meet the needs of children from 5 plus, especially given the investment in those 4 years to recruit the consumers in the first place. Again easy to say and tough to do. Innovation is a particularly challenging thing to do, with academic studies siting numerous different success rates, but basically it's no more than a 10% chance of success. However, brand extensions are more likely to succeed (marginally though...) as long as the new extended brand has a relationship with the original brand AND meets the need of the consumer in a unique way – a great example is how Proctor & Gamble took the Fairy brand from simple washing up liquid into washing powder.

Given what I know about this client and in particular their brand offering, I think this is unlikely as the brand is tied to a specific age and occasion.

Option 3.
Accept that it is a leaky bucket and make more money out of the leaky bucket than is currently being made. All of the following sub options are designed to drive more value from the existing core target consumers.

Option 3.a.
Increase the weight of purchase. From interrogating their data, my client knows that 35% of their shoppers make up 60% of their volume (a simple Pareto analysis or 80:20 rule) and they know that these shoppers buy 5 or more packs every time they visit a store. Brilliant news!

But how can they improve on that? Well, many other categories have increased their weight of spend by introducing multipacks, such as soft drinks, beer, toilet paper, washing powder etc. Basically these brands offer the convenience of buying multiple products in one easy shop and sometimes offer a discount for buying in "bulk". The best example of this is in beer, where 20 years ago, beer was bought in 4 pack cans. Now the variety of packaging formats (cans or bottles) along with the size of each type of format combined with the number of units per pack means that for some brands they have in excess of 200 SKU's just for one brand! The basic premise for each of these SKU's is to increase the weight of purchase and increase the value overall.

My client is lucky as they can not only play around with the number of units in a pack, the weight of each unit, but also have a number of different varieties to develop an infinite number of possibilities for multipacks.

Option 3.b
Increase the relevancy of the product. Again from their data, they know the number of times a shopper puts their product in one of their baskets. It's less than once a month. So how can they increase the frequency that a shopper puts their product in their basket? By understanding how the core shoppers (the 35% of shoppers that buy 60% of the volume) use their products they can look at other occasions that might be suitable. Pimm’s has tried for years to make it a drink outside of the sunny British summer (is there a sunny British summer????) and have had some marginal success in developing new products aimed at widening the frequency. With my client, until they undergo the analysis, it’s difficult to see a straightforward answer.

Option 3.c
Increase distribution. Using the nursery rhythm analogy again, this might be seen as increasing the number of times you can refill the bucket. Distribution has a marked and funny effect as not all stores are created equal. In the UK, each retailer classifies their stores into different groups and each group targets different types of shoppers or the same shopper for different occasions – e.g. not all Tesco's are in fact big supermarkets. Generally speaking, the more bigger stores that you can gain distribution in the higher the Rate of Sales (ROS) will be overall. Great news. This is down simply to being sold in more stores - availability drives demand - being available in more stores means that demand will grow. The same is true in my home with Tunnock's Caramel Wafers... if they are in the house, I'll eat them. If they're not in the house, I won't.

But something else also kicks in. The more stores that a shopper sees a product in, the more credibility the product is given by the shopper and therefore the more likely they are to buy it.

Studies have shown that if you can't achieve a set level of distribution within a set level of time (in beer it was under 66% Weighted Distribution within 12 weeks), then you are guaranteed failure (unfortunately, you can't guarantee success!).

Option 3.d
Increase the average price and there are two main ways to drive up price - directly and indirectly...

Option 3.d.1

Direct price increase - just simply increase the price to the customer. I've yet to meet a customer that likes price increases. In fact, a friend that works for one of the leading grocers in the UK, says that he is targetted on reducing the number of price increases he accepts every year and also on his profitability. So unless you can show the customer that this makes sense to their profitability either through re-investing that money into category volume driving initiatives (such as advertising - see Option 1) that offset the margin loss per unit, or that shoppers are willing to pay more for the product (only when the value equation is increasing can you show this) or that without your product his category will wither can you be confident of implementing a price increase. Achieving a successful price increase takes a great deal of planning (one source at a global soft drinks company says they spend 12 months planning in detail the price increase for the following year) and also requires a great deal of team work to ensure alignment in their messages to customers once hard nosed negotiations start and both parties get locked into their positions.

