Episode #234 Preview: How to Fire a Customer

What happens when your firm becomes filled with too many “C,” “D,” and “F” customers? How should you fire a customer? There are many strategies, some more effective than others.  Join Ed and Ron as they discuss essential strategies to deploy to fire customers with dignity and professionalism, while maintaining the goodwill of your firm.

Join Ed and Ron for this discussion:

  • If you’d like to call-in during the live show, the listener line is: 866-472-5790.

  • You can also participate on Twitter using the hashtag #ASKTSOE and the Twitter account @asktsoe

  • Prefer email? Shoot us a note at asktsoe@verasage.com

As always, please check our website for upcoming and previous show notes and recordings, use Twitter to find the show at @AskTSOE or find us on Facebook.

Our wonderful hosts Ed and Ron are on Twitter at @edkless and @ronaldbaker, respectively (and obviously).

Episode #233: Pricing at Starbucks

Pricing at Starbucks and Six Tactics You Should Know About 

In this show, Ed and Ron discussed the following post: 

6 psychological tactics behind the Starbucks menu,” Kent Hendricks, March 20, 2018

So What Are The Tactics?

  1. Why you like the drinks at the center of the menu

  2. Why you’re most likely to select the Grande size

  3. Why looking at three columns of prices makes you spend more

  4. How Starbucks uses the attraction effect to frame your choice between a Grande and a Venti size

  5. Why the Starbucks menu doesn’t include a dollar sign

  6. Why Starbucks prices end in .95 instead of .99 

…And What Are The Behavioral Effects Behind Each Tactic?

  1. The Center Stage effect

  2. The Comprise effect

  3. Lower price on left (first): We spend more

  4. The Attraction effect frame Grande and Venti

  5. No Dollar Sign

  6. Prices end in .95 instead of .99

Let’s talk in more detail about number 5. Currency symbols get you to think about money which makes you less likely to spend said money. $20 and 20 and twenty are all semantically the same thing but there is a big difference in salience. The $ symbol is a symbol of cost and it reframes your thinking. The $ symbol represents what you are losing, not getting.

Number 6 poses an interesting tactic as well. The 99 in .99 signals a low cost but the 95 in .95 signals high quality. For Starbucks, the .04 loss (1.33% per transaction) more than makes up for the high quality perception and the positive effect on their brand.

Parting Thoughts 

“Summaries of human behavior explain a great deal but predict very little,” Robert Sapolsky.

We can observe behavior in aggregate, then seek to explain that behavior. However, we cannot do the reverse. We can’t use an explanation of behavior in aggregate to predict how any single individual will act. 

Episode #232: Free-Rider Friday, March 2019

What a great Free-Rider Friday! Check out the links and summaries below…

Ed’s Topics:

An Apple a day can be taken away…
Apple is closing two stores in Collin County, Texas to avoid patent trolls. See story in The Verge, February 22, 2019, and an editorial in The Dallas Morning News, February 24, 2019.

Giveth and Taketh…
According to an interview in Forbes with Grace Slick from February 21, 2019, Chick-fil-A ran a commercial during the Oscars that used a song written by Slick. The CEO of Chick-fil-A has donated to marriage laws that state that marriage is between one man and one woman. Grace used the royalty money to support LGBT charities. A great example of free-market capitalism: both parties to a transaction win, even with divergent political views.

From The National Popular Vote Website:
The National Popular Vote bill would guarantee the Presidency to the candidate who receives the most popular votes in all 50 states and the District of Columbia. Explanation It has been enacted into law in 12 states with 172 electoral votes (CACTDCHIILMAMDNJNYRIVTWA). Map showing status in states. The bill will take effect when enacted by states with 98 more electoral votes. It has passed at least one house in 11 additional states with 89 electoral votes (ARAZCODEMEMINCNMNVOKOR) and has been approved unanimously by committee votes in two additional states with 26 electoral votes (GAMO). The bill has recently been passed by a 40–16 vote in the Republican-controlled Arizona House, 28–18 in Republican-controlled Oklahoma Senate, 57–4 in Republican-controlled New York Senate, 34-23 in Democratic-controlled Oregon House, and 26-16 in the New Mexico Senate. For a legal argument against, see “Why the National Popular Vote Compact is Unconstitutional,” by Norman R. Williams from the BYU Law Review.

Subscriptions Abound…
Since we’ve been discussing the subscription business model lately, I saw two advertisements this week that are subscription based: One from Trade: “the Netflix of coffee,” and Shoprunner, teaming up with UPS, is offering free two-day delivery for over 100 retailers.

Now for Ron’s Topics:

Apple make-a da money…
We are at Peak smartphone, according to The Economist, from January 12, 2019. Apple has a 13% worldwide market share in smartphones, but captures nearly 100% of the industry’s profits (and it might even be more). 

edited.jpg

Goodbye friend…
Herb Kelleher passed away on January 3, 2019, aged 87. Herb was one of Ron’s favorite CEOs and Founders. See the obituary in The Economist.

Cape Fear…
A new book, The Fearless Organization, by Amy Edmondson, a professor at Harvard Business School argues that a corporate culture based on fear and intimidation, it might appear targets are being met in the short term. But the long run effect is likely to be counterproductive. Fear inhibits learning. Scared workers find ways of covering up or getting around inefficient practices. What better way to implement an atmosphere of “psychological safety” than implementing After Action Review. See The Economist, “Permission to speak,” January 12, 2019.

Control this…
From FEE, February 28, 2019, “Oregon Just Became the First State to Impose Rent Control,” by Hans Bader.

Episode #231: LIVE from the Meeting of the Minds

Ron and Ed were jazzed to be doing the show live from the 90 Minds annual conference, The Meeting of the Minds in San Diego. The Meeting of The Minds brings a membership of consultants, resellers, and software providers together to celebrate our powerful community.

For two-plus days, these consultants shared, listened, learned, and challenged perceptions. Every year, they celebrate expanding their community through the renewal of relationships and building new alliances. The investment grows all year through online collaboration supported by their members, webinars from partners, and sharing of knowledge and experience with each other. 

The returns are greater than any one mind.”

Ron and Ed primarily took questions from the amazing live audience. Here is quick summary of those questions:

  • Historical in the subscription world, we were taught that there were like, three measures that you should have customer lifetime value, customer acquisition costs and retention rates. So if customer lifetime value is higher than retention is good rate because you don't want to lose these customers. What would you say the key measurements are for a business owner to be looking at in this new subscription model? (Editors Note: The VC firm, Andreessen Horowitz, has a list of 16 startup metrics that are a great place to look when trying to answer this question. Here is the link.)

  • How would you recommend that smaller firms balance the need to maintain relationships with all of these customers who are now on a subscription?

  • How do we go about thinking about this in a way that we don't get scared off or some customers going to rip us off line we're going to end up consuming all of our spending all of our effort on these guys and ignoring the other people?

  • When you're in a subscription model, do you still go to that three pricing method?

  • Do you have any other examples of maybe two companies that joined together to provide a value and then price it in in one of these subscription models?

  • How do you explain this to customers?

Slides from Ed’s Keynote

Episode #230: Interview with Tien Tzuo

Biography

Tien Tzuo is a Taiwan-born American tech entrepreneur. He is the founder, chairman, and CEO of Zuora, and prior to that was chief strategy officer of Salesforce. Tzuo was born in Taiwan, and when he was 3 years old his family moved to the Flatbush section of Brooklyn. His parents were psychology professors, and his father also worked as an importer-exporter and in real estate.

In 2007, Tzuo left Salesforce to launch Zuora as its founding CEO. The California-based enterprise software company creates and provides subscription management software to help other companies with their subscription-based services. Within a few weeks of its initial public offering on April 12, 2018, Zuora was valued at over $2 billion, and Tzuo's 10% stake in the company was worth an estimated $193 million.

Tzuo's book Subscribed: Why the Subscription Model Will Be Your Company's Future - and What to Do About It, written with Gabe Weisert, was published by Portfolio on June 5, 2018.


The Most Significant Impact On Your Business

With an entire chapter in his book, Subscribed, dedicated to the income statement and the changes that can be made to account for a subscription business, we didn’t have near enough time to dig into this topic. Here are a few important points to consider along with an example of a “subscription” income statement.

Click for a larger version

 How GAAP and the Income Statement Changes

  • The traditional income statement doesn’t differentiate between recurring and nonrecurring dollars

  • Sales and marketing are matched to past goods sold

  • It is a backward looking picture, not forward looking


Collection of Interview Questions

These questions and detailed responses from Tien Tzuo are all available in the audio of the show.  

  • Early on in the book, you write:

    • We prefer outcomes over ownership, we prefer customization not standardization, we want constant improvement not planned obsolescence, we want a new way to engage with businesses, we want services not products.

    • By the end of ownership you don’t mean some utopia where there’s no property, right? Talk about the end of ownership.

  • Ron and I have been having a lot of fun applying your concepts to professional firms. We’ve talked about how most firms now sell a rival asset—the billable hour—to selling a nonrival asset, such as knowledge. What are your thoughts around applying the subscription model to nonrival assets?

  • Do you make a distinction between an “outcome” and an “output”?

  • One of things we hear over and over is “I see how architects, lawyers, etc. could do this…I see how any other business beside me could do this.” Are there some exercises or questions you like to plant to get people thinking differently around the topic of Subscribed?

  • There’s a concept you talk about in the book, swallowing the fish, which is when my revenue curve dips temporarily below the operating expenses curve as people transition to subscriptions. In your work with professional firms, does this apply more, less, or the same than those that sell traditional product?

  • What can we learn from the lessons from some of the oldest subscription companies—The Financial Times, The New York Times, Wall Street Journal, The Economist, all made the transition from the physical to online. What can we in professional services learn from this, since they were going from subscription to subscription (physical to online)?

  • Does Zuora have professional firms in its customer portfolio?

  • I want to run this analogy by you. I look at the medical profession, some of which are transitioning to a Concierge model—similar to a boutique—or a Direct Primary Care model, which has more volume. Does Zuora have medical practices in your customer base at Zuora?

  • What intriguing about this model is your selling insurance, so customers are paying for access, which puts you more in an actuarial pricing model, and perhaps 10% of your customers might use your resources 80%, and the rest are happy to pay for access whether they use you or not, which is the interesting psychology of selling insurance. Does that play a factor in how you sell this model?

