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Are engineers living on another planet? Don’t they use their software?

Ok, I admit it. I spent 17 years as as engineer before going to business school and becoming a dyed-in-the-wool non-techie. It’s hard to remember the years as a programmer, rather like trying to remember early childhood. My brain was just too different back then. My brain of today won’t process that way any more.

Today I purchased an upgrade to my video editing software. Being an upgrade, it requires you to have the previous version installed already. But there’s a problem: my disk isn’t big enough to hold both the upgrade and the original.

With a small program of only a few megabytes, this oversight can be forgiven. After all, one can usually free up some space with a little detective work. But when the install is multiple gigabytes, it’s sheer sloppiness not to think through the issue of an install that eats up so much of the drive.

I like to think I was never that sloppy as an engineer. I like to think I used my own products and made sure they at least installed and ran smoothly. And since my whole goal today is to bitch about my frustration with Studio’s inability to install, my memory paints only a glowingly happy memory of being such a responsible, user-oriented programmer. And lost in my haze of manufactured memory, I can feel as self-righteous as ever, as I wait on hold (20 minutes and counting) for tech support to bail me out of this mess…

The eyes have it… Body language and the Body Politic

Last night (April 7, 2006) we were watching Scott McClellan in the White House press room responding to an onslaught of questions from reporters about leaks, classified information, and whether President Bush has declassified information for his party’s political gain (versus for the good and safety of the country).

Scott was a masterpiece of composure and a masterpiece of rhetorical wordgames. I find it funny that people decried Clinton from playing semantics, yet as far as I can tell, every politician from both parties pushes semantics to the hilt. Clinton wants us to know what the meaning of “is” is. Bush wants us to know that “declassified today” means “released to the public today” and that leaks aren’t leaks when he decides to leak them.

The funnest part was watching Scott’s body language. Check out Paul Ekman’s book “Emotions Revealed.” Ekman tells us that we have microexpressions that reveal our true emotions, even when we’re trying to hide them. Through the miracle of our DVR, we were able to freeze-frame and slow Scott’s face during critical questions. He was a veritable case study for Ekman’s micro-expressions. Our favorite came when a reporter asked Scott about the President’s reaction to the news story. We replayed it on super-slow-motion about a dozen times. He had sudden tightened lips, brows drawn slightly together, and his lower eyelids tightened. All signs of anger.

At this point, politics is so broken that I’m even losing the will to act. I have no faith in either party to understand, much less act in, the country’s long-term best interest. I have no faith in either party to understand, much less act on, the truly catastrophic dangers of our time: peak oil and global warming.

Values-wise, I happen to be socially liberal and fiscally conservative. Relatively speaking, that means I side with the Democrats. (At least during my lifetime, the four Republican administrations have racked up $7 Trillion in debt, and I highly disapprove of such fiscal recklessness. Give me tax-and-spend over borrow-and-spend any day. At least you feel the pain immediately rather than burdening your grandchildren for life!)

I don’t know what to tell you about politics, and it doesn’t matter, because it won’t change your mind anyway. But certainly check out Ekman and body language. At least you’ll get some entertainment out of the circus.

What is Viral Marketing? (What the buzzwords mean, and why not to use them)

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What the buzzwords mean, and why not to use them

“We will leverage our viral marketing efforts, resulting in widespread adoption of our revolutionary ‘no-revenue’ product, as customers recommend us to their friends.” — Any of a million forgettable business plans

Blech. Let‘s get real. It is mid-2000. Tech stocks are tanking, and VCs have boldly declared startups should have a revenue model. In this brave new world, the old “new rules” don’t apply, and the new “old rules” say business plans need more than New Economy Buzzword Hype.

Nonetheless, every plan I read will blow the world away with “viral marketing.” They almost always use the phrase incorrectly, Let’s explore the correct use of Viral Marketing.

The best plan: don‘t use buzzwords like “viral marketing.” Buzzwords rarely impress your readers. If you can’t say it in plain English (or your native language), then it‘s probably fluff and doesn’t belong in a serious document.

If you must use “viral marketing,” use it correctly. Viral marketing campaigns piggy back on your product, exposing non-customers to your company automatically when your existing customers use the product.