Option 3.d.2

Indirect price increase - this is really the black arts of promotional effectiveness. This client, like many others operating in the fast moving consumer goods market (FMCG), promote their products with retailers. Walk down any supermarket aisle and tens of products will be on promotion, with shelf cards highlighting the offer. Sometimes these offers drive a huge spike in volume, generally if they are on the ends or on pallet displays. The problem is, that for the brand owners (i.e. my client) they might be doing promotions only to please the buyer or to please the market by winning more market share at the expense of value or profit.

As hinted at in Option 1, the main role of in-store money off promotions is to drive penetration. That is to say, get more people to sample the product and then, ideally, have more shoppers once the promotion ends and the normal price returns. In the vast number of occasions that I have seen, this rarely is the case – I buy all my toiletries this way, simply by buying what’s on deal and stocking up, as the category demand doesn’t increase with availability.

The beer promotions in the 1990’s really highlighted how promotions could drive penetration and weight of purchase because the promotion helped drive overall category consumption - people were buying vast multitudes of beer at a cheap price, to then put in their fridge, which they duly consumed as they went into their fridge everyday, whereas before they wouldn't have any or only a little beer in the fridge, so their overall consumption of beer increased (the availability drive demand scenario). It seems that most people are indeed like me, as one beer is never enough...

Generally, promotions are overused and can become like a drug for brand owners. Brand owners see their volumes get high, and can't face the come down of their brands coming off promotion. And buyers play to that fear, as it's in their interests to have more promotions in their store as they don't really care what brand they sell as long as their category increases, and by having more promotions in store means that shoppers are more likely to come into that store and do their weekly shop there.

By understanding the shopper's behaviour, brand owners can become confident in weaning themselves off the promotional drug. For example, my client knew that only 1 in 20 baskets of their core shopper ever had a competitor product in it, that is to say they had a high degree of loyalty and combined with the other data, showed them that the risk of core shoppers switching out was relatively low. Furthermore, they found out that the promotions were not driving any more people into their products so were fundamentally only about the perceived need to steal share - but they weren't really effective in doing that, just that they were offering a reduced price to shoppers who would have bought it anyway at a higher price. Suddenly they didn't feel like it was rocket science...

Option 3.e
Cost saving. By offering a cheaper product at the same price, they could make more money. But the risk is that by reducing the cost through reduction in quality means that shoppers no longer value the product in the same way. So the trick with cost savings is to reduce the cost of things that add no or little benefit, ideally in things that customers can't see. So the first thing to be clear upon is what is the shoppers' needs and how the current product benefits those needs. Only then can you look to see how you can engineer your products to reduce costs. After several years of reducing costs, my advice is go slow...

So what to do?
All of these are viable and some are mutually dependent but their individual success is largely dependent upon gaining success with their customers. Will the corporate buyers of large retailers understand what they are trying to do and support their plans, especially the potential of a price increases, betting on the basis that they can increase the total value by increasing the volume at a greater degree than the offsetting loss of margin per unit? Persuading those buyers takes understanding, creativity, alignment and passion...

Starting Up In A Recession

I was recently asked by an old colleague who is thinking of starting her own business whether she should start a business in a downturn or not...

At first I thought about giving the "standard" response about historical examples of businesses that started in recessions such as Microsoft, but then I thought better of rolling out that cliche.

Starting a business always carries a degree of risk and depending upon the type of business being started, the general macro economic factors can have a massive impact, just ask Woolworth creditors and shareholders...