  • You talked about Deloitte in Australia and New Zealand, so let’s climb Mt. Everest and try to apply this to a Big 4 accounting firm, or a top 100 law firm. Would you see it across the entire group of services, or just some services with other services priced on some other type of model?

  • You wrote something in the book that I just love: “Focus on margin and efficiency come at the cost of the relationship between the seller and customer.” So many firms only look at the math of the moment rather than the lifetime value of the customer.

  • The idea that we can subscribe to an automobile is fascinating, but you also talked about airlines and how 200 million frequent fliers are up for grabs. How do you see the major carriers adopting a subscription model, at least for their top fliers.

  • When you list all the advantages of this model, the one that hit home is how it breaks down silos. Many firms speak of being “one firm” but it’s not the case. This model really does break down the silos, doesn’t it?

  • I would imagine you see much more innovation from the companies that have adopted this model [because they are more customer-centric]?

  • You talk about three different customer metrics, Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read), in addition, are there other predictive indicators that you’ve ferreted out from your customer base of what predicts a customer won’t churn, or will keep engaging and remain loyal?

  • I loved how you took GAAP to task for not being able to report on this model, and some of the new wording you presented. What’s been the feedback from CFOs on this new income statement and its presentation? [See example of this new income statement below].

  • What does Zuora do, what do you offer?

  • Are you applying any Artificial Intelligence to your offerings?

  • Do you offer consulting to help firms with the change management to help them make this transition?


In Summary

Don’t dismiss the subscription business model because you don’t think it would work for your business. Tien shared several examples from industries that might not feel like a good fit. It is worth exploring. If nothing else, read the book which made both Ron and Ed’s “best of 2018” lists.

Episode #229: Incumbents Hate Competition (But Customers Love It)

Overview

All business people live the ultimate contradiction. They pray at night for supernormal profits and spend their days driving down those profits by competitively supplying customers with more of what they want. As the Austria economist Joseph Schumpeter so poetically phrased it, entrepreneurial innovations make up the “perennial gale of creative destruction,” whereby entire industries have been eliminated due to this dynamism of free markets.

Buggy whip manufacturers didn’t invent the automobile and slide rule manufacturers did not invent the calculator. Both of these innovations, and a plethora of others, rose up and decimated existing stocks of infrastructure and propelled our economy forward.


Be the Ball, Danny…

Businesses are the ultimate change agents in society, ushering in new products, services and ways of conducting our affairs. This role of business is often ignored in the debate over the jobs destroyed in the process, which is the wrong metric: the creativity is more important than the destruction.

For example, Intuit announced assisting bookkeeping at $200/month in addition to its QBO subscription, at the following price points: $210, $217, $230, $260 (self-employed, Freelancer option is $205).

But why would Intuit invest in a dying industry? If anything, this validates the market for bookkeeping, and the human relationship that is required.


Where do we go from here?

Economists like a wide range of price/value points. Markets serve both the rich and poor, and everyone in between — think of the price points available with hotel rooms, cars, restaurants, etc. This puts a premium on positioning.

  • Does the $200 price anchor at too low a price? It could be too high a price for true DIY customers.


The Subscription Economy…Again!

The other overlooked reality of this is it validates the subscription business model. Customers in a free market are free to choose. Does anyone feel guilty using Veem, or buying prescription drugs from Amazon (when they enter that market)? Capitalism is not a “system of competition.” Competition is ubiquitous, no matter the system. Capitalism is a system of voluntary cooperation. Competition does not give rise to voluntary exchange, scarcity does. Competition is a feature, but not the defining feature of capitalism.

The Golden Rule of capitalism: The good fortune of others is also one’s own. It’s not zero-sum.

The impact on jobs is the wrong way to measure the health of a sector. It’s determined by outputs, not jobs. Nobody is nostalgic for bowling pin setter jobs or telephone operators.


So What is YOUR Strategic Response?

Firms need to niche (specialize) as more and more providers enter the market, especially at the low end. Our VeraSage colleague Tim Williams distinguishes between Magic Work and Logic Work. Firms could simply provide bookkeeping for free, along with other advisory (Magic) services.

Focus on customer transformations, which means you are taking responsibility for an outcome, rather than performing tasks. With a transformation, the customer is the product.

Tim has talked about Magic vs Logic before and one of his videos is below. It’s well worth watching. 

Episode #228: Memorable Mentors - Richard P. Feynman

On the show this week, we had a discussion about Richard Feynman and why he is a memorable mentor. Here’s some background to get you started…

Biography

According to Wikipedia, Richard Feynman [May 11, 1918 – February 15, 1988] was an American theoretical physicist, known for his work in the path integral formulation of quantum mechanics, the theory of quantum electrodynamics, and the physics of the superfluidity of supercooled liquid helium, as well as in particle physics for which he proposed the parton model. For his contributions to the development of quantum electrodynamics, Feynman, jointly with Julian Schwinger and Shin'ichirō Tomonaga, received the Nobel Prize in Physics in 1965. In a 1999 poll of 130 leading physicists worldwide by the British journal Physics World he was ranked as one of the ten greatest physicists of all time. He assisted in the development of the atomic bomb during World War II and became known to a wide public in the 1980s as a member of the Rogers Commission, the panel that investigated the Space Shuttle Challenger disaster.


So Many Quotes 

Some people are just “quotable”…that is, their words lend themselves either purposefully or naturally to being easily quoted. Richard Feynman is most certainly one of these individuals. The following quotes were excerpted from the book, The Pleasure of Finding Thing Out: The Best Short Works of Richard P. Feynman, published in 1999 by Richard’s family.

In physics, unlike chess, when you discover new things, it looks more simple.”

 

“The kick in the discovery,” the sudden feeling grasped a wonderful new idea, that there was something new in the world.”

 

He did physics for the fun of it—for the pleasure of finding out how the world works. When he received the pre-dawn call informing him he won Nobel prize, he replied: “You could have told me that in the morning.”

 

He won the Nobel prize for work he did in 1947, at the age of 29.

 

“Why knowing merely the name of something is the same as not knowing anything about it.”

 

“Social science is not a science—it’s a pseudoscience [Hayek called it scientism].

 

“I’d rather have questions I can’t answer than answers I can’t question”

 

“The question of doubt and uncertainty is what is necessary to begin; for if you already know the answer there is no need to gather any evidence about it.”

 

“The question is not whether it’s true or false, but rather how likely it is to be true or false.”

“Without doubt there is no progress, no learning.”

 

“And there’s no learning without posing a question, and a question requires doubt. People search for certainty, but there is no certainty.”

 

Don’t know a problem: ignorant
Have a hunch: uncertain
Pretty sure of result: some doubt

 

“The English call it “muddling through”, it’s the most scientific way of progressing—one must leave the door to the unknown ajar.”

 

“The power of government should be limited; that governments ought not to be empowered to decide the validity of scientific theories, that that is a ridiculous thing for them to try to do.”

 

“A friend of mine, Albert R. Hibbs suggested very wild idea: it would be interesting in surgery if you could swallow the surgeon.”

 

On the Challenger disaster: [we should not] “encourage ordinary citizens to fly in such a dangerous machine, as if it had attained the safety of an ordinary airliner. For a successful technology, reality must take precedence over public relations, for nature cannot be fooled.”

 

“Learn from science that you must doubt the experts. As a matter of fact, I can also define science another way: Science is the belief in the ignorance of experts.”

 

“I’ve learned how to live without knowing. I think my life is fuller because I realize that I don’t know what I’m doing. I’m delighted with the width of the world!”

 

In a chapter titled the “Relation of Science and Religion,” he writes: “I do not believe that science can disprove the existence of God; I think that is impossible. Moral questions are outside the scientific realm.”

Science is the belief in the ignorance of experts.

Hell, if I could explain it to the average person, it wouldn't have been worth the Nobel prize.

Adjectival sciences, aren’t. - Attributed.


Some additional quotes…not necessarily from the same book as referenced above:

There are 1011 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.

The real problem in speech is not precise language. The problem is clear language. The desire is to have the idea clearly communicated to the other person. It is only necessary to be precise when there is some doubt as to the meaning of a phrase, and then the precision should be put in the place where the doubt exists. It is really quite impossible to say anything with absolute precision, unless that thing is so abstracted from the real world as to not represent any real thing.

No government has the right to decide on the truth of scientific principles, nor to prescribe in any way the character of the questions investigated. Neither may a government determine the aesthetic value of artistic creations, nor limit the forms of literary or artistic expression. Nor should it pronounce on the validity of economic, historic, religious, or philosophical doctrines. Instead it has a duty to its citizens to maintain the freedom, to let those citizens contribute to the further adventure and the development of the human race.

The real question of government versus private enterprise is argued on too philosophical and abstract a basis. Theoretically, planning may be good. But nobody has ever figured out the cause of government stupidity — and until they do (and find the cure), all ideal plans will fall into quicksand.

Do you seriously entertain the idea that without the observer there is no reality? Which observer? Any observer? Is a fly an observer? Is a star an observer? Was there no reality in the universe before 109 B.C. when life began? Or are you the observer? Then there is no reality to the world after you are dead? I know a number of otherwise respectable physicists who have bought life insurance.

If we suppress all discussion, all criticism, proclaiming "This is the answer, my friends; man is saved!" we will doom humanity for a long time to the chains of authority, confined to the limits of our present imagination. It has been done so many times before.

Related to and of Feynman

We didn’t spend the entire show reading Richard Feynman quotes (although we did find a Twitter account that effectively does that). There were a few other topics worth calling out during our discussion this past week.

Episode #227: Free-Rider Friday, January 2019

Ron Thinks ASMR Is Super Bowl Big…

Autonomous Meridian Sensory Response - or ASMR - is an effective tactic in advertising. Case in point from the SuperBowl: “Zoe Kravitz Does ASMR, Whispers About Michelob Ultra’s Pure Gold Organic Beer in Super Bowl Spot,” AdWeek, Kristina Monllos, January 28, 2019

 Here is some more information from Wikipedia to get you started on the subject of ASMR.

Colin-Quinn.jpg

 What do comedy, Trump, and Broadway have in common?

