After the Civil War, corporations grew to unprecedented size. The public was suspicious of this concentration of economic power, and politicians responded in 1890 by passing the first antitrust law, the Sherman Antitrust Act. Over the years, antitrust policy has evolved through further legislative acts and amendments, regulatory guidelines and judicial interpretation, which have implications for pricing strategies. Join Ed and Ron as they discuss some of these laws, as well as the economics of price signaling to competitors, which is not a violation of antitrust laws.
This show was dedicated to the possibility that innovation goesbeyond just technological developments. Technology is important, but it is only a small part of innovation.
For innovation to be more fully complete we must look at other areas including the internal processes of the organization and most importantly the very language we use.
Innovating like this is hard work and not for everyone because it requires deeper thinking than usual. If you believe you can attain this level of thinking, you are invited to listen to this show.
Other Resources and Books Mentioned
The Grid: The Decision-Making Tool for Every Business (Including Yours), by Matt Watkinson, 2017.
“The Grid provides you with a simple way to look at the complex system which is your business. With the possible exception of Warren Buffett, everyone needs to read this book.” - Rory Sutherland, Vice-chairman, Oglivy Group
“Matt Watkinson distills strategic know-how into nine ingenious perspectives and, with the use of clever examples, shows us how to apply this technique of thinking to any business problem or market opportunity. An extraordinarily powerful book.” - Dr.Jules Goddard, author Uncommon Sense, Common Nonsense
Innovation and Entrepreneurship, Peter F. Drucker, 1985
Only the Paranoid Survive, Andy Grove, 1999
Our show with Professor Deirdre McCloskey on the Bourgeois trilogy.
Our show on Innovating Your Business Model.
Rory Sutherland’s Zeitgeist talk
Is Hourly Billing Ethical?
Ethics—originating from the Greek word ethos, meaning habit—is a branch of philosophy that explores and analyzes moral problems, concerned with questions such as: What kind of moral principles and values should guide our actions? What do we mean by right and wrong?
Immanuel Kant proposed broad principles to provide a framework for making moral decisions, described as categorical imperatives:
- Act only on that maxim by which you can at the same time will that it should become a universal law (e.g., no stealing).
- Act so that you treat humanity whether, in your own person or in that of another, always as an end and never as a means only (people are to be respected because they have dignity. Moral agency is what gives humans dignity).
- Kingdom of Ends formulation: You should act as if you were a member of an ideal kingdom of ends in which you were both subject and sovereign at the same time.
If you apply this test to hourly billing, you find it fails miserably on all the questions, especially the first and third.
Would you want hourly billing to become universal? Would you want all businesses to utilize it?
If the Golden Rule is true—treat others as you yourself would want to be treated—how can one defend the morality of hourly billing? Would you accept that method of pricing from a hotel, an airline, or a grocery store?
Aristotle wrote, “It’s not easy to be a good citizen in a bad society.”
Hourly billing creates a bad culture, focused almost exclusively on the convenience of the seller, not the customer.
It is not how you purchase anything else in your life. You would not tolerate it for one minute if any other business tried to price this way. Hence, it is unethical. We think Kant would agree.
Is Hourly Billing Unprofessional?
“A professional is someone who is responsible for achieving a result rather than performing a task.” - Michael Hammer
The billable hour (and timesheets) are unprofessional as they keep the professional focused on the tasks, not the result.
Day laborers are paid for performing tasks. Professionals should create results. Yet the empirical evidence from nearly a century of the billable hour regime proves it has deleterious consequences on professionalism.
William Ross states the following in his book, The Honest Hour:
Most dishonest billing is the perfect crime. Because there is no practical manner of verifying the accuracy of most time records, every attorney who has billed time knows that hourly billing creates tempting opportunities for fraud.
Ross ends his book The Honest Hour by saying, “Despite its potential for abuse, time remains the best means of billing clients. Hourly billing therefore ought to be reformed rather than abandoned.”
Misalignment in interest
The American Bar Association and courts have opted for imposing standards on hourly billing.
Here’s a partial list of where its brainpower is being applied:
- Double billing—billing two customers for different work performed at the same time. A lawyer who flies for six hours for one client while working for five hours on behalf of another, has not earned eleven billable hours. A lawyer who is able to reuse old work product has not re-earned the hours previously billed and compensated when the work product was first generated.
- Recycled work—billing customers by the hour for work that was created at another time for another customer. The ABA Opinion suggests that the lawyer is reaping a windfall from “the luck of being asked the identical question twice,” just as the attorney who is able to bill two clients for work performed at the same time is receiving an unfair advantage.
- Overstaffing of lawyers—assigning too many lawyers to a case or project to fulfill billable hour quotas.
- Excessive research.
- Attorneys performing clerical and administrative tasks and billing at their hourly rates. Surgeons piercing ears. Michelangelo should not charge Sistine Chapel rates for painting a farmer’s barn.
- Charging for travel time. Slippery slope: Shower time?
- Attorney conferences—chitchat on the customer’s dime or valuable timesaving devices?
- Charging for small units of time—rounding up to the quarter hour or charging for every minute?
- Overhead expenses—charging (and possibly marking up) general overhead expenses such as copies, faxes, phone calls, secretary time, and overtime.
There is some sanity. The New York State Bar Association had this to say with respect to alternative pricing methods, "Indeed, subject to the economic realities of the situation an attorney’s professional obligations, virtually any billing method that attorney and client can both agree upon and abide by will result, almost by definition, in a fair fee.
Listener Twitter Comments
In situations where scope of work is impossible to define, uncertainty gets overpriced under fixed fee arrangement. Far from optimal.— Max Fonarev, CFA (@SorbusValuation) October 6, 2017
Chris Marston’s Concentric Circles
Listen to Chris explain his circles, from the Art of Value Podcast.
See Ron’s blog post on using Chris’s circles.
Other Resources Mentioned
Moores, a law firm in Melbourne, Australia offers Moore’s Guarantee
We can’t guarantee outcomes but like price, the quality of our service is another thing we can guarantee up front. If you think the quality of our service didn’t match what was agreed, let us know and tell us how you think that should be reflected in the price you pay.
Economist Bart Wilson explaining the concept of fairness
Donald Rumsfeld on Unknown Unknowns
Anti-Price Gouging Laws Make as Much Sense as Anti-High Temperature Laws, Mark J. Perry, American Enterprise Institute
Kevin Williamson, National Review’s economics reporter called price gouging “a public service.”
Robert Wood, TSOE’s Scifi Contributor asked Ron if he’d sell his generator to a rich person offering $10,000—to run his air conditioner—or to a family who needs it to keep a member alive on oxygen?
Free market prices don’t mean that allocations are made to the most worthy cause, otherwise the Kardashians would not be rich.
Self-driving cars update
In an article from Washington Post by Elizabeth Dwoskin, Silicon Valley startup Atrium is looking to replace lawyers with computers. It has raised $10.5 million in capitalization, and it’s not going to bill by the hour!
Decentralized Predication Market
Check out www.augur.net, a decentralized (read can't be shut down) prediction market based on the Etherium blockchain.
In the 1919 document, Mussolini called for: universal suffrage; proportional representation; formal councils for experts; a minimum wage; reorganization of railway and transport sectors; reduction in retirement age from 65 to 55; a strong progressive tax on capital; outright seizure of 85% of profits on companies manufacturing military goods. Not exactly what you think of when you hear people say someone is a "fascist."
Ford and GM are at the bottom of the price-earnings ratio in the S&P index; the walking dead.
Terrifying signal: $18 billion combined profit last year, but a combined market value of $98 billion. Profits will half or worse in coming years.
Uber, Tesla, and Waymo are all worth more, yet all lose money and bring in little revenue.
Detroit execs sniff that Silicon Valley no idea how to make millions of vehicles safely. Tesla’s production is 1% of GM’s.
Both Ford and GM are making investments in the future, GM owns 9% of Lyft and Ford has invested $1 in Argo, AI for autonomous vehicles.
Investors don’t seem to care.
We may be at Peak Auto.
New strategy: ring-fence autonomous divisions, New Ford, New GM, for example, but the income statements won’t be pretty, nor have none of Tesla’s pixie dust (or subsidies). This is a typical incumbent’s dilemma.
Listener Jim Borchers, a lawyer in St. Charles, MO sent us this.
From a Texas Bar ethics committee opinion: The word “officer’ indicates the person has the power to control either the entire law firm or significant areas of the firm’s operations.