But I have a slightly more pragmatic viewpoint... Unless you have funny shaped crystal balls, you'll never know if it's going to be a recession or a boom time, and frankly don't try to guess it either.

What is far more important than timing is whether or not customers actually need only your product or service, in boom AND bust times.If the answer to that is yes, then go ahead and start in a recession as you will probably succeed.

So spend the time understanding what customers need and whether or not you can meet their needs better than anybody else rather than spendign time worrying about recessions or boom times.

There's only 3 things you can sell to a business

I have been working on a number of b2b projects recently and what I have discovered is that everything they do with their clients boils down to either one of three things or a combination of three things.

Before I disclose the three things, some wider thoughts...

Businesses like people have needs. And they only buy products or services that meet those needs. But unlike people, businesses are massively motivated by the power of money, either spending it or creating it - that is their raisin d'être. To enable them to make money, they have a number of drivers, which in turn each have a number of supporting elements.

But no matter what sector, nor the size of the business, the need for buying a product or service comes down to one or a combination of these three things which fits with their core supporting elements

1. Sell more
2. Save more
3. Solve more

So quiz yourself the net time pitching to a company to ensure you are able to demonstrate to one or a combination of the three things....

Will this sell more of their products? Will it make them more money? Will they increase their frequency of purchase or their spend per purchase?

Will it save them money? Even if they have to spend more money to get this product or service will it make them more efficient over the long term on the basis of an Internal Rate of Return?

Does it solve a problem better than they can solve it themselves? Does this problem stop them or slow their business down?

And if you don't have an emphatic "Yes" to any of those questions, don't waste their time...

Returning to the scene of the crime

Today I returned to my old employer's office on a social visit.

The visit brought out mixed emotions in me. It was nice to see everybody but it was also a bit depressing to see everybody there, still going about their normal routine.

I went there to help an old colleague who is leaving to set-up on her own and also gain her help on a couple of my own ideas.

We spent some time chatting about what it feels like leaving, our different reasons for leaving and then discussed her ideas and plans.

Bizarrely enough, her main idea is in an area similar to one of my own, but with a different perspective. Her idea is aimed at an earlier stage to mine, and there could be quite a lot of synergies, especially around the marketing and networks we develop.

One of the things we chatted about was about how she should get after her idea once she left... passionately working on her own vs tailoring her proposition to the needs of the customers... Should she focus solely focus on her passion, bunker down for a couple of months, developing her own solution bouyed by her passion and then take it out into the big bad world? Or should she go out and see what people want and then develop something from that, which she might not feel that passionate about?

I suggested doing both.

Developing the outline of her proposition and then getting feedback from her potential customers and then in turn taking that feedback, developing it more and seeking more feedback so that by the end of it you have something which is relevant to the customer but also something she could be passionate about it.

I think & feel that she's got a great idea and will be able to offer something amazing for her customers and I look forward to seeing how it develops...

Incentives

I've been pondering incentives & penalties recently, and how they can influence people's behaviours, probably because of books I've been reading on Economics / Game theory and also events over the summer with my business buddy.

As I've said earlier, I am an equal partner in a business with my business buddy, and over the last 6-9 months, not much has happened. To some degree we haven't moved forward that much. That isn't strictly true, as we did have a major rethink in May about our product range & strategy, but essentially we're still where we were in January in that we have a web site set up, ready for trading.

Over the summer, I could have easily intervened in the inertia and made something happen, as is very much in my personality. However, I chose not to. I did what I perceived what I thought was a fair amount of work and no more. But why stop at that?

I felt that any work I did beyond my "fair share" would not reward me beyond my 50% of the share capital. I felt that my partner would be "unfairly" rewarded for my extra work, as he was focussed on something else, of far more importance and he had admitted he hadn't given the fair level of input to the project.

But perhaps that is not logical. Currently I am earning zero dividends from that share capital because there are zero sales because the outstanding work has to be completed. If I had made the interventions, then I would have at least a chance of earning something. So therefore I could justify my intervention.