…more than you might think. Colin Quinn’s one-man off-Broadway show is real talk. He tackles some tough subjects and shows guts. Some might even call it counter culture. More here: “The Comedy Counter-Counterculture,” Kyle Smith, National Review, January 29, 2019

Don’t make me craugh. I might spit out my milk. Or cry in despair…

From FEE this past week, we had a great article on the North Korean constitution and a new word for everyone to file away. More here: “North Korea’s Constitution Makes Me Craugh,” FEE, Lawrence W. Reed, January 30, 2019 

Craugh: The temptation to cry and laugh at the same time (Reed conjured up this word while reading North Korea’s constitution)

At one point, we all thought Bezos was just a little crazy…

In hindsight, many of Jeff Bezos’ letters to Amazon shareholders have been great reads. Even years later. This one in particular is from 1997. So get in your Wayback Machine (maybe a Motorola in your pocket and definitely a CRT monitor on your desk) and take a look at this one: “Investor Letters: Jeff Bezos’ 1997 Letter to Amazon Shareholders

From this letter, we have Bezos’ four tenants:

  1. Be obsessed with the customer

  2. Focus on results over process [hat tip to House, M.D.]

  3. Make high quality decisions quickly

  4. Embrace external trends quickly

When Bezos was asked by an employee what Day 2 at Amazon will look like, he said Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death.

For a contrary view on Day 2, see Debbie Madden’s column in Inc.: “Jeff Bezos Says It’s Always Day 1 at Amazon. Here’s the Big Problem With That Philosophy

A Huge Hat Tip to Tim Williams…once again 

Don’t Change Your Practices, Change Your Mind,” Tim Williams, Ignition Consulting Group, January 15, 2019

Speaking of Tim Williams. Do yourself a favor and follow him on LinkedIn. He’s a LinkedIn influencer and every piece he writes is worth reading.

So what did Ed want to talk about this week? Texas.

If Texas were its own country, it would be the third largest oil producer in the world. Heck, if Texas were its own country, by many measures it would be the third largest country in the world too. (Wikipedia link for data points)

Larry Lessig still fights for the commons…

In 1922, Robert Frost wrote a poem. Until now, you had to pay a royalty to use it. Robert Frost poem enters the public domain as of January 1, 2019.

From the Be Careful What You Ask For department… 

Let’s get Caesar involved! (written by Allan Patterson) Go ahead, click the link. You’ll laugh. You might even craugh.

Let’s Get Deep For A Moment…

So what does Jesus have to say about the welfare state? Mr. England has a few thoughts in his article: “Jesus on the redistribution of wealth,” Randy England, Liberty.me, January 15, 2019

Creating An Emotional Connection With Your Dish Detergent…

Something that happens time and time again. That brand WANTS you to love it. That brand WANTS you to feel an emotional connection. But it’s dish detergent so are we expecting too much? Probably. And that’s why “Brand purpose is a lie,” …from Fast Company, January 17, 2019

Episode #226: A Priest and a Rabbi...

Folks, we have the Judeo-Christian tradition on the show! Ed and Ron were honored to have back on the show for the third time, and at the same time, Father Robert Sirico and Rabbi Daniel Lapin. Join us for another fascinating conversation with these two mentors, covering issues from economics, liberty, freedom, truth, and a host of other topics.

Rev. Robert A. Sirico received his Master of Divinity degree from the Catholic University of America following undergraduate study at the University of Southern California and the University of London. During his studies and early ministry, he experienced a growing concern over the lack of training religious studies students receive in fundamental economic principles, leaving them poorly equipped to understand and address today's social problems. As a result of these concerns, Fr. Sirico co-founded the Acton Institute with Kris Alan Mauren in 1990. His writings are published in a variety of journals, including: the New York Times, the Wall Street JournalForbes, the London Financial Times, the Washington Times, and National Review. He is a member of the prestigious Mont Pèlerin Society, the American Academy of Religion, and the Philadelphia Society. He is the Pastor of Sacred Heart of Jesus parish in Grand Rapids, Michigan. Father Sirico holds dual Italian and American citizenship.

Rabbi Daniel Lapin was born into a prestigious Torah family. He was a student of his father, Rabbi A.H. Lapin, who served the Jewish communities in Johannesburg and Cape Town, South Africa, eventually immigrating to America with his wife where they established the Am Echad synagogue in San Jose, CA. He learned in yeshivas (Torah schools) in England and Israel as well as studying physics, engineering and mathematics in S. Africa. Rabbi Daniel immigrated to the U.S. where, along with Michael Medved, he founded the Pacific Jewish Center in California. In 1992, he and his family relocated to Washington State where he began his work strengthening the Judeo-Christian roots of this country by writing, speaking and standing shoulder to shoulder with prominent Christian leaders, leading to the establishment of the American Alliance of Jews and Christians. In 2002, Rabbi Lapin wrote his bestselling book Thou Shall Prosper: The Ten Commandments for Making Money.

Ed’s Questions

Father Sirico, you wrote in your book Defending the Free Market: Freedom is not a goal or virtue in itself. Ultimately, the aim of freedom must be the truth. You value the truth more than your freedom. Can you explain that, and then we’ll get Rabbi Lapin’s reaction.

Peter Block, a consultant and previous guest of the show [Episode #183], defines liberty as the absence of oppression, freedom is the act of commitment (a choice to have an intention to create a certain kind of world).

Father, what is your favorite story, part, or concept from the Old Testament? And Rabbi, what is your favorite story, part, or concept from the New Testament? Do you have favorite concept from the Old Testament?

We humans are said to be a tribal species, but it seems nowadays that tribalism has gotten completely out of hand, and is running amuck, with people running to quick judgment. Would you address this notion that being tribal is ok, but tribalism really seems to be a problem?

Ron’s Questions

Rabbi Lapin, on your recent podcast, you laid out a principle: The Bible is the source of morality. But the Bible’s morality applies to individuals, not to nations. Can you explain what you mean, and then we’ll get Father Sirico’s reaction.

Why do we tend confuse poverty with virtue (or piety)? Father I’ll start with you. [Rabbi Lapin wrote in Business Secrets of the Bible: “The opposite of wealth is evil. If wealth isn’t being created, then evil is being done.” And if wasn’t for the Bible, we wouldn’t have the word “poor”.

Prior Shows with Father Robert Sirico and Rabbi Daniel Lapin

Books by Father Robert Sirico and Rabbi Daniel Lapin

Episode #225: The Real Monopolies: Occupational Licensure

In 1950, one out twenty occupations required some type of licensure. Today, it is almost one out of three. There are three levels of occupational licensure:

  1. Registration

  2. Certification

  3. Licensure

Political organization is a far better predictor of licensure than the danger the profession poses to the public (measured by liability premiums).

Some Suggested Reading:

One book that really changed Ron’s mind on this topic is The Rule of Experts: Occupational Licensing in America , S. David Young, 1987 (CATO).

President Obama was likely the first president to ever discuss occupational licensing in a public speech (speech before national Governors’ Assn), and his Council of Economic Advisors issued a report, which included 80 pages that are highly critical of occupational licensure.

George Bernard Shaw: “All professions are a conspiracy against the laity.” Economists have documented the following effects of licensure:

  • Limit consumer choice

  • Raise consumer prices

  • Increase practitioner income

  • Limit practitioner mobility

  • Deprive poor of adequate services (rich drive, poor walk)

  • Restrict job opportunities for minorities, older workers

  • Stifle innovation and creativity—had retailing been subject, supermarkets, big box, Amazon could have never happened

Thomas Edison had little formal education and could not have been licensed as an engineer under today’s guidelines. Frank Lloyd Wright would not qualify to sit for the architect’s certifying exam. Cranks, crackpots, and outsiders bring innovation.

Colonial America Cotton Mather and his fellow clergyman fought to establish inoculation as a cure for small pox: their leading opponents were doctors.

The first law in the USA was in Virginia in 1639, which regulated physicians fees. The second law regulated the quality of physicians service in Massachusetts 10 years later.

The American Medical Association (AMA) was formed 1847, and by 1900 every state had mandatory licensing law.

Most licensure imposes experience requirements—usually an arbitrary length. Until courts stopped it, it took longer to become a master plumber in Illinois than to become a Fellow of the American College of Surgeons.

Citizenship and residency requirements are also part of licensure. Many of these began in the 1930s as European refugees came to the USA.

More Suggested Reading:

Another great book is The Right to Earn a Living: Economic Freedom and the Law , Timothy Sandefur, 2010 (CATO).

A Louisiana law licensed florists. It requires a one-hour written exam and 3-hour performance exam that tests on “harmony” and “effectiveness” of floral arrangements.

Since 2000, fewer than 50% have passed!

One witness testified in court in a case that was challenging the licensure law: “I believe that the retail florist does protect people from injury…We’re very diligent about not having an exposed pick, not having a broken wire, not having a flower that has some type of infection, like, dirt that remained on it when it’s inserted into something they’re going to handle, and I think that because of this training, that prevents the public from having any injury…”

This doesn’t pass the laugh test. However, it did pass the “rational basis test.”

Cause and Effect:

In 2007, psychics in Salem, MA lobbied for licensing as a requirement to protect the public. But it is literally impossible to be a competent psychic.

In 1881, the National Burial Case Association set prices for coffins across the industry. Two years later, the National Funeral Directors Association fixed the price of adult coffins at $15, a large sum in those days. For a wooden box your kid could make in wood shop.

Interior designer license is one of the most difficult to earn. Only three states and Washington, D.C. offer it. It requires 2,190 days of education & experience (6 years)!

They argue that carpets could begin sparking infernos, porous countertops could spread bacteria, mis-chosen jail furnishings can be used as weapons.

In Illinois, barbers and manicurists are licensed, but not electricians, even though shoddy electrical job could burn down your neighborhood, but your hair will grow back.

Let’s Talk Liberty and Freedom:

This is not just a dollars and cents issue, it’s a liberty and freedom issue. One doesn’t have to ask permission to exercise one’s rights. The right to earn a living: marry, travel, have children, (drive), worship, etc.

Even the Magna Carta protected the right of “any man to use any trade thereby to maintain himself and his family.”

This right to earn a living was transformed into a privilege that could be revoked whenever politicians decided that doing so would be a good idea.

In License to Work: A National Study of Burdens from Occupational Licensing , Dick M. Carpenter, Lisa Knepper, et. al., they describe a new occupation: Permit Expediter. In Los Angeles they exist for helping restaurants comply with all of their licensing. In Washington, D.C. former Consumer and Regulatory Affairs bureaucrats help with licensing.