Nonlawyers cannot direct or control the professional judgment of a lawyer.
Also, you can’t pay bonuses based on revenue or profit targets. Ethical guides ban sharing legal fees with a nonlawyer.
Firms can take revenue and profits into account for bonuses.
“American Men, Quit Your Whining,” John Tamny, Foundation for Economic Education, May 23, 2017
The last people to rate our compassion is men without work.
The rest of the non-English world working feverishly to learn English. American males already know the language.
Is the USA the land without opportunity? “Men without work”?
The per capita income of Shanghai, China’s richest city, $7,000. Aliquippa, PA, over $20,000.
Feminism has neutered men. Right, Tom Brady, Jeff Bezos, Derek Jeter curl up in the fetal position each night. By this logic, men wouldn’t be thriving in professions of all kinds.
This is a certain sign that the USA is so rich it must find problems to invent as opposed to solving real ones.
The book Hillbilly Elegy, J.D. Vance makes the same point about social capital, and argues we need to stop the blame game.
“Human capital: The People’s Champion,” The Economist, August 5, 2017, Six big ideas
Gary Becker and human capital, RIP 2014. 1992 Nobel winner, pushing economics into new spheres of human behavior.
In 2004, a panel of German linguists deemed “human capital” the “most offensive word of the year.”
Why do families in rich countries have fewer children? Because they invest more in each one’s human capital.
Why do companies in poor countries provide meals to workers? To keep them rested, well-fed, makes them more productive.
Why each new generation spent more time in school than one before? Because a longer life expectancy raised profitability and ROI of education.
Why have earnings of highly skilled workers risen even as their numbers have also increased? The increasing returns from human capital.
Human Capital is defined as: the abilities and qualities of people that make them productive.
Economist Arthur Pigou coined the term.
America’s GI Bill, post WW II, is usually believed to be the dawning of the knowledge economy.
Becker did distinguished between specific and general human capital.
¼ rise in per-person incomes from 1929-1982 is due to increases in schooling. Much of the rest is harder to measure.
Two interpretations: government should invest more in education; or 2) returns so big to individuals, they should pay for it themselves.
Becker distinguished between bad inequality and good inequality. Doctors, scientists, programmers, etc., motivated to tackle tougher subjects, thus pushing knowledge forward.
According to The World Bank, human capital is 80% of the developed world consists of human capital.
Ron and Ed interviewed the dynamic Magatte Wade. Magatte is the founder and CEO of Tiossan, a high-end skin care products line based on indigenous Senegalese recipes and ingredients. Tiossan products are distributed via www.tiossan.com, as well as through selected boutiques and Nordstrom. Tiossan commits at least ten percent of profits to the creation of entrepreneurial schools in Senegal designed to develop the next generation of Senegalese genius. Previously, Magatte founded Adina World Beverages, with African-inspired drinks sold throughout the United States at retailers including Whole Foods and Wegmans. Prior to her departure from Adina, she assembled an executive team featuring a co-Founder of Odwalla, CEO of SoBe, and ex-co-Chairman of PepsiCo. Her latest company is www.SkinIsSkin.com, the purpose of which she explains during the show.
She came to Ron and Ed's attention due to her role in the documentary film, Poverty Inc. We interviewed Father Robert Sirico about the movie on Show #134, March 17, 2017.
Questions We Asked Magatte
Your background, how did you become an entrepreneur?
You upset the president of Senegal in your FEE talk, would you tell that story?
Near the beginning of the movie Poverty, Inc., you took on the 1984 Band-Aid song, “Do They Know it’s Christmas,” performed in response to the famine in Ethiopia. You say:
It perpetuates false image of Africa as barren, and a sentimental image of Africans as helpless and dependent. Africa has no rain, no river, and they don’t know it’s Christmas. One critic said "It was the most self-righteous platform ever in the history of popular music."
You then met Bono at a TED talk. Did you get through to him, because seven years later he admitted commerce and capitalism take more people out of poverty than aid? In the same speech he says, “But, we still need aid! Deny this and you’re brain-dead and heart-dead.”
Do you still believe Bono will leave Poverty industry? He seems to have one foot on each side.
The late Christopher Hitchens said: Mother Theresa was not a friend of the poor, but a friend of poverty. I don’t think he was right about Mother Theresa, but when it comes to the entire poverty industry exposed in the movie—foreign aid, NGOs, social entrepreneurs, celebrities, etc.—it seems to apply nicely. Do you agree?
One my favorite sayings is the German Proverb: If you want equality, visit a cemetery. Do you worry more about inequality or poverty?
The World Bank's list measuring the ease of the ability to do business in each country.
- Tiossan (Tee-oh-sahn), high-end skin care products, sold in selected boutiques and Nordstrom (www.tiossan.com)
Magatte on solutions to poverty
Join Ed and Ron for their insightful interview with Daniel Bennett, Senior Behavioral Strategist with Ogilvy Change in the UK. He works with Rory Sutherland, who we also interviewed on Episode #9. Daniel shares his insights and experience on how behavioral science and economics can be used in business, enhancing both customer loyalty and profitability. Don't miss this fascinating discussion.
Dan is a Practitioner, Speaker and Writer on the application of Behavioural Science to Marketing. The World's first 'Choice Architect' (until proven otherwise) joining Ogilvy Change in 2012 working on over 50 of the worlds major brands across retail, health and nutrition, organisational change, and society. His proudest achievements have been delivering behavioural interventions that deliver millions of pounds of revenue for some of the world's biggest brands such as Unilever, Nestle, Public Health England, Fox, ITV, the Times, British Airways, Unilever, Adobe, the EU Parliament, Comic Relief and many more. And winning a range of awards from the Creative Circle, Cannes Lion to the Nudge awards. He's been lucky enough to speak to audiences in over 15 countries about the unseen opportunities behavioural science brings. Some highlights have been the Super Yacht congresses, National Security summits, Marketing and Social Media conferences, financial conferences, and academic institutions.
Calculating needed sample size
This episode is dedicated to the possibility that the majority of leadership thinking is wrong as it is ultimate based on manipulation - trying to “get someone to do something.” Coming to terms with this idea is difficult and not for everyone because it requires us to examine some of our most deeply held beliefs and either dismiss them or at least think differently about them. If you are interested in hearing a conversation about healing leadership, you are invited to listen to this episode with Ron Baker and Ed Kless.
This material is based on the work of Howard Hansen and Steve Geske, who have appeared previously on The Soul of Enterprise - Episode # 11.
For more visit the Healing Leaders website.
- Healing Leadership: A Survival Guide for the Enlightened Leader, by Steven J. Geske and Howard R. Hansen
- A Failure of Nerve: Leadership in the Age of the Quick Fix, by Edwin H. Friedman
- Leadership BS: Fixing Workplaces and Careers One Truth at a Time, by Jeffrey Pfeffer, Professor of Organizational Behavior at Stanford Graduate School of Business
Ron's Notes on Leadership BS
Most conventional wisdom on leadership offers more hope than reality; wishes rather than data; beliefs instead of science; and is filled with fables, not facts.
He calls it “lay preaching,” like religion it offers a false sense of control.
Leaders fail with unacceptable frequency, and the leadership industry has failed in its 40-year history to improve the human condition.
Most people look for an “inspiring leadership course,” yet how manymedical schools advertise as “inspiring?” Inspiration does not produce change.
Leadership industry obsessively focused on the normative—what leaders should do and how things out to be—whiling ignoring what is true, and what is going on, and why.
Pfeffer debunks the five Leadership Attributes
- Modesty—this is rare among most leaders; most are narcissists
- Authenticity—not true to themselves, rather true to what the situation calls for (in sports, “play through the pain”). Anthony Weiner was authentic! Nelson Mandela, Martin Luther King, Jr. inauthentic? Who cares? True to which self? We are constantly changing.
- Truthfulness—leaders frequently lie and face few consequences
- Trustworthiness—notable mostly by its absence.
- Concern for welfare of others—Officers eat after enlisted men. Yet CEOs earn 330x the pay of average worker, receive severance packages when they screw up, which is certainly not taking care of others first.
It is more helpful to understand why and how people who don’t have the above attributes reached such powerful positions.
His recommendations for improving leadership
- Measure and hold people accountable—what gets inspected gets affected (he admits that measuring the wrong things is worse than measuring nothing; e.g., student evaluations ≠ learning)
- Acknowledge the different interests of leaders and their companies (align career success with organizational success)
- Use more scientific methods and worry about credentials
Did You Pray?
