Ideas and Validation March 31, 2020

Room To The Right

RJ Youngling @RjYoungling

Original thinkers are scarce.

Most people simply do what other people do.

That’s not because people are dumb, it’s just difficult to resist peer pressure and centuries of evolutionary wiring.

Also, be extremely careful when talking about people in this manner, not to forget you, in fact, are also human. These cognitive biases apply to all of us, inc. yours truly. The bias blind spot shows that nearly all of us believe other people are more biased than we are.

It makes sense when you view such behavior in the right context.

In business, unfortunately, the rewards for following orders are.. well, suboptimal.

Younglings will already start thinking in terms of Anti-Network Effects and collapses of prices into Nash Equilibria.

So if it’s not a function of people being dumb, then what’s going on?

It’s A Lack Of Courage

Professor Janis coined ‘Groupthink’ in 1972, which is described as:

According to Janis, groupthink stands for an excessive form of concurrence seeking among members of high prestige, tightly knit policy-making groups. It is excessive to the extent that the group members have come to value the group (and their being part of it) higher than anything else. This causes them to strive for a quick and painless unanimity on the issues that the group has to confront. To preserve the clubby atmosphere, group members suppress personal doubts, silence dissenters, and follow the group leader’s suggestions.

(Hart, 1991).

Does this seem familiar? Doesn’t this describe 90% of businesses?

Our desperate need to fit in effectively silences our inner critic to the point where it stops voicing its concerns altogether, not at all dissimilar to an overly enthusiastic spam filter that doesn’t only filter out all bad emails, but all the good ones as well.

Normal Distributions

Which brings me to the point of today’s essay.

If you take a probability density function and you take the integral of the function over a certain range, it gives you a probability.

A probability density is a fancy term for a function that is used to determine the probability of a variable falling within a range of values.

An integral is a tool that you can use to determine the area under the function and above the x-axis.

You’ll probably remember the normal distribution from high school.

If you look at the mean (0) and you observe the area 1 standard deviation from the mean (-1,1), you’ll notice it covers most of the normal distribution (68%).

This is where most entrepreneurs find themselves, fighting for the middle, the average.

Average prices. Averages products. Average clients. Average execution. Average customer support. Average everything.

The extreme low-end isn’t that busy (because pricing below the Nash equilibrium is usually a last-ditch effort of a company that’s struggling and will be bankrupt soon).

Also, to quote Highlander, there can be only one. The cheapest can be a value proposition. The 5th cheapest.. or even the 2nd cheapest.. yeah, not so much. That kind of audience values superlatives.

Also, people consistently underestimate how difficult it is to make things cheap. Amazon notoriously picks a price they think the market will love, then obsessively try to figure out post-facto how they can turn a profit under that constraint. Not exactly a risk-averse strategy for a non-venture backed, bootstrapping company.

Most companies would be much better off if they simply charged more, but unfortunately, whether it’s due to a lack of imagination or something else, everyone wants to be Amazon.

So most companies look to the left, look to the right, figure out what everyone else is doing and copy them. Sometimes with a minor tweak to demonstrate the slightest bit of creativity.

But what if you shift to the right?

There’s Room To The Right Of The Mean

On that end, you’ll find yourself competing for better customers, higher-paying customers, and less headache-inducing customers.

I’m not trying to be crass here but anecdotally, with myself and my clients, I’ve noticed a significant difference in catering to the bottom vs the more ‘high-end’ ones.

That’s not to say, you’ll never encounter a bad customer, just that there seems to be a pattern where the customers who’re attracted to the cheapest things seem to be the ones who require the most attention, while simultaneously being the least profitable.

Remember, you get to pick your clientele. So why not pick customers that’ll give you better margins.

Margins which you can then invest back into the company.

References

Hart, P. (1991). Irving L. Janis’ Victims of Groupthink. Political Psychology, 12(2), 247. doi: 10.2307/3791464. Retrieved from: https://bit.ly/2NzeiaI

Youngling, R. (2019). Network Effects, Neutral Network Effects, and Anti-Network Effects. — Youngling & Feynman. Retrieved 9 November 2019, from https://www.younglingfeynman.com/essays/antinetworkeffects


Thanks for reading. Originally posted on: https://www.younglingfeynman.com/essays/roomright