But in Chicago, Permit Expediters are so common, they have their own license!

The book also studied 102 low-income occupations, such as: Interior designer, shampooer, florist, home entertainment installer (8 months), funeral attendant, tree trimmers (1+ year), shoe shiners (Newark).

On average, states license 43 occupations (LA = 71/102, OR = 59; WY = 24 fewest).

CA licenses 177 job categories and Hawaii imposes the most burdensome requirements, while PA has the lightest.

Most of the 102 occupations are practiced somewhere without licensure or widespread harm.

The average cosmetologist requires 372 days training while the average EMT requires 33 days.

One argument made in favor of licensure is asymmetric information, but that is true in a lot of markets (houses, cars, etc.). Information will never be perfect; it’s costly to acquire.

Reputation is stronger than regulation. And of course there is always tort law.

Milton Friedman wrote his PhD thesis with Simon Kuznets, Income from Independent Professional Practice (NBER, 1945). One excuse he constantly heard from the medical profession was: letting too many people in would lower incomes to such an extent that doctors would resort to unethical practices to increase their income.

Friedman replied: “This has always seemed…objectionable on both ethical and factual grounds. It is extraordinary that leaders of medicine should proclaim publicly that they and their colleagues must be paid to be ethical.”

Another excellent book is Bottleneckers: Gaming the Government for Power and Private Profit, by William Mellor and Dick M. Carpenter II.

The Chairman and founding GC of Institute for Justice, and director of strategic research, www.ij.org.

They define Bottlenecker as: A person who advocates for the creation or perpetuation of government regulation, particularly an occupational license, to restrict entry into his or her occupation, thereby accruing an economic advantage without providing a benefit to consumers.

Justice William O. Douglas: “The right to work is the most precious liberty that man possesses.”

Conclusion: these laws really hurt the poor and minorities, exacerbate inequality, and even harm kids (can’t have a lemonade stand).

Episode #224: The Best Books We Read in 2018

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“I think we ought to read only the kind of books that wound and stab us. If the book we are reading doesn’t wake us up with a blow on the head, what are we reading it for.” -Franz Kafka

Ron’s Five Best Books in 2018

5. The Tyranny of Metrics, Jerry Muller

“Juking the stats”—the way in which institutions are perverted, as effort is diverted from its true purpose to meeting the metric targets.

Surgeon avoids tough cases—creaming, avoiding risky instances that might have negative effect impact on metrics.

“While we are bound to live in an age of measurement, we live in an age of mismeasurement, over-measurement, misleading measurement, and counter-productive measurement. The problem is not measurement, but excessive measurement and inappropriate measurement—not metrics, but metric fixation.”

Hospitals penalized % patients fail survive for thirty days beyond surgery, so they kept the patient alive for 31 days.

The Tyranny of Metrics
By Jerry Z. Muller

Metric fixation leads to a diversion of resources away from frontline producers toward managers, admin, and those who gather and manipulate data. Goodhart’s law: Any measure used for control is unreliable.

Metric fixation stifles innovation, risk-taking, and creativity, and creates a short-term vs. long-term outlook. During Vietnam War, Robert McNamara substituted civilian mathematical analysis for military expertise.

In the book, Muller covers:

  • Colleges and Universities

    • Training, oriented to production and survival

    • Education, oriented to making survival meaningful

  • Schools

  • Medicine—diagnosing and treating disease, American medicine is best in world; lifestyle patters beyond control of Drs

  • Policing

  • The Military

  • Business & Finance

  • Philanthropy and Foreign Aid—the snake of accountability eats its own tail

Sunlight best disinfectant, Wikileakism. More often, result is paralysis. Transparency becomes the enemy of performance

You can listen to Jerry Muller being interviewed by Russ Roberts on EconTalk

4. Strategic Cost Transformation, Dr. Reginald Lee

Ron was honored to write the Foreword, where he states:

“Dr. Lee’s distinction between noncash costs and cash costs is brilliant, not to mention essential for understanding how manipulating costs will not alter cash. The goal is to generate cash profit, not accounting profit. Most costs in organizations today are for capacity: Human capital, facilities, and technology. These costs don’t change based on how they are utilized, and yet cost accountants force math relationships that make it appear as if they did, such as cost per hour. The fact is, services and products don’t have costs, organizations do.

Besides, as Dr. Lee makes clear, “You don’t need calculated costs for managerial purposes. The data in the OC domain are precise and unambiguous [measurements]. The AD information is ambiguous and messy [metrics]. OC provides everything AD does without the drama.”

Cost accountants have all sorts of metrics in their toolboxes they claim are the magic bullet for calculating profitability per job, or per product/service. Yet these metrics of margin analysis won’t predict the need for additional capacity, or help you model cash flow, nor do they tell you from a pricing perspective if you’ve left money on the table.

Further, these metrics do not help you improve the future performance of your organization. Cost accountants are collectively plunging a ruler into the oven to determine its temperature—it is the wrong tool.

Listen to our interviews with Dr. Lee: Episode #200 and Episode #112.

3. Factfulness, Hans Rosling

Son, Ola, daughter-in-law, Anna, also co-authored the book.

Hans Rosling, R.I.P. [July 27, 1948 – Feb 7, 2017]

The book begins with a test, here are few of the questions, with the correct answer in bold.

Where does the majority of the world population live? Low income countries (9%)/middle (75%)/high income countries

In last 20 years, proportion of world population living in extreme poverty has… Almost doubled/same/almost halved

On average, 7% get it right (less than 1 in 10), all around the world, all types of professions, including Nobel Prize winners, and medical researchers worst

They did worse than random chance!

Chimps would do better—and their errors would be equally shared between the two wrong answers. The human errors all tended to be in one direction—the world is worse than it really is.

Rosling calls this an “Overdramatic worldview,” and it’s not the media’s, or the school’s fault, etc.

It’s how our brains work: illusions don’t happen in our eyes, they happen in our brains.

One linguistic change he convinced me of: there is no gap between the “developed” and “developing” worlds.

2. In the First Circle, Aleksandr Solzhenitsyn

Shunning the moral relativism that permeates modern thought, Solzhenitsyn unapologetically treats good and evil and the human soul as metaphysical realities.

Four days in a sharashka (slang for a prison research institute), December 24-27, 1949

Polyphonic principle: no single character dominates the novel.

To sum the book up: What does it mean to be a human being?

Solzhenitsyn last words to his fellow countrymen as he departed into exile: “Live Not by Lies!”

“The man from whom you’ve taken everything is no longer in your power; he is free again.”

“Lenin and Trotsky were right: If you couldn’t shoot people without trial, you would never be able to make history at all.”

“Socialism without Stalin was no different from fascism!” (Stalin to himself)

Mrs. Elanor Roosevelt: ask the prisoners whether any of them wished to address a complaint to the UN?

“They unanimously protest against the distressing situation of the blacks in America and ask the UN to look into the matter.”

There are two episodes on EconTalk on this book, with Russian Literature Professor Kevin McKenna. The first one talks about Solzhenitsyn the man, and the second discusses the book [spoiler alert for the second interview]. 

Ed’s Five Best Books in 2018

5. The Vampire Economy, Gunter Reimann

4. Tomorrow 3.0: Transaction Costs and the Sharing Economy, Michael C. Munger

Listen to our show with Mike Munger, Episode #190.

2. Win Bigly, Scott Adams

And… Ron and Ed’s #1 Book for 2018 surprising no one…

1. Life After Google, George Gilder

  • Kurt Godel: “Every logical system necessarily depends on propositions that cannot be proved within the system.” The mathematics of information, led to computers.

  • Computers required what Alan Turing called “oracles” to give them instructions and judge their outputs. Also led to Claude Shannon’s information theory.

  • Gordon Bell coined Bell’s Law: every decade a hundredfold drop in the price of processing power engenders a new computer architecture.

Listen to our interview with George Gilder on Life After Google, Episode #207.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #223: 2018 - The Year in Review

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RIP

  • President George Herbert Walker Bush

  • Barbara Bush

  • John McCain

  • Charles Krauthammer

  • Marty Allen, comedian

  • Penny Marshall

  • Stephen Hillenburg, Creator SpongeBob Squarepants, ALS, 57

  • Roy Clark

  • Stan Lee

  • Paul Allen

  • Burt Reynolds

  • Neil Simon

  • Robin Leach

  • David Ogden Stiers, M*A*S*H

  • Aretha Franklin

  • Charlotte Rae (Edna Garret, The Facts of Life)

  • Adrian Cronauer, 79, American airman, radio show was inspiration for Good Morning, Vietnam

  • Joe Jackson, patriarch of Jackson family, 89

  • Anthony Bourdain, 61

  • Kate Spade, 55

  • Dwight Clark, The Catch, ALS, 61

  • Jerry Maren, 98, last surviving munchkin from The Wizard of OZ

  • Verne Troyer, Mini-Me in Austin Powers, 49

  • Tom Wolfe, 87

  • Margot Kidder

  • Larry Harvey, Founder of Burning Man Festival, 70

  • Harry Anderson, Night Court, 65

  • R. Lee Ermey, Full Metal Jacket drill sergeant, 74

  • Linda Brown, center of US Supreme Court Case ended segregation, 75

  • Stephen Hawking, 76

  • Bill Graham, 99

  • John Mahoney, Frazier, played the father, 77

  • Jerry Van Dyke, 86

  • John Young, Astronaut, walk on moon, first space shuttle flight, 87

  • Ken Berry

  • Richard Harrison, The Old Man on Pawn Stars, 77, Parkinson’s

TSOE Shows in 2018

Out of 50 live shows in 2018, we had guests on 23 of them (46%). Big shout out to our show runner, Thomas Casey, for arranging most of the wonderful guests we had on, and thank you to all the wonderful guests for appearing on the show.