The Book That Started It All
Henry Hazlitt (1894-1993) was one of the greatest economic journalists of the 20th century. He is the author of Economics in One Lesson, among twenty other books; was a chief editorial writer for the New York Times; and wrote weekly for Newsweek. He was a founding board member of the Foundation for Economic Education, where he served in an editorial capacity at The Freeman. We discussed the nine chapters included in the FEE’s free book, "The Essential Henry Hazlit," the last of five books in this Memorable Mentor series.
1. The Lesson (Economics in One Lesson, 1952)
“Economics is haunted by more fallacies than any other study known to man.” As Thomas Sowell says: It’s not the economics that’s complicated, it’s the fallacies. Why is economics bedeviled by these fallacies?
- Not in physics, mathematics, or medicine do you find self interested individuals
- Economists who only look at the immediate effects of a policy
2. The Early History of FEE (The Freeman, March 1984)
Leonard Read was the General Manager of the Los Angeles Chamber of Commerce. In 1947 he organized a conference in Vevey, Switzerland, with 43 libertarian writers, which was the beginning of Mont Perelin Society.
FEE opened March 16, 1946, Irvington, New York. In mid-1954 FEE took over The Freeman publication, one of Ron’s favorite (now available only online).
FEE published Roofs or Ceilings, by Milton Friedman and George Stigler, and Planned Chaos by Ludwig von Mises. Neither publication had a direct effect on legislation but even Adam Smith’s book, The Wealth of Nations, took time to influence policy.
3. Understanding “Austrian” Economics (commissioned by the Silver and Gold Report, 1981)
Three prominent Austrian economists are discussed: Carl Menger (1840-1921), Friedrich von Wieser (1851-1926), and Eugen von Bohm-Bawerk (1851-1914).
Menger (and Stanley Jevons and Leon Walras) came up with marginal utility (Wieser coined the term), between 1871-1874.
Goods have no inherent value; they only have value because they help to satisfy some human want or need.
There are goods of the first order (consumption), the goods of the second order (machinery, labor, etc.) used to produce first order goods.
What a good has cost cannot determine its value. What it will cost determines how much gets made. Whether you mined a diamond or found one on street is irrelevant to its value.
Money is not a measure of value—it’s a measure of transactions at an agreed upon price.
After these three economists passed on, economics went to the mathematics of general equilibrium, which Austrians don’t believe. Balance is for tires and ballerinas, after all. Equilibrium doesn’t exist in capitalism because it is in constant dynamic disequilibrium. Austrians speak of a market process, not market equilibrium.
4. The Problem of Poverty (The Freeman, June 1971)
The history of poverty is the history of mankind. The Encyclopedia Britannica identifies 31 major famines from ancient times to 1960.
Thomas Robert Malthus (1798), author of Essay on the Principles of Population as it affects the Future Improvement of Society, was a pessimist who influenced Ricardo and even Darwin.
Hazlitt writes that this essay led British journalist Thomas Carlyle to coin economics as “The Dismal Science.” But this is not true (Hazlitt is wrong).
Carlyle was a racist who believed in slavery. The economists of his day, all of them from Adam Smith to David Ricardo, were against slavery. Hence, Carlyle’s epithet for economics.
Malthus posited his theories just as the Industrial Revolution was about to falsify them.
The population of England and Wales in 1700 was 5.5 million; in 1750, 6.5 million; in 1801 9 million (1st census); and by 1831 it was 14 million [due mostly to a continuous fall in the death rate, not an increase in birth rates].
Not one Famine since end of 18th century fell in a single country in the industrialized Western world.
5. False Remedies for Poverty (The Freeman, Feb 1971)
Hazlitt identifies the chief evil from the left’s perspective is inequality, not poverty. There are several remedies proposed.
Land reform, guaranteed income, which destroys incentives at both ends of economic scale.
Unions and strikes, overtime rules that obliged employers to hire additional workers (more dues-paying members). Minimum wage laws, but we can’t mandate productivity. As Thomas Sowell points out: The real minimum wage is always zero. Price and Wage Controls. And outright socialism.
6. On Appeasing Envy (The Freeman, March 1972)
“Your levelers wish to level down as far as themselves; but they cannot bear leveling up to themselves.” Samuel Johnson
Justice Holmes: “I have no respect for the passion for equality, which seems to me merely idealizing envy.”
Helmut Schoeck wrote Envy, 1966.
Societies engage in redistribution to prevent a supposed actual revolution. But this is the opposite of the truth. Appeasing envy provokes more of it. We should never try to buy off a revolution.
7. Planning vs. The Free Market (The Freeman, December 1962, originally a lecture at the 1962 Mont Pelerin Society)
The question is not having a plan or no plan? The question is: whose plan?
Planning always involves compulsion.
8. Can We Keep Free Enterprise?
No defense of capitalism will ever be generally accepted. Hazlitt identified give main impulses inherent in human nature to explain why this is true:
- Genuine compassion
- Impatience for a cure
- Envy (graduated income tax)
- Propensity to think only of the intended or immediate results, overlook secondary and long-term results
- Propensity to compare any actual state of affairs, and its inevitable defects, with some hypothetical ideal
“Each of us is as free to practice what he preaches as to preach what we practices.”
Yet, as Charles Murray writes in his book, Coming Apart, the upper class is not preaching what it practices.
9. The Lesson Restated (Economics in One Lesson, 1952)
The Forgotten Man of William Graham Sumner, essay in 1883:
Their law always proposes to determine what C shall do for X or, in the better case, what A, B and C shall do for X…What I want to do is to look up C…I call him the Forgotten man…He is the man who never is thought of.
Amity Shales book The Forgotten Man is an excellent history on The Great Depression.
The forces of self interest exceed forces of altruism. This is because our sphere of altruism is smaller.
We interact with many more people when we purchase goods and services in the market than we do in personal and social institutions. We couldn’t rely on altruism alone for food, automobiles, and the many other items we purchase in the free market.
Changes in tastes and preferences cause harm too, just like technology. If we increase sobriety, we reduce bartenders. If we increase male chastity, we decrease the world’s oldest profession.
Other Resources Mentioned
- “12 Venn Diagrams that Show the Intellectual Inconsistency of the Left,” by Mark J. Perry.
- To manage your Kindle highlights, check out: www.clippings.io
- Rules for Living, by Henry Hazlitt, making the utilitarian case for ethics.
“The Myth of Technological Unemployment,” Deirdre N. McCloskey, July 11, 2017, Reason
Lot’s of economists think we’ll lose jobs due to technology:
- Robert Gordon, The Rise and Fall of American Growth
- Tyler Cowan, Average Is Over
- John Maynard Keynes and David Ricardo believed it, too
They were all wrong.
Walter Reuther, long-ago president of the United Auto Workers, touring a factory with newly installed robots with Ford:
- How are you going to get them to pay union dues, Walter?
- How are you going to get them to buy your cars, Henry?
This is a fallacious argument according to McCloskey because employees of car companies are a trivial share of the car buying public.
The point of an economy is production for consumption, not protection of jobs.
McCloskey writes, “If the nightmare of technological unemployment were true, it would already have happened.”
Each month in the USA, out of 160 million jobs, roughly 1.7 million vanish! That’s over 1%, each month.
In just a few years, at such rate, one-third of the labor force would be standing on street corners. We need flexibility in labor force mobility, not government programs, according to McCloskey.
“Hot Stuff,” The Economist, August 12, 2017
Flying at Mach 5 burns hot—3,000° C, which could take you from Britain to Australia in about two hours. This is above the melting point of most materials.
Two researchers, one at the University of Manchester, England, and one at the Central South University in Changsha, China, have created a novel substance: a ceramic, that contains strong bonds between their atoms: a carbon-carbon composite.
Infused in the composite with a liquid mixture of zirconium, titanium, carbon and boron.
The world’s Air Forces would love it, and so would commercial passengers.
1843, Aug & Sept, 2017, “Turn On, Tune In, Drop By the Office”
Remember Timothy Leary’s “Turn on, tune in and drop out”?
Well, Nathan, age 27, a venture capitalist in San Francisco, ingests 15 micrograms of LSD, every three days. A normal dose to get high is 100 micrograms.
He does it because it makes him feel more productive and creative, calling it “my secret vitamin.”