However, I think, on balance I did the right thing. Simply put, it is impossible to have an exact "fair share" of the workload between two parties, and I accept that. Also, it would have set a precedent which I would not be happy or willing to live up to in the future - my business buddy can clearly see the impact that he has in the business and also that I have in the business.

So what's my solution on how to solve this problem in the future? It comes down to having a fair and transparent guideline for the share capital. The premise of 50:50 share capital is intact, but it slides depending upon how much time and how many of the actions are put into the business.

This is how it could work in practice...

All parties agree a nominal value for the business... perhaps its £1,000, with the share of the value of the business being determined by who does what, on the basis of time. Basically the longer it takes to do, the more shares you get. It could be engineered to ensure a 50:50 split, if the time taken was equally split.

We need to make sure that there is no "inflation" in the complexity of the tasks being set. For example, it might only take me 30 minutes to upload 10 products onto a web page, but if I was being devious I might claim that it will take me 2 hours. That would be "cheating" so I could quadruple my share capital. But there's also the view that I can do things quicker than the other party and vice versa. So how do we get round the problem of inflation and efficiency?

My way round this is for the tasks not to have any owners at first, and each party individually estimates the amount of time it would take to complete the task. The parties then combine their times for each task and take the lowest time for that task as the "currency" for that task (remember the more time spent on the work = greater share capital).

The parties then bid for ownership of that task, with every bid reducing the estimate of time for that task (i.e. reducing the share capital value of that task), therefore driving down the cost until it becomes optimally efficient (why would I bid for something that would take longer than I thought it would!). If nobody "bids" for ownership of that task then the party who estimated the shortest time for that task ends up owning that task. This reduces the risk that parties will under call the time it to do a task that they don't know how to do but spoil if for the expert in that field.

As an example, say the action is to develop a web page. Now I might not know anything about web page development (which isn't far from the truth!). But my partner does know about web page development. Now if I was being devious I could undervalue this task by estimating a significantly lower value, so that my partner ends up with lower capital. But by making the lowest estimate the winner, it means I would be shooting myself in the foot because I would then have to learn web development thus spending valuable time that I could spend on other tasks where I could be more efficient with my time and therefore earn more capital.

So by now, we know how long all the actions should take and the corresponding level of capital each action offers, and we should also have bided on each action ensuring a "fair" split of capital. Now, we introduce an incentive to finish the task on time by having a deadline. If the deadline on that action is missed, then both parties have an equal chance to complete the action and increase their share capital.

One last thing to introduce would be a floor level of shares for an individual to ensure that if an unforeseen event comes up meaning that one of the parties can't complete their tasks, then they are not wholly penalised and end up with zero.

This only really works if there is trust & respect for each party. If you don't have that level of trust you shouldn't get into business with each other! If you don't respect the other party then you probably don't need them, so why get involved with them in the first place???

Bearing in mind trust & respect, interestingly in Tim Harford's book "The Logic of Life", he quotes the authors of Freakonomics arguing over the split of any future revenues before they started to write it. They both dug their heels on demanding a 60:40 split of the revenues, but each party had wrongly assumed that the other one had wanted the 60, when actually they thought their own contribution was worth 40. It was only after they both realised their mistakes that the agreed to do the book. That's an interesting view in how to run a partnership - only enter into ones where you are valued more than you value yourself!

Another interesting dilemma on incentives is with a friend who recently offered me a "cut" of any business I bring him. Nothing wrong in that, but it doesn't feel right with me nor does it actually incentivise me to send him work. I think it's something to do with the fact that the cut is not worth my reputation in sending him the work and also something about "karma". I feel it would be bad karma only to pass on work for the basis of a cut and not on the quality of the work itself. Perhaps that's the actual point... I really don't know how good he actually is and until that I won't recommend him, no matter how much of a cut he gives me!