Ron’s Five Favorite Shows of 2018 

  1. Bad Medicine, Episode #178

  2. Laws of Systems Thinking, Episode #175

  3. The Subscription Business Model, Parts I & II, Episodes #217 and #221

  4. Top Ten Pricing Lessons, Episode #196

  5. The Value Guarantee, Episode #179

Ed’s Data-driver Top Shows according to YOU

Top 3 interview shows

  1. George Gilder, Episode #207, Life After Google

  2. Stephan Liozu, Episode #203

  3. Russ Roberts, Episode #213

Top 3 topic-driven shows

  1. How to Have a Value Conversation, Episode #182

  2. The Subscription Business Model, Part I, Episodes #217

  3. Top Ten Pricing Lessons, Episode #196

Pull-quotes from our Guests

Mentors and Economists

Ron’s 37-year mentor, George Gilder, Episode #207, Life After Google

  • “We have to act in the darkness of time”

  • “Faith precedes knowledge, faith precedes action, faith precedes meaning”

  • “You can’t have any logical, rational system without faith”

Ed’s long time mentor, Peter Block, Episode #183

  • “Liberty is the absence of coercion; freedom is a choice, a commitment”

  • Ed sang to Peter!

  • Eisenhower asked computer, “Is there a God?” “There is now.”

Thomas Hazlitt, Episode #184, The Political Spectrum

  • The story of naming the SS Minnow from Gilligan’s Island

  • The iPhone wouldn’t have been allowed with net neutrality

Don Boudreaux, Episode #187

  • Public Choice is “Politics without romance.”

  • If mass transit is going to be measured by the number of jobs it creates, then we should have publicly funded Rickshaws, since there is a 1:1 of jobs and passengers

Michael Munger, Episode #190, Tomorrow 3.0

  • Uber is not threat to taxis, but to Amazon (Sears was first Amazon)

  • Triangulation, Transfer, Trust

  • To the customer, all costs are transaction costs

Russ Roberts, Episode #213

  • From Russ’s recent podcast, a Chinese proverb: “No food, one problem. Lots of food, many problems.”

Walter Williams, Episode #216

  • Referring to minimum wage laws: “They don’t even pass the sniff test.”

Other notable guests: a journalist, a former Thunderbird(!), authors, entrepreneurs, etc.

Mark Skousen, Episode #205

John Stossel, Episode #204

Chris “Elroy” Stricklin, Episode #214

Jeffrey Tucker, Episode #201, Right-Wing Collectivism

Barry Melancon, Episode #177, President of the American Institute of CPAs

Blair Enns, Episode #188, Pricing Creativity

Phil Rosenzweig, Episode #191, The Halo Effect

  • “Whenever someone says ‘We have the right strategy, we just need to execute better,’ I make sure to take an extra-close look at the strategy.”

Mary Ruwart, Episode #192, Death by Regulation

  • Ed: “Your book is more horrific than a Stephen King novel, because it’s real.”

  • “At least one-half of Americans who died lost at least a decade off their lives because of the 1962 FDA Amendments”

Reginald Lee, Episode #200, Strategic Cost Transformation, VeraSage Senior Fellow

Warren Myer, Episode #218, Coyote Blog, and Climate-Skeptic

Ron Quaranta and Erik Asgeirsson, Episode #212, Erik is the President and Chief Executive Officer of CPA.com, and Ron is the Founder and Chairman of the Wall Street Blockchain Alliance.

Stephan Liozu, Episode #203, Chief Value Officer of Thales Group, Professional Pricing Society Faculty, author

David Meikle, Episode #206, How to Buy a Gorilla

Ryan Lazanis, Episode #210, Founder of Xen Accounting

Alessandra Lezama, Episode #195, AbacusNext CEO

Jeff Kanter, Episode #197, Co-founder of HealthExcellencePlus.com 

Honors

Michael Palin, Knighted, Sir Palin 

Predictions Made about 2018

2 Comments

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #222: Free-Rider Friday, December 2018

Episode #222 reminded Ed of the old TV show, Room 222, which ran from 1969-1974 (typical bad 70’s TV).

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Ed’s Topics

Warren Myer, Coyote Blog, October 2018, the real scandal in climate science.

Andrew Winston, Harvard Business Review article on pending climate catastrophe.

Ed’s brother’s Christmas joke.

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[On the take down of the 1984 song “Do They Know it’s Christmas” by Band Aid, see our shows with Father Sirico, Episode #134, and Magatte Wade, Episode #160, and the movie they made, Poverty, Inc.].

From Intellectual Takeout, November 25, 2018, Socialists are more materialist than capitalists.

New York Times, December 21, 2018, “What is Glitter?”

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Ron’s Topics

IBM’s rebel yell,” The Economist, November 3, 2018

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    • IBM bought Red Hat, $34B, 63% premium

    • Founded 1993, $2.9B revenue

    • For 22 quarters IBM revenue declined

    • Culture clash IBM straight-laced, Red Hat freewheeling

    • Watson: disappointment in AI

    • Red Hat name: 18th-century revolutionaries in American and France wore red caps.

    • Now, open-source looks like the establishment

Coping with the 100-year-life society,” The Economist, November 17, 2018

More than one-half of Japanese babies can expect to live to 100.

Shinzo Abe talks about a model of how to make ultra-long lives fulfilling and affordable (“designing the 100-year-life society”). The Economists thinks Japan needs to: 

  1. Persuade current workers to labor longer

  2. Encourage more women into the labor force

  3. Let in more immigrants

Even though it has made progress on all three, it’s not enough. The Japanese population is declining at almost 400,000 year, and there are 1.6 vacancies for every jobseeker.

Baby bust,” The Economist, November 24, 2018

From 2007 to 2017, America’s fertility rate dropped from 2.12 to 1.77, which is equal to England, but well below France. The teenage birth rate has halved in the past 10 years.

fertility.png

Staying alive,” The Economist, November 24, 2018

Suicide rate in America is up 18% since 2000, largely among white, middle-aged, poorly educated men.

At the global level, suicide is down by 29% since 2000, notable among:

    • Women in China and India

    • Middle-age men in Russia (stage between communism and capitalism: alcoholism)

    • Old people all around world

Why? Greater urbanization; falling poverty; greater employment rates.

515 people survived jumping off the Golden Gate bridge between 1937-1971, 94% were still alive in 1978. 90%+ survivors of suicide don’t try it again.

Suicide is strangely contagious: after Robin Williams committed suicide in 2014, 1,800 more suicides than would otherwise have been expected occurred within the next 4 months.

The Economist thinks doctors should be able to assist. Ron vehemently disagrees with this.

Take a break,” The Economist, November 24, 2018

The average Americans worker in a typical year works 100 hours more than an average Briton, French, and 400 hours more than average German worker.

Average American worker receives 17.2 days of vacation (it was 20.3 1978); around one-half don’t take full allotment.

In the European Union, there are 20 paid holidays per year (in Spain and Sweden, 36). And HBR study in 2016 found that those who took 11+ days off were twice as likely to get a raise.

But the causation could be the opposite: star workers may feel they can afford to take a break.

Extra hours don’t automatically lead to higher productivity. Parkinson’s law: work expands to fill the time available.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #221: The Subscription Business Model, Part II

Ed and I continue our exploration of the subscription business model. Check out our first episode in this series from November 9, 2018 (Episode #217).

In this episode, we discussed the book, The Automatic Customer: Creating a Subscription Business in Any Industry, by John Warillow (2015).

The history of the subscription model dates back to the 1500s, when European map publishers subscribed to future editions. Newspapers and magazines began in 17th century Europe. Ron’s first book, The Professional’s Guide to Value Pricing, which was published by Harcourt Brace initially, was sold on a subscription model.

Vijay Ravindran, from Amazon Prime: “It was never about the $79. It was really about changing people’s mentality so they wouldn’t shop anywhere else.” Nothing has been as successful in getting people to shop in new product lines

Nine Subscription Business Models

  1. The Membership Website Model—Wall Street Journal, New York Times, The Economist, Financial Times, etc.

  2. The All-You-Can-Eat Library Model—Spotify, Rdio, Rhapsody, Netflix, etc.

  3. The Private Club Model—Ongoing access to something rare (networking clubs, etc.). Disney’s Club 21 [and Club 33] at Disneyland.

  4. The Front-of-the-Line Model—Priority access to a group of your customers  (turnaround time, etc.).

  5. The Consumables Model—A product that needs replenishing (razors, diapers, socks).

  6. The Surprise Box Model—a curated package of goodies, sometimes samples (wine, cholates, etc.). Requires big supply chain, variety products, etc.

  7. The Simplifier ModelHassle Free Home Services takes care of your home maintenance, $350/month. Bigger jobs are provided, 50% of revenue. Don’t need to bundle all your services, just the ones your customer needs regularly (Q&A, tax, compliance, etc., in professional firms). Check out the Porschepassport.com—you can subscribe to a car company!

  8. The Network Model—Partial access to expensive infrastructure, value increases as more people subscribe (Zipcar, acquired by Avis).

  9. The Peace-of-Mind Model—Insurance against something your customers hope they’ll never need. Tagg is a pet tracking service, or IRS audit representation offered by accounting and law firms, Turnover Insurance, LoJack for laptops and Alzheimer’s sufferers, etc. You earn an underwriting profit, which is equal to the premiums less claims paid, plus the investment of float). Calculating risk biggest challenge, so go slow, only offer to handful of customers, limit your coverage to a dollar amount (# incidents, etc.), reinsure.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #220 : Memorable Mentors: Eric Hoffer

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Biography

Eric Hoffer (July 25, 1898 – May 21, 1983) was an American moral and social philosopher. He was the author of ten books and was awarded the Presidential Medal of Freedom in February 1983 (Reagan). His first book, The True Believer (1951), was widely recognized as a classic, receiving critical acclaim from both scholars and laymen, although Hoffer believed that The Ordeal of Change (1963) was his finest work. Hoffer was born in 1898 in The BronxNew York, to Knut and Elsa (Goebel) Hoffer. His parents were immigrants from Alsace, then part of Imperial Germany. When he was five, his mother fell down the stairs with him in her arms. He recalled, "I lost my sight at the age of seven. Two years before, my mother and I fell down a flight of stairs. She didn’t recover and died in that second year after the fall. I lost my sight and, for a time, my memory." His eyesight inexplicably returned when he was 15. Fearing he might lose it again, he seized on the opportunity to read as much as he could.

His recovery proved permanent, but Hoffer never abandoned his reading habit. By age five, Hoffer could already read in both English and his parents' native German. He was raised by a live-in relative or servant, a German immigrant named Martha. Hoffer spoke with a pronounced German accent all his life, and spoke the language fluently. Hoffer was a young man when he also lost his father. The cabinetmaker's union paid for Knut Hoffer's funeral and gave Hoffer about $300 insurance money. He took a bus to Los Angeles and spent the next 10 years on Skid Row, reading, occasionally writing, and working at odd jobs.