Americans age 30-34 are the most likely group to have tried LSD, even though drug use has dropped across board; LSD risen a little.
Researchers have traced the development of the personal computer industry through the 1960s counter culture.
One research center in Menlo Park (Xerox PARC?), observed 350+ scientists, engineers and architects, in experiments with psychedelics—how it affected their work.
Tim Ferris, an angel investor, says “billionaires I know, almost without exception, use hallucinogens on a regular basis.”
Steve Jobs: “Taking LSD was a profound experience, one of the most important things in my life.” He use to joke that Microsoft would be a more original company if Bill Gates had dropped acid.
Today, groups of friends rent a place in the countryside, take LSD or Mushrooms and go for a hike: a “hike-a-delic.”
Popular among technologically aware individuals because they are interested in science, nutrition, and their own brain chemistry.
It can also reduce social awkwardness!
Data on the number of people doing this is non-existent, but a group on Reddit has 16,000 members, up from 2,000 a year ago (most use 10 micrograms every 3 days).
LSD is not thought to be addictive.
Since there is a lack of medical research on microdosing, it’s touted as a panacea for depression, menstrual pain, migraines, impotence, etc.
Yet compared to America’s opioid epidemic, and 3.5 million children prescribed drugs for attention disorders, LSD doesn’t seem as threatening as it once was.
“The New Old,” The Economist, Special Report, July 8, 2017
During the 1940s, society coined the label “teenagers,” which was recognized to be a big market for goods and services.
Today, we need a new name for those 65 and older, but who are not yet elderly (by 2100, the 65+ group compared to working age folks ratio will triple).
In 1950, 65+ were 5% of the world’s population; in 2015 it’s 8%; and by 2050 it’s projected to be 16%. The share in OECD countries, is 16% in 2015 to 25% by 2050.
Today, in the rich world, 90% of people will celebrate their 65th birthday!
The UN estimates between 2010-2050, the 85+ group will grow two times as fast as the 65+ group, and sixteen times everyone else labeling it a silver time bomb, or grey tsunami.
Doomsayers predict economic stagnation, asset-market meltdown, dearth of innovation, public spending increases, etc.
The Economist Report argues the opposite: this can be a boon if societies turn them into more active participants.
The financial industry needs to update its life-cycle models.
The so-called gig (or sharing) economy seems to help the 65+ group participate in the economy:
- ¼ of Uber drivers are 50+
- ¼ of those who work in the sharing economy are over 55 (according to PWC)
- Wahve (Work at Home Vintage Experts)
- Airbnb, the 60+ are the fastest growing group and have the highest ratings
- The 65+ group does a lot of unpaid work, volunteering 3.3 billion hours in 2016
- They may be slower at jobs, but they make fewer mistakes
According to the Kauffman Foundation, the 55-65 age group are 65% more likely to startup new companies than are 20-34 olds.
The 50+ age group have 70% of the disposable income in America. Global spending by the 60+ is projected to be $15 trillion by 2020, two times the 2010 amount, much of it on leisure.
So-called “Silver splits” are soaring: the 60+ are divorcing at twice the rate from 1990, and in Briton it’s three times the rate. 25% of Match.com users are between 53-72, growing faster than any other group.
Long-term care: 47 million people worldwide suffer from dementia, which could grow to 132 million by 2050 without a medical breakthrough.
Proposed new labels fro the 65+ group:
- Nyppies (Not Yet Past It)
- Owls (Older, Working Less, Still earning)
- Hopskis (Healthy Old People Spending Kids’ Inheritance)
- Indy: I’m Not Dead Yet?
Life stages are social constructs, triggering deep changes in attitudes.
Rock stars used to rely on royalties but due to the digital revolution they are back on tour.
Lloyd’s has “Non-appearance products.” For example, Disney had it on Carrie Fisher, who died at 60 before completing Star Wars, resulting in a $50 million claim.
Keith Richards of the Rolling Stones, 73, has his hands insured for $1.6 milliion.
Underwriters are ready to accept their clients’ lifestyle and work hazards, arguing that where there’s risk, there is reward—if the price is right.”
They do have exclusions for pre-existing conditions, alcohol abuse, failing livers, etc.
Ron asked Ed to take a look at this browser based on blockchain technology. It is okay, but not ready for primetime. Plug ins do not work.
Ed ran through them with Ron and predicted eight of nine correctly.
Fascinating conversation about how language is never static. Give it a listen and see if you change your mind about some of your pet peeves.
Understanding this word takes not a fluency in the language but rather a fluency in Mexican culture.
The VeraSage Symposium and Art of Value Conference are coming up in November. For more information visit - http://thesoulofenterprise.com/verasage
New York Urban Planning in 1898
Ohio in 1895 Theory of History: in 1895, there were two automobiles in the entire state of Ohio. They collided.
In 1898, in New York City, there was the first ever urban planning meeting. The topic: Horse manure. The conclusion: All cities will be gone in 50 years, certainly 100 because the manure pile wold be too great. All (100 percent) of the experts agreed!
Why is milk in the back of the store?
Russ Robert’s article on this topic.
Last Friday, Bitcoin broke $3,500 and $3,600 while we were on the air. Now it is over $4,000. When can we call this "real!"
GOP Healthcare Failure
Up to 10% of Adjusted Gross Income, you pay, after that Single Payer
“Fuel of the Future,” The Economist, May 6, 2017
Oil refinery and data centers much in common: crucial feed stocks to world economy.
By 2025, data every year will reach 180 zettabytes (180 followed by 21 zeros). It would take 450 million years to pump through a broadband connection.
Oracle: Data will be the ultimate externality; we will generate them whatever we do.
Google: Information allows it to target ads better; use for AI, and cognitive services.
Tesla possesses 1.3 billion miles worth of driving data, far more than Alphabet’s Waymo (its self-driving car division).
Flows of data are not a commodity; each stream is different (lack of fungibility):
- Unlike oil, it’s a non-rival asset
- Easily used for other purposes than agreed
- Adds confusion over who owns it (e.g., with driverless car who owns the data: sensor makers, owner, passenger, auto manufacturer?)
We are only starting to develop pricing methodologies. When Caesars Entertainment filed bankruptcy in 2015, its most valuable asset: data on 45m customers.
Will the future bring personal data account that can be bought, sold, and managed personally?
Google’s chief economist, Hal Varian says data exhibit decreasing returns to scale, collecting more doesn’t add anything. What matters is the quality of the algorithms, and the talent that develops them. “Google’s success is about recipes, not ingredients.”
3 Policy problems:
- Antitrust (broke-up Standard Oil; will Google suffer the same fate?)
- Social equality
The Economist, Free exchange, “How to be wrong,” June 10, 2017
We did episode #147, Changing Your Mind on June 16, 2017.
Real trouble leads to a refusal to grapple with contrary evidence.
Beliefs are like other economic goods. We spend time and resources building them, they become part of our identity (Endowment effect—we value that which we own or possess, sometimes called the IKEA effect).
People engage in three “motivating reasoning” to manage such challenges:
- Strategic ignorance, avoid information that contradicts your beliefs
- Reality denial, troubling evidence is rationalized away
- Self-signaling, believer creates his own tools to interpret the facts in the way he wants (e.g., an unhealthy person goes for a run everyday which proves he’s well)
“It is rarely in the interest of those in the right to pretend that they are never wrong.”
The Economist, “Not so Froogle,” July 1, 2017
Margrethe Vestager, the EU’s competition commissioner has fined Google 2.4 billion Euros ($2.7 billion), a record antitrust penalty in Europe and the USA, for abusing it’s monopoly.
One business owner complained. NPR’s Planet Money podcast, Google Is Big. Is That Bad? discussed this issue.
In 2002 Google launched price-comparing shopping, called Froogle, later renamed Google Shopping. It was found to systemically favor Google’s own results.
Supposedly, Google has a 90% market share in Europe. Of course, that’s because the EU doesn’t count other sites as search engines for shopping, such as Amazon, eBay, etc.
Competition is just a click away. Compare the convenience of shopping on the Internet with that of driving around comparing prices.
One EU commissioner said, “We need these super-platforms to adhere to a principle of neutrality.” But competition isn’t neutral; there’s no such thing as “perfect competition,” which is the outdated model antitrust regulators use.
Economist Thomas Hazlitt’s new book, Political Spectrum, argues that net neutrality would have meant no iPhone.
EU has fined many USA tech companies: Intel, Microsoft (3 times), and Facebook. This is a form of blackmail, from unaccountable bureaucrats who are economically illiterate.
George Gilder is currently working on a new book, Life After Google (available in June 2018). Here’s a talk he gave at the Blockstack Summit 2017, where he argues that Google’s business model is not sustainable.
Charlie Gard, RIP, July 28, 2017, 11 months old
Parents: Connie Yates and Chris Gard wanted to try experimental treatment in USA for their infant son’s rare genetic condition, encephalomyopathic mitochondrial DNA depletion syndrome (MDDS). There are 16 known cases worldwide
The British government refused the parents to take their son to USA. Staff at the Great Ormond Street Hospital received death threats, which shows there’s at least some resistance in the UK who understand liberty.
The Parents raised £1.4 million from crowdfunding.
On April 11, the British High Court judge ruled that Charlie’s doctors to turn off life-support. Parents appealed to the Court of Appeals, the Supreme Court, the European Court of Human Rights, and lost at all three.
Two Congressman introduced legislation to expedite Charlie’s trip to USA.
On July 24th, Dr. Michio Hirano, at Columbia University, who was to carry out the experimental treatment. When he saw the scans of Charlie’s brain, he was no longer willing to provide the treatment.
In the UK, adults can consent to experimental treatment, but courts can overrule in cases of children. In the USA, courts are reluctant to go against the parent’s wishes.
This can mean doctors performing treatments they believe go against the best interests of the patient.
In Texas, the futile care law says that if doctors feel the treatment would be of no benefit the parents can appeal before an ethics committee. If the committee agrees, the parents can seek another doctor within a specified time limit.
Fortunately, only 10% of cases involve severely ill babies—hardest of all.
Charles Krauthammer wrote a column and offered this: Two truths must guide any decision cases such as these:
- The parents must be sovereign
- The parents are sometimes wrong
He believes the parents were wrong in this case. However, he would have allowed the parents take the child to USA. Since there are no definitive answers, so must we fall back on sentimentally, on love.
What’s the best for the child: The best guide is a loving parent, their motive is most pure.
Is death is in the child’s best interest? Dr. House: “Yeah, I’m trying to save her life, I’m morally bankrupt.”
National Review editors wrote: “Horrifying precedent: In the UK and, by extrapolation, throughout Europe, every child belongs, finally, to the state.”
John C, CPA, TSOE Listener Question, 8/2/17
I really struggle when I get the response that my price is too expensive. I don’t get it all that often, which tells me my pricing is okay I think, but I wanted to see what your best responses would be to that response/question.
Thanks guys and keep up the good work!
John E. C, CPA, CGMA – Principal
- We’re not the cheapest CPA firm in town, during the value conversation
- Reiterate value (value conversation is critical, excellent questioning)
- Reiterate your value guarantee, fixed price, change request policy, no surprises, unlimited access
- Often times, price isn’t wrong—the customer is
- Also, often they don’t understand the value, not so much questioning the price
- "Sounds about right."
- As the President of Snap-on Tools once said, "I would rather explain my high price once, then apologize for skimping on quality later.
Ron’s recent post on LinkedIn: “Why Timesheets Focus Firm Leaders on the Wrong Things.”
About Greg LaFollette, CPA, CITP, CGMA
Greg is one of the most recognized and respected voices on technology within the accounting profession. He is also a sought-after speaker at trade shows and conferences. Prior to joining CPA.com, Greg was a consultant to public accounting firms and to technology vendors with a focus on the accounting profession. Additionally, he was the Executive Editor of TheTechGap — the country’s first blog specifically created for the tax and accounting profession and for vendors who seek to serve that community, and Senior Manager of Tax and Technology Consulting with the Top 25 firm of Eide Bailly, LLP.
Earlier in his career, Greg served as the Executive Editor of The CPA Practice Advisor (formerly The CPA Technology Advisor), VP of Product Strategy at Thomson Reuters Creative Solutions, and founding partner at LaFollette, Jansa, Brandt & Co., LLP in Sioux Falls, SD. He served on the AICPA’s CITP Credential Committee (Chair), the National Accreditation Commission (ad hoc via the Credential CITP Committee), and the Top Technologies Task Force, the TECH+ Planning Committee. He serves on the Technology Advisory Board of the Journal of Accountancy where his column, “What’s Your App-Titude,” is printed monthly.
He appears on Accounting Today’s list of the Top 100 Most Influential People in Accounting, the CPA Practice Advisor’s Top 25 Thought-Leaders, and was inducted into the Accounting Technology Hall of Fame in 2011. Greg completed his professional training at Augustana University (SD) and is a CPA, a CITP, a CGMA,, and a member of the AICPA Information Technology Division. He is a graduate and former staff lecturer at the AICPA’s National Tax Institute. He and his wife Kaye have one grown daughter and choose to live in their hometown of Sioux Falls, SD where he chairs the City’s Board of Ethics and is a volunteer’s as a high school speech coach.
About Mark S. Brooks
Mark is the Senior Manager, Innovation with the Association of International Certified Professional Accountants where he co-founded and now leads the organization's first ever Startup Accelerator, a particular model of corporate venture capital designed to accelerate R&D and growth into adjacent markets by investing in and partnering with startups within the global accounting ecosystem.
He has helped the AICPA increase revenue, organization learning, and enhanced collaboration with 13 state-level partners by exercising significant cross-functional leadership in piloting 5 new business models in emerging markets; resulting in 1,800+ new student members and new sources of revenue in <1 year.
Mark has had a role in enhancing the internal culture of innovation by developing and executing an innovation tournament, an innovation training program for staff in 9 countries, dedicated innovation spaces, and other high impact cultural initiatives that have engaged over 70% of global employees and significantly improved the internal culture (recognized with award from the CEO for these accomplishments).
As a skilled consultant, Mark routinely collaborates with senior executive leadership and 50+ global internal teams to identify and exploit adjacent market opportunities and develop go-to-market plans, resulting in strategic insights and revenue growth. He plan is to develop a platform for idea sharing within the Accounting profession; awarded $10k innovation grant to implement from the American Society of Association Executives.
Within 2 years, he became a routinely sought after thought leader with 20+ accepted invitations to speak at conferences, publish magazine articles and blog posts, and ad-hoc consulting requests. Mark drives high performance and high caliber output of millennial direct reports through focused professional development and coaching.
Ron’s Questions for Mark and Greg
What does innovation mean to you?
Grade the profession A-F on innovation, in the past 50 years, or even shorter, the last 25 years.
Are there are any other programs or initiatives in the works to foster innovation in the profession?
What is the number one issue facing the CPA profession?
- Greg answered: Change management
- Mark answered: Sustaining its relevancy
Ed’s Questions for Mark and Greg
What is happening with the AICPA and CPA.com Startup Accelerator?
Is this going to be Shark Tank type of program, with Greg playing Mark Cuban?
Greg: In your capacity as a thought leader to the profession, what are your thoughts on the Sage acquisition of Intacct?
Are we ready almost ready to call Bitcoin (not just blockchain) a technology of the future?
Have you heard anything about the results of H&R Block and its relationship with IBM’s Watson to help file tax returns?
Due to localized flooding at the VoiceAmerica studio, our Free-rider Friday show scheduled for broadcast later today has been cancelled. We are hopeful that next week's show will go on as planned.
Thanks for listening.
Ron and Ed were at Sage Summit 2017 in Toronto and recorded an episode featuring a great panel discussion on the bookkeepers and accountants of the future. While the job description for accounting professionals has largely stayed the same, technologies and laws have come into play to change the way business is done. It is time that accountants alter the way they do business to keep up with the shifting tide. Join our discussion with Dianne Mueller, Rachel Fisch, and Tamar Satov.
Listen to Part One here - http://thesoulofenterprise.com/toronto1
Tamar Satov is the managing editor at CPA Magazine, and is an award-winning journalist specializing in business, parenting and personal finance. Her work has appeared in Canadian Living, Today’s Parent, Report on Business Magazine, Canadian Business and Vancouver magazine. She also contributes to CPA Canada’s financial literacy blog, sharing advice and anecdotes on her efforts to raise a money-smart kid.