In 1931, he considered suicide by drinking a solution of oxalic acid, but he could not bring himself to do it. He left Skid Row and became a migrant worker, following the harvests in California. He acquired a library card where he worked, dividing his time "between the books and the brothels." He also prospected for gold in the mountains. Snowed in for the winter, he read the Essays by Michel de Montaigne. Montaigne impressed Hoffer deeply, and Hoffer often made reference to him. He also developed a respect for America's underclass, which he said was "lumpy with talent."

Eric Hoffer: The Longshoreman Philosopher, Tom Bethell, 2012

Hoover Institution houses Eric Hoffer’s papers.

His early decades are a mystery (DOB: some say 1902, more likely 1898). Grew up in Bronx, blind for 8 years, recovered his sight.

Quite possibly born in Germany and never became a legal resident of the USA. Lili Osborne knew him better than anyone, thought it possible he was born in Germany. His birth certificate has never been found. He had no passport. He spoke with a thick German accent, not American, as most immigrants. His Social Security Application applied on June 10, 1937 shows born in NYC on 7/25/1898. Fellow Dockworkers referred to him as “The one who writes books.” He was turned down by US army in 1942 due to a hernia.

Found himself broke in San Diego in 1934 (he lived on skid row in Los Angeles, then was a migrant worker in California’s Central Valley). His whereabouts from there are well known. He moved to San Francisco permanently after Pearl Harbor and worked as a longshoreman.

He described himself as an atheist (Tom Bethell says his thoughts are too complex to label). He remained very concerned about the fate of the Jews. He became an Adjunct professor at UC Berkeley during the Free Speech movement; President Johnson received him at the White House.

He worried about automation; later, he saw his fears were greatly exaggerated.

“I cannot get excited about anything unless I have a theory about it.”

Murray Rothbard was critical of Hoffer. He wasn’t interested in economics. Though he was a neoconservative.

He did say in the 1970s: “Russia’s day of judgment will come sometime in the 1990s. And when the day comes everyone will wonder that few people foresaw the inevitability of the end.”

Two contemporary writers did impress him: George Gilder, especially an article in Commentary, “In defense of Monogamy,” and Malcolm Muggeridge on Sidney and Beatrice Webb.

Jean Paul Sartre: […intellectuals enjoy the privilege of being] “scandalously asinine without harming their reputations.” Hoffer wondered what would America have been like if only college graduates had been allowed to enter the country?

He wrote that prior to FDR if you failed, blamed yourself; after FDR, you blamed the government and the system. America’s decline began with FDR and it’s absurd to think of him as a great man. He’s buried at Holy Cross in Colma, (as is Ron’s Grandmother).

The True Believer: Thoughts On The Nature of Mass Movements, 1951

Summary: President Eisenhower cited it during one of his earliest TV press conferences (Look profile stated he was Ike’s favorite author). A highly provocative look into the mind of the fanatic and a penetrating study of how an individual becomes one. Mass movements and political fanaticism.

Bethell: True believers are disappointed men—disappointed in their own lives. But instead of recognizing this they seek to reform the world. [Nazi leaders initially had artistic or literary ambitions, failed at them]. Only a handful mentioned in book: Hitler, Stalin, Luther and Gandhi, St. Paul and Jesus.

Richard Pipes: “the masses don’t make revolutions, they make a living.” Revolutions are started by intellectuals. Hoffer originally thought Communism was a mass movement, and highly productive.

Quotes

  • Fear of the future causes us to lean against and cling to the present, while faith in the future renders us receptive to change.

  • A man is likely to mind his own business when it is worth minding. When it is not, he takes his mind off his own meaningless affairs by minding other people’s business.

  • Our frustration is greater when we have much and want more than when we have nothing and want some.

  • Unless a man has the talents to make something of himself, freedom is an irksome burden. …We join a mass movement to escape individual responsibility, or, in the words of the ardent young Nazi, “to be free from freedom.”

  • The genius of a great leader consists in concentrating all hatred on a single foe…We do not usually look for allies when we love. But we always look for allies when we hate.

  • The best and worst is observed in the case of language. The respectable middle section of a nation sticks to the dictionary. Innovations come from the best—statesmen, poets, writers, scientists, specialists—and from the worst—slang makers.

The Ordeal of Change, 1963

The Ordeal of Change
By Eric Hoffer

Summary: Essays on the duality and essentiality of change in man throughout history. In Chapter One, titled Drastic Change, he begins: It is my impression that no one really likes the new. We are afraid of it.

Quotes

  • Intellectuals have been imprisoned and liquidated in Communist countries. What the intellectual craves above all is to be taken seriously, to be treated as a decisive force shaping history. He would rather be persecuted than ignored.

  • There can be no real freedom without the freedom to fail.

  • The intellectual derives his sense of usefulness mainly from directing, instructing, and planning—from minding other people’s business—and is bound to feel superfluous and neglected…in any social order that can function with a minimum of leadership will be anathema to the intellectual.

  • To adopt the role of the pioneer and avant-garde is to place oneself in a situation where ineptness and awkwardness are acceptable and even unavoidable; for experience and know-how count for little in tackling the new, and we expect the wholly new to be ill-shapen and ugly.

  • We know that words cannot move mountains, but they can move the multitude; and men are more ready to fight and die for a word than for anything else. Words shape thought, stir feeling, and beget action; they kill and revive, corrupt and cure. The “men of words”—priests, prophets, intellectuals—have played a more decisive role in history than military leaders, statesman, and businessmen.

Reflections on the Human Condition, 2006

Epigraph: If anybody asks me what I have accomplished, I will say all I have accomplished is that I have written a few good sentences.

Summary: A collection of poignant aphorisms taken from his writings.

Quotes

Nature attains perfection, but man never does.

We hear a lot about the dehumanizing effects of the machine. Actually, the large-scale dehumanization of the Stalin-Hitler era was the work of ideological machines. In Russia the doctrinaire appliances work better than the mechanical.

A concern with right and wrong thinking is the manifestation of a primitive, superstitious mentality.

In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.

Noncomformists travel as a rule in bunches. You rarely find a noncomformist who goes it alone.

It almost seems that nobody can hate America as much as native Americans. America needs new immigrants to love and cherish it.

Action is released by emotion, and emotion is stirred by words.

An empty head is not really empty; it is stuffed with rubbish. Hence the difficulty of forcing anything into an empty head. (Ron wonders is this was a prescient quote about AOC.)

When a genuine leader has done his work, his followers will say, “We have done it ourselves,” and feel that they can do great things without great leaders. With the noncreative it is the other way around: in whatever they do they arrange things that they themselves become indispensable.”

Language was invented to ask questions. Answers may be given by grunts and gestures, but questions must be spoken. Humanness came of age when man asked the first question. Social stagnation results not from a lack of answers but from the absence of the impulse to ask questions.

People who bit the hand that feeds them usually lick the boot that kicks them.

There are no chaste minds. Minds copulate where ever they meet.

A man’s worth is what he is divided by what he thinks he is.

More Quotes

It’s disconcerting to realize that businessmen, generals, soldiers, men of action are less corrupted by power than intellectuals...You take a conventional man of action, and he’s satisfied if you obey. But not the intellectual. He doesn’t want you just to obey. He wants you to get down on your knees and praise the one who makes you love what you hate and hate what you love. In other words, whenever the intellectuals are in power, there’s soul-raping going on. –Eric Hoffer

The best education will not immunize a person against corruption by power. The best education does not automatically make people compassionate. We know this more clearly than any preceding generation. Our time has seen the best-educated society, situated in the heart of the most civilized part of the world, give birth to the most murderously vengeful government in history. Forty years ago the philosopher Alfred North Whitehead thought it self-evident that you would get a good government if you took power out of the hands of the acquisitive and gave it to the learned and the cultivated. At present, a child in kindergarten knows better than that. –Eric Hoffer

The monstrous evils of the twentieth century have shown us that the greediest money grubbers are gentle doves compared with money-hating wolves like Lenin, Stalin, and Hitler, who in less than three decades killed or maimed nearly a hundred million men, women, and children and brought untold suffering to a large portion of mankind. –Eric Hoffer

The central task of education is to implant a will and a facility for learning; it should produce not learned but learning people. The truly human society is a learning society, where grandparents, parents, and children are students together. In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists. –Eric Hoffer

Other Program Notes—Third Segment

Five-Star Review on iTunes from Scott The Locksmith. Thank you Scott and welcome to the TSOE Community!

Email from Liz Farr on New Mexico: One of our 50 is missing, December 1

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Hi Ron and Ed,

Thanks for sharing the piece on the NM resident who had to convince someone that NM is part of the US. 

This happens all the time. For decades, New Mexico Magazine has had a column called “One of our 50 is missing.”  I’ve had experience with this myself. Here are some of my personal experiences:

I’ve been told that my English is very good and that my skin is lighter than they expected. 

Back in the 80s, when I was living in Albuquerque, I sent off to the University of Chicago for information on their graduate program in neuroscience. I received a package plastered in stamps, with “Air Mail” stamped all over. Inside that package was information on the Test of English as a Foreign Language, which I would have to pass before I could enroll.

Also in the 80s, my then-boyfriend applied to grad school at Brown University. He forgot to include a check for $20 for the application fee. He got a letter back, also covered with stamps and also stamped “Air Mail,” that noted they needed his application fee. Since the fee had to be paid in US dollars, they suggested that perhaps he had a friend in the US who might be willing to pay on his behalf. 

No problems with TSA, but I did run into a BC border patrol agent who asked if I had made the NM license plate on my car myself. 

Thanks for the chuckle!

Liz

Email from Tim

Ron,

I am reading your book [Implementing Value Pricing] and have written you once before.

This is a sincere question: I am 57 years old and have had my own marketing firm since 2002. (Pricing and billing by the hour no less).

What do you say to people when they read your implementing value-based pricing book, look to the heavens and cry out in frustration “Why the hell didn’t I swerve into this book and value pricing 20 years ago?”

Is there any sentiment that gives them peace?

Even though I’ve started implementing this thinking in the last six months, I need it.

Thank you, TIM

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Ron’s reply to Tim

Hi Tim,

Thank you so much for your email.

I know it is cliche to say, “I wish I had a nickel…” but it’s true nonetheless.