Rachel Fisch is the National Bookkeeping Lead for Deloitte Canada and has over 20 years of experience in roles from Bookkeeper to Controller for growing businesses. She is in demand as a dynamic speaker and thought leader from local to International conferences and events. Rachel is passionate about supporting the bookkeeping and accounting community through her own experience and expertise, including the 1,500 member (and growing) Facebook Group QB-HQ. She continues to be an advocate of the highest level for cloud-based accounting and the app ecosystem, creating seamless workflow solutions for clients of all sizes across Canada. Rachel lives with her very patient husband and two amazing daughters near Toronto.
Dianne Mueller is the founder and president of the Institute of Professional Bookkeepers in Canada and Soma Small Business Solutions. For over 12 years she and her team have been helping small business entrepreneurs keep their financial position up front and central in their business. Established in 1997 and located on the Sunshine Coast of British Columbia, Soma provides professional outsourced bookkeeping, with full cycle accounting and payroll services. Soma has earned a reputation as a reliable and very knowledgeable source of bookkeeping help.
VeraSage Symposium and Art of Value Conference
This Idea Is Not New
There is never a good sale for Neiman-Marcus unless it’s a good buy for the customer. —Herbert Marcus, advice to his son Stanley, 1926
It is a deceptively simple question: What are we getting paid for? Yet many businesses arrogantly assume they know what their customers want and believe they have been giving them exactly that for years.
This is a myopic vision, and potentially harmful, because there now exists a plethora of information available on why people buy, how they buy, and the decision process they go through, which businesses ignore at their peril.
In fact, there are least six theories of what people buy that we regularly discuss on this show:
- Simon Sinek—People buy “why” you do, not “what” and “how” you do
- Theodore Levitt: People buy expectations
- Joseph Pine and James Gilmore: people buy experiences and transformations
- Michael LeBoeuf: people buy good feelings and solutions to problems
- Clayton Christensen: People hire a product to do a job
- Kevin Kelly: Generative Value will be more important in our increasinbly technological future.
Economist Thorstein Veblen [1857–1929] posited many theories in his book The Theory of the Leisure Class (first published in 1899), which Maital has drawn upon for some of the above motivations of why people buy.
Veblen referred to a “barbarian culture,” citing that trophies such as property or slaves were signs of successful aggression.
In today’s culture, luxuries are the major signal of status and class, which Veblen reasoned were purchased for two reasons: to show others you are a member of the class above and to distinguish yourself from those below.
A better theory is posited by Michael LeBoeuf, Ph.D., in his book How to Win Customers and Keep Them for Life: Revised and Updated for the Digital Age. He suggests that customers have the following motivations for these various purchases:
- Don’t sell me clothes. Sell me a sharp appearance style, and attractiveness.
- Don’t sell me insurance. Sell me peace of mind and a great future for my family and me.
- Don’t sell me a house. Sell me comfort, contentment, a good investment, and pride of ownership [and a piece of the American Dream]
Successful salespeople do not necessarily ignore features in the products they are selling, but they almost always add “which means” to the end of every explanation of their product or service offering.
For example, “This car has a V-8 engine, which means it will last longer because it doesn’t have to work as hard as a smaller engine.”
Advertising giant Leo Burnett used to say, “Don’t tell me how good you make it; tell me how good it makes me when I use it.”
Again, Michael LeBoeuf distilled his summation of customer statements and posited the following overall theory to explain what people really buy:
Despite all of the untold millions of products and services for sale in today’s marketplace, customers will exchange their hard-earned money for only two things:
- Good feelings
- Solutions to problems
This is a good theory; it has a certain utilitarian streak to it––that is, the idea that individuals spend their time (and money) pursuing pleasure and avoiding pain.
It is the old marketing axiom that says you really do not buy drill bits, you buy the hole it makes. Understanding that simple fact could help a company (such as Black & Decker) get into the laser beam business, since they, too, put holes in things.
It also explains why so many people purchase lottery tickets; they are really buying a low-cost dream.
Rogaine does not sell hair (it cannot legally make that claim, since it does not work 100 percent of the time); but it does sell hope, and its advertising reflects this motivation.
Callaway Golf founder Ely Callaway, who introduced the Big Bertha in 1991, priced at $240 to $300, while its competitor Taylor Made was selling for $150, said “We sell the physical and emotional experience of hitting a satisfying golf shot, not increasing your distance by eight yards or that your handicap will fall.”
Focusing on the total customer experience––solving the problem and creating the good feelings––demonstrates not just competency, but distinction.
But the utilitarian view posited by LeBoeuf does not help a firm custom tailor its service offering to its various customers.
Theodore Levitt’s theory of what customers really buy: expectations. Levitt was a marketing professor at Harvard Business School, and once the editor of Harvard Business Review. His expectations theory is useful because it forces the company to focus on the utility the customer is trying to maximize.
By ascertaining customer expectations, the company has the ability to manage––to a certain degree––those expectations. Southwest Airlines is a master at managing customer expectations. Customers understand very well that it is a no-frills airline, with no assigned seats (although this is expected to change), no food, no first class, and so on.
Because expectations are dynamic, not static, it is also imperative to continuously ask customers what they expect. A company should never rest on its laurels and assume it knows exactly what the customer is up to.
When General Electric asked this question for its jet engines, it came to the same conclusion Caterpillar did, and it innovated the “Power by the Hour” program for its aircraft engines, whereby it would be responsible for maintaining the engines and price for the serviceable usage the airline received.
Charles Revson, who launched the Revlon cosmetics empire, introduced color-coordinated nail polish and lipstick during the Great Depression.
His competitors acted as if the product was a commodity, but Revson knew better. He believed nail enamel was not just a concoction of chemicals, or a beauty aid, but a fashion accessory, and he believed women should use different shades to suit different outfits, moods, and occasions. This, of course, greatly expanded the market, as women now purchased multiple nail colors, and matching lipstick expanded the market again.
Indeed, he understood better than his competitors what he was really selling. His famous saying, “When it leaves the factory, it’s lipstick. But when it crosses the counter in the department store, it’s hope,” reflects the wisdom of a company in touch with its customers’ expectations.
Disney is another company that has mastered surveying and listening to their customers. In the Disney tradition, they have their own term for the art and science of knowing and understanding customers: guestology.
At the Disney University course on customer loyalty, they teach that the most significant factor that determines whether a family will return to a particular resort hotel comes down to one item (and this Disney executives were shocked to learn, according to the instructors): the swimming pool.
Focusing on the customer’s individual expectations forces the firm to individualize its service delivery to that particular customer’s wants and needs. No two customers should be treated equally. Customers want to be treated individually, or better yet, specially.
There’s No Such Thing as a “Market”
Stanley Marcus led the store through the difficult Great Depression. After he sold his interest in the business, he became an author and consultant and his teachings hold many excellent lessons for the willing student. One point he was especially fond of making was there was no such thing as a market, only customers:
I am unaware of any store, or any business school, for that matter, that conducts a course or a series of lectures on “The Care and Treatment of Customers.” I am referring to “customers” and not “consumers,” for never in my retail experience have I ever seen a “consumer” enter a store. I’ve seen lots of “customers,” for that’s what they call themselves.
This was a particular sore subject for Stanley Marcus, who had this to say with respect to lost sales opportunities due to not paying attention to customers:
Americans used to be known as the world’s best salesman. Recently, it has become difficult in most stores to encounter that quality of salesmanship, if indeed you can even find a salesperson. A few years back, I made up my mind I would not buy anything I did not urgently need unless a salesperson was convincingly persuasive. As a result of this self-imposed discipline, I have saved $46,734.
The store used to have a standing offer of $20,000 for any salesperson who was able to read the mind of the customer. No one ever claimed the prize.
Another concept is that people buy emotionally and justify intellectually.
I live in California, and I understand the best time for earthquake insurance sales is right after one. This is curious, especially from an actuarial point of view. If people were willing to assume the risk prior to a quake, why would they not be willing to assume the risk after one strikes?
People also do not like to admit being sold, but they brag about what they buy. Think of the last time you made a major purchase––a boat, car, or appliance––and talked to a friend, colleague, or spouse and said, “Guess what I was sold today.”
People do not like to feel they are being sold because it makes them feel like they are out of control. The best salesmen in the world actually empower customers to buy and help them envision their future with their product or service. Forget selling, focus on what the customer buys.
The Job to Be Done
In Competing Against Luck: The Story of Innovation and Customer Choice, Clayton Christensen, 2016, posits The Theory of Jobs to Be Done.
Innovation is about progress, not products You’re selling progress, not products.
What are the experiences that customers seek, not just in purchasing, but in using?
Question: What job did you hire that product to do?
A job is defined as: the progress that a person is trying to make in a particular circumstance (we don’t create jobs, we discover them).
Customer satisfaction metrics: don’t reveal clues as to how to do the job better.
Negative jobs often are the best innovation opportunities, such as CVS prescribing medication with nurse practitioners.
P&G marketed in China that babies who wore Pampers disposable diapers fell asleep 30% faster and slept 30 minutes longer. More sleep led to better cognitive development.
By 2013, China was buying $1.6 billion of Pampers, giving P&G a 30% market share, in a country that hadn’t used disposables just a decade before.
IKEA doesn’t focus on demographics/psychographics, it is structured around jobs to be done.
Purpose Brands—synonymous with the job to be done
- Mayo Clinic
In 1952, surgical pioneer Dwight Harken observed that patients were surviving increasingly complex surgical procedures, but an alarming number of them were dying in post-op care, even though all hospital processes were being followed. An excellent example of being efficient and completely ineffective.
This observation—which is not quantitative, but qualitative, led to the ICU.
Humans are unpredictable
From 2012-16, according to Breakthrough Innovation Reports, by Nielsen, 20,000 new products were launched.
Only 92 sold more than $50 million in year one and sustained sales in year two.
Not everything that motivates us is a Job to Be Done.
Bottom line: we humans are unpredictable, dreamy, wayward creatures that can’t be neatly fitted into a unifying theory.
Art of Value and VeraSage Symposium
We are excited to announce the details of these two events. Check out the Agenda and register at: http://artofvalue.com/conference/
Leonard Edward Read (September 26, 1898 – May 14, 1983) was the founder of the Foundation for Economic Education (FEE), which was one of the first modern libertarian institutions of its kind in the United States. He wrote 29 books and numerous essays, including the well-known "I, Pencil" (1958).
Read and Henry Hazlitt founded the Foundation for Economic Education in 1946. In 1950, Read joined the board of directors for the newly founded periodical The Freeman, a free market magazine that was a forerunner of the conservative National Review, to which Read was also a contributor.
Read received an Honorary Doctoral Degree at Universidad Francisco Marroquín in 1976. He continued to work with FEE until his death in 1983. Join Ed and Ron as they discuss FEE’s free book, The Essential Leonard Read.
Our discussion is on the free ebook, The Essential Leonard Read, available from the Foundation for Economic Education. It contains 12 chapters, which we discussed as follows.
1. I, Pencil
G.K. Chesterton: “We are perishing for want of wonder, not for want of wonders.”
“Left” and “right” is a semantic graveyard for libertarians.
3. A Break with Prevailing Faith
The Freeman was “too conservative” for a high school library.
There’s no such thing as a broken commitment. A man has a commitment to his own conscience.
What is man’s earthly purpose: expand one’s own consciousness.
4. Socialism Is Noncreative
Socialism is operative only in wealth situations brought about by modes of production other than its own.
Socializing means and results of productions are two sides of the same coin.
Soviets are alive because they don’t practice 100% socialism (3-5% of land consists of private plots, yet they produce 47% meat, and most of other consumable food).
Ludwig von Mises said, "Production is spiritual…What distinguishes our conditions from those of our ancestors who lived 20 thousand years ago is not something material, but something spiritual. The material changes are the outcome of the spiritual changes.
5. How Socialism Harms the Individual
Does anyone ever benefit by the removal of self-responsibility?
6. How Socialism Harms the Economy
The more interdependent we are on each other, the more trust that is required. “Are we over specialized, and dangerously interdependent? I believe we are.” Much specialization is government forced and artificial (unnatural specialization, whose origin is not in consent). The Moon Project was his example.
7. The Most Important Discovery in Economics
Socrates: “This man thinks he knows something when he does not, whereas I, as I do not know anything, do not think I do either.”
Egotist: Hitler, Stalin
H.G. Wells: “A high-brow is a low-brow plus pretentiousness.”
Man is not really knowledgeable, only teachable. Subjective theory of value, greatest discovery in economic science. Labor theory, sentimental, poor, hard-working farmers, set political stage for AG subsidies.
8. The Greatest Computer on Earth
Market enormously complex computer. Computer can’t exercise judgment: GIGO (Guy-go).
9. The Service Motive
Founder of Panasonic. Focused on service, rather than profitability.
10. Why Freedom Works Its Wonders
Because of what we don’t know. If no one can make a pencil, try a Boeing 747, with 4,500,000 parts. And the private sector isn’t capable of delivering the mail?
12. In Pursuit of Excellence
Economic education is not enough! Teaching virtue and morals more important. Kakistocracy—a government by the worst men—or a natural aristocracy founded on virtue and talents? If no one person can make a pencil, can anyone design or draft a good society? US Constitution?
Reason magazine conducted an interview with Leonard Read in April 1975, which you can read here.
Listener Vair Ellison sent us this hysterical article from The Washington Post, “Forget robots—the goats are coming for our jobs,” in response to our Memorable Mentor show on Frederic Bastiat.
Hector Garcia asks Ron is he still believe that Total Quality Service is still the “final frontier” of business? And thanks, Hector, for the Fortis Cab, from Pine Ridge!
Ron and Ed were at Sage Summit 2017 in Toronto and recorded an episode featuring a great panel discussion on the bookkeepers and accountants of the future. While the job description for accounting professionals has largely stayed the same, technologies and laws have come into play to change the way business is done. It is time that accountants alter the way they do business to keep up with the shifting tide. Join our discussion with Dianne Mueller, Rachel Fisch, and Tamar Satov.
The VeraSage Symposium and Art of Value Conference
We are excited to announce the Art of Value Conference and VeraSage Symposium being held in Allen, Texas on November 8-12, 2017. You can attend one or the other, or both. Find out more about these two events, the agendas, and register.
Article by Rory Sutherland in Ranconteur, May 25, 2017. Listen to his appearance on The Soul of Enterprise.
Uses the 1980 movie Airplane! as an analogy. Most businesses are run like air traffic control: there’s rules, routines, regulations, standards, metrics, targets; optimize, copy, repeat.
Other parts of a business don’t work this way: marketing is one of them. It can never be standardized. Truly efficient marketing is not marketing at all, it’s merely noise.
Remember, a flower is a weed with a marketing budget
EasyJet’s and British Airways’ approach to safety are similar, but the marketing of their brands are diametrically different.
Grand strategist Edward Luttwak argues against obsession with efficiency.
Strategy demands doing the least efficient thing possible to gain the upper hand over your enemy by confusing them.
In our aspergic age, it’s easier to get fired for being illogical than for being unimaginative. By dressing marketing up as a science, your protected from the CFO, but you’re using statistics as a drunk uses a lamp post: for support, rather than illumination.
Competition or anti-competition
Amazon’s patent that blocks shopping bots while in store.
Amazon Prime exclusive show: The Man in the High Castle was discussed. First two seasons are out, and the show is just excellent!
Here’s the money quote from the show, from economist Michael Munger
Fundamental insight: If you and I disagree about the value of something, we can probably agree on a price. So all prices that are agreed on probably result from a disagreement about value.
Prices reconcile disagreements on value.
“Rules of the road,” The Economist, May 6, 2017
In 2008, an unemployed Los Angeles chef, Roy Choi, started a business, which led to a reality TV show, a hit movie (Chef), and jump-started a $1.2B industry: Food trucks.
Portland, Oregon has had them for decades, over 500. But Chicago, with over 7,000 restaurants and 144 breweries, has only 70 food trucks. The regulations in Chicago are onerous:
- Food trucks can’t be within 200 feet of an eatery
- They can’t park for longer than two hours
- They are required to carry GPS or face heavy fines
New York and Boston are little better, with a 15-year waiting list to get a license, or $25,000 to rent one on the black market.
One of trucks in Portland’s is named: Kim Jong Grillin’.
Brick and mortar - Amazon
“Amazon Just Invented the Bookstore,” Foundation for Economic Education, M.G. Siegler, June 8, 2017
Amazon Books, opened in New York City and looks like a Borders.
The pricing is innovative: you pay the online price if you’re an Amazon Prime member, or the jacket price if you’re not.
More on the suckiness of Performance Reviews
“Performance Reviews Suck, Here’s What We Do Instead,” Matt Rissell, Forbes, May 26, 2017
Your typical performance review is an inaccurate representation of how your employees are performing, and more often than not, they're a giant waste of time for you and your team. Let's call them what they really are: a massive distraction and worst of all, a demotivator.