Yours is a common reaction. We had one guy sit in a course on Value Pricing with his arms crossed and was silent the entire time. We wrote him off as a skeptic with no hope of changing his mind, let alone the behavior in his firm.

We shouldn’t have. He went back and implemented everything, almost immediately, including eliminating timesheets.

When we asked him how he was able to do all this so quickly, he replied (paraphrasing here, but it’s close): “I was so damn mad sitting in your course and computing how much money I had left on the table over my career that I swore I would change.”

So the sentiment that should give you peace is this: it’s never too late to change.

It’s one thing to be wrong; it’s quite another to stay wrong.

You’ve taken the first giant step.

Keep in touch and let me know your progress. Thanks, Tim.

Regards,

Ron

Forbes Article Quotes Ron on Auditor Independence

Hat tip to Liz Farr for letting me know about this Forbes article on auditor independence (spoiler alert: auditors aren't independent, no matter all the lip service paid by the profession to this claim). 

I'm quoted by the author, Mike Whitmire—CEO and Co-Founder of FloQast’s, and leads its corporate vision, strategy and execution—on a proposed remedy: have the stock exchanges select and pay the auditors, and also open up the attest function to competition, such as insurance companies that could offer financial statement insurance, and other firms that could attest to blockchain transactions (one startup already exists to attest to smart contracts on blockchains). 

I first came across the stock market exchange idea from an excellent bookAfter Enron, by William A. Niskanen. It is chocked full of sensible diagnosis and prescriptions on this issue that you won't find in the mainstream accounting media.

Economists don't like monopolies, and there's no reason to have the attest function locked into CPAs only. It stifles innovation and new ways to offer the attest function that would be far more effective, and more truly independent. I've been writing and teaching about this in our ethics course for over 20 years. Great to see Forbes pick up on it.

You can see the 50+ comments on Ron’s LinkedIn blog on this article, with over 16,000 reads.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #219: Free-rider Friday - November 2018

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Ron’s Topics

Pinot or pot?, The Economist, October 13, 2018

Winemakers worry that people’s “intoxication budgets” could be diverted to pot—they are substitutes, not complements.

Wineries complain they can’t afford seasonal labor to harvest grapes—cannabis farms pay more

Sonoma County imposed restrictions on who may grow weed, and where

Legalization will encourage more women, baby boomers and high earners—the demographic that buys a lot of wine—to smoke weed.

Legalization and medical marijuana are associated with a 15% drop in alcohol consumption (72% Americans think weed is safer).

Polish airline asks passengers to chip in for plane’s repairs before takeoff,” news.com.au, November 22, 2018

Seen and not seen. What incentives are being created here?

A Selection from the trolley,” The Economist, October 27, 2018

From a paper published in Nature, MITs “Moral Machine” website asks the general public and gathered nearly 40 million decisions from 233 countries, territories, or statelets. Ed and his family were among those who participated.

Strongest preferences:

  • Saving human over animal lives

  • Save many rather than a few

  • Prioritizing children over the old

Weakest preferences:

  • Saving women over men

  • Pedestrians over passengers in cars

  •  Taking action rather than doing nothing

  •  Criminals subhuman, below dogs, but above cats!

Differences by countries: Western, Eastern, Southern. Autonomous cars may need to download new moralities when cross national borders.

So far, Germany only country to propose ethical rules, one that discrimination by age should be forbidden.

All sort of choices will affect who lives and dies, e.g., staying relative close to cycle lane. Repeat that over hundreds of millions of trips, and you’re going to see a skew in the accident statistics.

For our show on ethics, and the trolley thought experiment, see Episode #7: Everyday Ethics: Doing Well and Doing Good.

General Motors Restructures,” National Review, The Editors, November 28, 2018, and “The Bailouts at Ten: I Told You So,” National Review, Kevin Williamson, November 28, 2018, and “A hard bargain,” The Economist, November 3, 2018

See Ron’s review of Car Guys vs. the Bean Counters.

Ed’s Topics

D.C. Agency Is Sorry Its Staff Didn't Know New Mexico Is a State

Reason story on a mistake at a Washington, DC agency denying marriage license for New Mexico resident, asking for a New Mexican passport.

Here's how climate change will impact your part of the country - CNN

refuted by Warren Meyer in

Knowledge and Certainty "Laundering" Via Computer Models

Our show with Warren Meyer

Another Economics Joke - David Friedman’s Idea Blog

Our show with David Friedman

The Importance of Local Knowledge

Don Boudreaux’s friend, Frayda Levin, recently sent the following excellent letter to the New York Times. Our show with Donald Boudreaux.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #218: Interview with Warren Meyer

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Biography

Ron and Ed were excited to have on economist and blogger Warren Meyer. 

Warren runs a large small business, by which he means that it seems to require a tremendous amount of work for the money it makes. His company runs parks and campgrounds under concession contracts with public recreation authorities. Before becoming an entrepreneur he worked from other people in companies as large as Exxon and as small as 3-person Internet startups. He has an MBA from the Harvard Business School and a mechanical engineering degree from Princeton University.

But we are going to speak with him about his blogging activities including his work at CoyoteBlog.com and Climate-Skeptic.com. He also has written a novel called BMOC and several books and videos on climate change.

Ed’s Questions—Segments One and Three

Let’s talk about yourself and your company, Recreation Resource Management?

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I’m a staunch libertarian, as I think you are, often times when I hear public/private partnership, I think crony capitalism, but it sounds like you have a good deal going here?

The California wildfires, is this mismanagement of the Park Services. Any thoughts on that?

It sounds like a worse mess than the Fed, which is to balance unemployment and interest rates because there’s five or six competing interests here?

Your video presentation at Claremont College, explain what you mean when you call yourself a luke-warmer?

You have another proposal regarding healthcare. It’s one of the most innovative proposals. I love it and hate it, so it must be a good idea.

We’d also see a dramatic expansion of concierge and direct primary care medicine where people would subscribe to a doctor.

Reminds me of a line, if you look at a balance sheet of the US government you realize it’s a large insurance company with an army.

If we were responsible for our first 10% of heath care, what percentage of the transactions would that be, it has to be like 90% right?

Ron’s Questions—Segments Two and Four

We were discussing during the break this FEE article, “Why We Need More Climate Change Skeptics” by Doug Casey his point is climate scientists are not prophets. Scientists have made many mistakes, from Rachel Carson’s book, Silent Spring, causing the deaths of 30-50 million people in Africa from malaria due to the banning of the pesticide DDT. He defines the 97% consensus on climate change as “climate scientists actively publishing in scientific journals. That’s who the survey was sent to, so there’s obviously a selection bias, as only those advocating are going to publish, not the skeptics. Do you think it’s become too political?

Science progresses by dissent, not consensus. At one point, most doctors believed bloodletting was effective.

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Plate tectonic theory [and how it was rejected for so long] is a great example. You can be alone and still be right in science. It’s not up for a vote.

Some of this climate science based on computer models, and the Club of Rome had computer models, too, which were wrong. Garbage in, garbage out, right?

It seems like when they do release the data, it’s disproven. We just had that mathematician call out mistakes in some recent data released.

You have an interesting proposal on the carbon tax and income tax. Can you explain that?

It’s a great idea, that’s the problem with it, it’s too logical. Do you think Congress would ever do it?

Picking up on your proposals that both sides tend to hate, what is your position on the Universal Basic Income.

That’s Charles Murray’s idea, pass a constitutional amendment to get rid of everything else, including Social Security, and replace it with a UBI. But that doesn’t seem like it would fly politically.

You wrote a post about doing business in California, and how you are pulling out due to the regulatory environment, not so much the taxes.

In your post, Doing Business In California, you cite how Governor Brown signed more than 1,000 bills this year. The governor Tweeted that he decided on nearly 20,000 bills in his 16 years." (source).

I love how you pick on Elon Musk In my extended article the other day about Tesla I wrote of Elon Musk [“Elon Musk is not the smartest guy in the world. He is clearly a genius at marketing and brand building. He has a creative mind -- I have said before he would have been fabulous at coming up with each issue's cover story for Popular Mechanics.”]. Do you think Tesla would sell without the subsidies (it doesn’t in OZ, other countries)?

What is your novel "BMOC" about?

2 Comments

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #217: The Subscription Business Model

We used to know the people we bought from: the butcher, baker, blacksmith, barber, farmer, etc. All that knowledge got lost when the Industrial Revolution ushered in the product era. That knowledge is coming back in a big way!

The idea is turn customers into subscribers—the Subscription Economy, according to Tien Tzuo in his book, Subscribed: Why the Subscription Model Will Be Your Company’s Future—and What to Do About It.

World is moving from products and services to subscriptions, favoring access and outcomes (Transformations) over ownership and deliverables. Customization, not standardization, constant improvement, not planned obsolescence. Lock-in and Switching Costs effects.

According to McKinsey, the subscription ecommerce market has grown by more than 100% a year for past five years. Subscription-based companies are growing eight times faster than the S&P 500 (17.6% vs. 2.2%), and five times than US retail sales market (17.6% vs. 3.6%). Companies running on subscription models grow their revenue more than nine times faster than the S&P 500.

Tzuo argues this model is industry agnostic:

Health Care, Concierge, Direct Primary Care, Amazon Prime and Rx, Education (it fires their customers after four years); Insurance; Pet Care; Utilities; Real Estate; Finance; Automobiles; Newspapers, etc.

Subscriptions are a forward-looking revenue model, as seamless as buying a book on Amazon. It changes the question from “How many services can we sell?” to “What does our customer want, and how can we deliver that as an intuitive service?”

Competitors can steal your service features, but they can’t steal your insights you gain from an active, loyal subscriber base.

Salesforce and Amazon don’t have customer segments, they have individual subscribers (Prime has 90 million subscribers who spend an average of $117 billion per year). Other businesses that have subscription models, either in total or in part:

  • Apple: Earnings call Feb 1, 2018: service revenue $31.15 billion in 2017, growing at 27% a year, more than half of Apple’s growth

  • Spotify: 50 million subscribers > 20% global music industry revenues

  • Netflix: Spends $8 billion a year on original content, providing new and innovative services to its subscribers

  • Gillette: Market share decreased to 54% (2016) from 70% (2010), because of Harry’s and Dollar Shave Club

  • Warby Parker: Averaging $3,000/sq. ft. retail space (slightly less than Tiffany’s), because 85% of foot traffic has done extensive browsing online

  • Uber/Lfyt: 60 million riders (testing flat-rate subscriptions, no surge)

  • Starbucks: More than 13 million Starbucks rewards program

Old business model: Products/Services > Channels > Customers

New business model: Services > Subscriber > Experiences > Channels

From linear transactional channels to a circular, dynamic relationship with your subscriber.

Fender guitars, 90% new users quit within one year, so Fender launched subscription-based online video teaching, Fender Play. By simply reducing the abandonment rate by 10%, it could double the size of its market (applying a service-oriented mindset to a static product).

Instead of margins and unit sales, thinking about subscriber bases and engagement rates.

Other industries where subscription business model is happening:

Automobiles

Hyundai’s new hybrid, Ioniq, you can subscribe to for $275/month. Makes owning a car as easy as a mobile device.

Porsche’s Passport, half dozen models, covers maintenance, insurance, and vehicle tax and registration, starting at $2,000 per month.

Cadillac, $1800/month, switch out vehicles as frequently as 18 times per year.

Volvo: XC40, $600/month.

One out of five autos are expected to be subscription by 2023. Here’s the differences between subscribing to a car and leasing one: 

  • Not bound to specific vehicle

  • Signing up with the company, not the car

  • R&M, etc., go away

  • Can’t buy the car at the end (company’s interest to keep car in good condition, not yours)

Data and services associated with vehicle > vehicle itself (Spotify, Sirius, OnStar). From car manufacturers, but transportation solutions (Ford: make that “bed to bed” journey as simple as possible). 

Airlines

SurfAir: Uber of the skies: limitless flights for a flat monthly fee, western USA and Europe (more than 200 million frequent fliers up for grabs!).

Newspapers

169 million US adults read newspapers online, 70% of the adult population.

  • Financial Times metrics: Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read)

  • The Economist: Charges for digital and print, increased revenue 25%

  • New York Times: 60% revenue comes directly from readers, more than $1 billion, digital-only subscription revenue exceeded print advertising revenue in the second quarter of 2017.

Software

Gartner predicts by 2020, 80%+ software providers will have shifted to subscription-based models (no growth left in on-premises software).

Swallowing the fish: as the revenue curve temporarily dips below the operating expense curve before climbing back upward again.

Adobe launched Creative Suite, a perpetual license in 2012. The new metrics (not GAAP): AAR = Annual Recurring Revenue (ARR); ACV (Annual Contract Value).

Digital subscriptions in May 2013 (Adobe Creative Cloud), let customers know, no longer updating Creative Suite: from 0 to 100% subscriptions in three years, inspired Microsoft, Autodesk, Intuit, and PTC. Today, over 70% Adobe’s revenue is recurring

Microsoft, Office 365, IBM, Symantec, Sage, HP Enterprise, Qlik: IT buyers prefer opex to capex.

Creates deferred revenue, so quarterly GAAP metrics can take short-term hit.

Hardware companies, too: Cisco is swallowing the fish.

IOT and Manufacturing

What can’t your subscribe to? A refrigerator? Roof? Tease out the service-level agreement that sits behind the product! 

  •  Refrigerator: fresh, cold food

  •  Roof: solar energy

Selling the milk, not the cow.

Komatsu uses drones to survey a site in 30 minutes, which changes the question from: How many trucks can I sell you? To How much dirt do you need moved?

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Advantages

  • Predictable revenue

  • Customer lock-in and Switching costs

  • Not selling services, but creating annuities with a lifetime value that far exceeds whatever you paid to acquire them

  • Collective knowledge of our customers is a competitive advantage can’t be duplicated

  • 1:1 Marketing: Changes the 4 Ps of marketing (pricing is most important). We’re not pricing a service, we’re pricing an outcome and insurance (peace of mind)

  • Monitor usage, solve problems, pursue opportunities, and provide Transformations 1:1

  • Shift to a long-term relationship focus rather than delivering tasks

  • Allows for faster growth, as will attract new customers (rather than just selling more to current customers)

  • We can plan capacity more effectively

  • Moving beyond efficiencies and into possibilities (don’t solve problems, pursue opportunities, Drucker, otherwise starve your successes and feed your failures)

  • Breaks down silos, mold organization around needs of customer

  • Actuarial approach to risk pricing, work planning, etc. (20/80 rule)

  • Tears down silos: Portfolio approach to analyzing profit, rather than silo DCM and Realization Rates,

  • Truly “one-firm” model (this doesn’t just talk about one-firm, it achieves it!)

  • New metrics (not GAAP): AAR = Annual Recurring Revenue (ARR); ACV (Annual Contract Value)

  • Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read); to keep customers renewing and re-engaging, have to provide real value

  • Dynamic cycle of action: renew, suspend, upgrade, downgrade, etc.

  • Experiment with different value metrics: tied to: seats, boxes, events, gigabytes, locations, texts, family members, you name it

  • Companies that employ a small amount of usage-based pricing in their revenue mix (less than 10%) grew more than twice as fast on average, with lower churn rates.

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #216: Interview with Dr. Walter Williams

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Biography

Born in Philadelphia, Pennsylvania, Dr. Walter E. Williams holds a B.A. in economics from California State University, Los Angeles, and M.A. and Ph.D. degrees in economics from UCLA. He also holds a Doctor of Humane Letters from Virginia Union University and Grove City College, Doctor of Laws from Washington and Jefferson College. Dr. Williams has served on the faculty of George Mason University in Fairfax, Virginia, as John M. Olin Distinguished Professor of Economics, since 1980; from 1995 to 2001, he served as department chairman. He has authored ten books: America: A Minority ViewpointThe State Against Blacks, All It Takes Is GutsSouth Africa's War Against CapitalismMore Liberty Means Less GovernmentLiberty vs. the Tyranny of SocialismUp From The Projects: An AutobiographyRace and Economics: How Much Can Be Blamed On Discrimination? and American Contempt for Liberty

Dr. Williams is the author of over 150 publications which have appeared in scholarly journals such as Economic InquiryAmerican Economic ReviewGeorgia Law ReviewJournal of Labor EconomicsSocial Science Quarterly, and Cornell Journal of Law and Public Policy and popular publications such as NewsweekIdeas on LibertyNational ReviewReader's DigestCato Journal, and Policy Review.

He has made scores of radio and television appearances which include “Nightline,” “Firing Line,” “Face the Nation,” Milton Friedman’s “Free To Choose,” “Crossfire,” “MacNeil/Lehrer,” “Wall Street Week” and was a regular commentator for “Nightly Business Report.” He is also occasional substitute host for the “Rush Limbaugh” show. In addition Dr. Williams writes a nationally syndicated weekly column that is carried by approximately 140 newspapers and several web sites. His most recent documentary is “Suffer No Fools,” shown on PBS stations Fall/Spring 2014/2015, based on Up from the Projects: An Autobiography

Dr. Williams serves as Emeritus Trustee at Grove City College and the Reason Foundation. He serves as Director for the Chase Foundation and Americans for Prosperity. He also serves on numerous advisory boards including: Cato Institute, Landmark Legal Foundation, Institute of Economic Affairs, and Heritage Foundation. Dr. Williams serves as Distinguished Affiliated Scholar at the Mercatus Center at George Mason University. 

Dr. Williams has received numerous fellowships and awards including: the 2017 Bradley Prize from the Lynde and Harry Bradley Foudation, the Fund for American Studies David Jones Lifetime Achievement Award, Foundation for Economic Education Adam Smith Award, Hoover Institution National Fellow, Ford Foundation Fellow, Valley Forge Freedoms Foundation George Washington Medal of Honor, Veterans of Foreign Wars U.S. News Media Award, Adam Smith Award, California State University Distinguished Alumnus Award, George Mason University Faculty Member of the Year, and Alpha Kappa Psi Award. 

Dr. Williams has participated in numerous debates, conferences and lectures in the United States and abroad. He has frequently given expert testimony before Congressional committees on public policy issues ranging from labor policy to taxation and spending. He is a member of the Mont Pelerin Society, and the American Economic Association.

Ed’s Questions

Your show Good Intentions, do you think the situation is better or worse, and why can’t we seem to shake this good intentions versus actual outcomes paradigm we’re stuck in?

What, specifically, do you mean by spiritual poverty?

Do you think the current welfare regime contributes to this situation because it encourages this behavior because of the way the programs are structured?

I’ve heard you speak eloquently on the freedom of association and the impact it has from an economic standpoint. Would you mind talking a little bit about that?

I’d actually prefer that bigots self-identify so I could avoid them.

Ron’s Questions

You published your autobiography, Up From The Projects: An Autobiography, in 2010. One story I found fascinating was about your economics professor Armen Alchian, who asked the class: why do we build the Golden Gate bridge when a military bridge would do just fine? He didn’t know the answer. Do you now have an answer to that question?

[Professor Williams recommends the book Universal Economics, based on Armen Alchian’s work].

In 1989, you published South Africa's War Against Capitalism, which sounded like an ironic title at the time. What would you say is the biggest misperception about apartheid [apart-hate]?

Speaking of immigration, what would be your preferred policy on immigration?

Would you be for more legal immigration?

Do you favor a point system, or charging people, to get into the country?

Do you think we’ll ever see a market for body organs?

I find it ironic that Iran allows the sale of body organs, but here in the capitalist west we do not?

You and Dr. Sowell have taught me that a shortage usually has nothing to do with actual physical scarcity but because the price is wrong.

If we had to rely solely on people’s altruism, we’d have a materially lacking life.

If you had a meeting with president Trump, what would be one piece of economic advice would you give him?

Comment

Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.

Episode #215: Free-rider Friday - October 2018

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Ron’s Topics

Ed’s Topics

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Ed Kless

Ed Kless joined Sage in July of 2003 and is currently the senior director of partner development and strategy. He develops and delivers curriculum for Sage business partners on the art and practice of small business consulting. Courses include: Sage Consulting Academy, Business Strategy and Customer Experience Workshops. Ed is the author of The Soul of Enterprise: Dialogues on Business in the Knowledge Economy, a compendium of a few of the episodes of his VoiceAmerica talk-show The Soul of Enterprise: Business in the Knowledge Economy with Ron Baker, founder of the VeraSage Institute where Ed is also a senior fellow.