It surveyed employees and found they hated annual performance appraisals, rankings, but wanted more feedback. Here’s what they do instead
- Hold consistent one-on-ones with your employees
- Ask employees how they think they’re doing
- Make it go both ways (how you doing as a leader)
- Don’t tie feedback to compensation
- Encourage employees to be proactive
I would only add that the first paragraph above also applies to keeping timesheets in professional firms.
The Adaptive Capacity Model for Supermarkets
“Surge pricing comes to the supermarket,” Tim Adams, The Guardian, June 4, 2017
In 1861 Philadelphia shopkeeper John Wanamaker introduced price tags, with the slogan, “If everyone was equal before God, then everyone would be equal before price.”
Before this, haggling was common. The fixed price changed the relationship (business model) between the store and the customer and led to price wars, loss leaders, promotions, etc.
It’s said that Facebook has over 100 data points on every user. Orbitz was charging Mac users 20-30% more to book a trip, and Uber allegedly looks at a user’s battery life to help determine price.
French, German, and Scandinavia retailers are changing prices 90,000 times per day.
Dynamic pricing in Britain, at Spar stores, for bread created a 2.5% uplift to profit, while waste dropped 30%.
This puts under threat Oscar Wilde’s famous quip: The cynic knows the price of everything, and the value of nothing.
Today, the price may be changing. Pricing the customer continues.
Today marks not only the 241th Independence Day in the United States, but also the third anniversary of The Soul of Enterprise!
By his 35th birthday Mike Michalowicz (pronounced mi-‘kal-o-wits) had founded and sold two multi-million dollar companies. Confident that he had the formula to success, he became an angel investor…and proceeded to lose his entire fortune. Then he started all over again, driven to find better ways to grow healthy, strong companies.
Among other innovative strategies, Mike created the “Profit First Formula”, a way for businesses to ensure profitability from their very next deposit forward. Mike is now running his third million dollar venture, is a former small business columnist for The Wall Street Journal; is the former MSNBC business make-over expert; is a popular keynote speaker on innovative entrepreneurial topics; and is the author of Profit First, Surge, The Pumpkin Plan and The Toilet Paper Entrepreneur, which BusinessWeek deemed “the entrepreneur’s cult classic.”
From the Profit First Professionals Website: Everyone on the planet knew it. It was a cold, hard fact. The world was flat. Until it wasn’t. That’s when everything changed. Society is addicted to axioms: beliefs that have become so entrenched in our global culture that they are never challenged. These axioms are simply considered to be true, because everyone says it is. Then one day, someone calls bullshit. Sales – Expenses = Profit is one of those axioms. For centuries entrepreneurs have followed the “profit comes last” formula off the proverbial financial cliff. Now everything has changed… In his globally acclaimed, paradigm shifting book, Profit First, business author Mike Michalowicz explains why the Sales – Expenses = Profit formula actually prohibits profitability and keeps the vast majority of businesses, throughout the world, struggling to survive check-by-check. Michalowicz teaches us to a new formula: Sales – Profit = Expenses. This seemingly subtle change, empowers you to grow your profitability immediately and permanently. Join Ed and Ron for this dynamic interview with Mike.
Questions/Topics We Discussed with Mike
The first edition of Profit First came out in 2014? Revised and Expanded edition came out earlier this year, 2017.
Your life’s purpose is to eradicate entrepreneurial poverty. Explain.
The Small Business Administration reports there are 28 million small business (< $25m in revenue):
- 125 million businesses globally
- 8/10 business fail; #1 reason: lack of profitability
- 50% fail in first 5 years
GAAP: Sales – Expenses = Profit
This equation doesn’t make human sense because it goes against human nature. Explain.
Primacy Effect: we focus on what comes first, so the Profit First formula changes the equation:
Profit First: Sales – Profit = Expenses
GAAP does not model cash.
Profit First works because it doesn’t try to fix you. It’s designed to work with who you are already. Profit not an event; it’s a habit!
This revised equation requires you to reverse engineer your business:
- Are all expenses necessary? Who knows? Most are too busy chasing sales
- It’s the same with pricing:
- Customer > Value > Price > Cost > Product/Service
- Reminds me of Henry Ford: “No one knows what a cost should be.”
- There’s a difference between being Frugal vs. Cheap
Shouldn’t some of these businesses fail? Isn’t that the market saying this business is not a good idea?
If we can increase the probability of success of small businesses, society would be better off, which is why you’re so passionate about this topic, isn’t it?
When do you suggest you start Profit First in your business, from day one?
You’re working a lot with accountants now, right? And do accountants have this same challenge in their businesses?
Do you notice a difference between CPAs and bookkeepers (e.g., bookkeepers are more proactive and CPAs are more reactive)?
In how many languages have your books been translated?
You recommend five checking accounts: Income/Profit/Owners Comp/Tax/Opex + 2 no-temptation accounts. What’s the logic and mechanics of all these accounts?
Explain TAPs: Target Allocation Percentages.
You equate PF with the Granny Shot in basketball. Explain.
You talk about the eight Mistakes business owners make with Profit First:
- Going it alone
- Too much too soon
- Grow first and profit later (#1 objection; not substitutes, complements)
- Cutting the wrong costs
- Plowing back and reinvesting
- Raiding the tax account (stealing)
- Adding complexity
- Skipping the bank accounts
Do you ever bring the Profit First business owners together, not just the accountants who consult on the system?
Have you found any banks willing to work with you?
Other than succumbing to the lies of GAAP, what are other issues facing small businesses?
What’s the #1 issue/problem facing the accounting profession?
Are you optimistic or pessimistic with respect to Artificial Intelligence?
Mike’s Books and Websites
There’s a crucial principle for coming to know the truth, according to philosopher Amélie Oksenberg Rorty, namely, “Our ability to engage in continuous conversation, testing one another, discovering our hidden presuppositions, changing our minds because we have listened to the voices of our fellows. Lunatics also change their minds, but their minds change with the tides of the moon and not because they have listened, really listened, to their friends’ questions and objections.”
I read this line from Rorty in Deirdre McCloskey’s paper, “Economic Liberty as Anti-Flourishing: Marx and Especially His Followers,” published by the American Enterprise Institute.
I opened my session at Scaling New Heights 2017 in Orlando, Florida last week with this quote, and asked the audience if they have ever changed their mind on a significant issue?
What was the process you went through? How long did it take? Everyone has changed his or her mind on something. If you’re not changing your mind, you’re not using it.
As Nobel laureate economist Paul A. Samuelson wrote, “I’m willing to be occasionally wrong. But what I hate most in life is to stay wrong.”
Partial list of stuff about which we changed our minds
- In high school Ron was all for the Chrysler bail out (1979)
- Offering three options for pricing the customer, supported by insights from behavioral economics and customer psychology
- Hourly billing
- Measurements and “what you can measure, you can manage.”
- Generally Accepted Accounting Principles (not a theory, and useless with respect to intellectual capital)
- Myers-Briggs and other personality profiles
- Abortion, each of us in a slight different direction
Also, reading George Gilder’s book, Wealth and Poverty, back in 1982 made Ron change his mind on:
- Keynesian economics
- Milton Friedman and monetary economics
- Ayn Rand and Objectivism [her last public talk bashed Gilder and his concept that capitalism was really based on altruism]
- The importance of the entrepreneur for a dynamic economy
Thoughts on changing your mind
Changing your mind does support that notion that knowledge is only ignorance postponed.
Are people who won’t change their mind dangerous?
Ron is currently reading Pixar founder Ed Catmull’s book: Creativity, Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration.
Catmull worked with Steve Jobs for over 25 years, and said Jobs would change his mind, and that the reputation he has acquired after his death is often not justified.
We all suffer from confirmation bias, articulated in the 1960s by Peter Wason, a British psychologist, that is: We give lesser weight to data that contradicts what we think is true.
But our mental models are not reality, they are tools. They should be our servant, not our master.
Philosopher Arthur Schopenhauer wrote: All truth passes through three stages:
- First, it is ridiculed.
- Second, it is violently opposed.
- Third, it is accepted as being self-evident.
Ron would add: Fourth, I told you it was a good idea all along!
Listener Shout Out
Thank you so much, Mark. This means more to us than we can express in mere words. Definitely an HSD - High Satisfaction Day!