Hotmail spawned the viral marketing revolution. Hotmail is web-based e-mail that appends “Try hotmail!” to every outgoing message. Without any user action, every e-mail advertises the service to the message recipient, who (at that time) probably didn’t know about Hotmail.

Hotmail was weak viral marketing, since the recipient could ignore the ad without trying the service for themselves. Weak viral marketing requires voluntary action. MCI’s successful “Friends and Family” plan gave discounts for calling people in your plan circle if they were also on the plan. This made customers persuade friends to join the plan, and friends could refuse without trying it. The need for both customer and recipient action made this weak..

Strong viral marketing requires the non-customer to try the service. To receive money e-mailed with the “Paypal” payment service, a recipient must register with the service. Since registration means receiving money, Paypal recipients are highly motivated to join. Evite online invitations also require recipients to use the service to confirm an event invitation. Other strong viral applications include Yahoo!’s shared calendar service and their briefcase service.

Pressuring customers isn’t viral marketing. If you’re selling manufacturers a production planning system, and the manufacturers pressure their distributors to switch to the same system for convenience, that’s simple peer pressure. It may be effective, but it isn’t viral marketing, since using the system normally doesn’t automatically expose new prospects to the system.

Word of mouth is neither viral nor marketing. Since it depends on the customer acting voluntarily, it isn’t viral. Since it’s what the customer does, it’s not marketing (marketing is what your company does; not what your customers do).

In short, Viral marketing works in transaction oriented businesses where a customer transacts with a non-customer. The opportunity comes in controlling that interaction so the non-customer must be told about your product (weak viral) or actually made to try the product (strong viral) without action by the current customer.

Losses and Responsibility: How everyday business language lets us engage in accounting…deception.

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How everyday business language lets us engage in accounting…deception.

We’re living in interesting times. Worldcom announced $4 million in losses that had been buried as, um, capital expenditures (oops. Don’t you just hate it when that happens?). Enron’s collapses from horrendous mismanagement, taking Arthur Anderson down for obstruction of justice. Tyco apparently funneled billions of company dollars straight to the founder’s family. Global Crossing… Xerox… Merck … Everyone is so upset about the losses. We’re losing so much money. Losses, losses everywhere. But wait!

What does that mean? When I "lose" my wallet, it’s because it got accidentally (and thoughtlessly) misplaced. Getting into the cab, it was there. Six tequila shots later, when it was time to pay, the wallet was gone. Whoops. I must have lost it. Fortunately, the realization comes after the six shots, so the consequences (while probably severe) seem like little more than a hazy dream…

This article is continued in “It Takes a Lot More than Attitude … to Lead a Stellar Organization!" Click here to purchase.

What is Leverage? What the buzzwords mean and why not to use them.

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What the buzzwords mean, and why not to use them

“We will leverage our viral marketing efforts, resulting in widespread adoption of our revolutionary ‘no-revenue’ product, as customers recommend us to their friends.”
— Any of a million forgettable business plans

Leverage

Where you put in the same force but get much bigger result.

You leverage "X" to do "Y". You need a second verb in order for the construction to make sense.

You leverage small amounts of money to control a lot of money by borrowing with a small downpayment.

When you leverage X to do Y, Y must be something you could do without X. And having X must make Y a whole lot easier. If having X doesn’t make Y easier, it’s not leverage.

You leverage one person’s smarts by having them be a teacher.

You don’t leverage one person’s smarts by having them do their work.

You leverage your salesforce by having each of them get a dozen customers to become evangalists.

You don’t leverage your salesforce by having them go out and sell.

If you’re going to "leverage your technical expertise," that means you’ll use your technical expertise to produce a multiple of the results you could produce without that expertise, by automating, etc. Fedex has leveraged their package tracking system to lower costs, and increase offerings [web-based tracking, and now at-your-printer printing of airbills]

If "use" is a synonym for "leverage," you can probably safely use "use."

You don’t leverage your people unless you have a mechanism for turning 5 people’s knowledge into many more.

You leverage an expert by having them write a column. Not by hiring them to do work.

You don’t "leverage the power of the internet." You leverage the broad reach of the internet to aggregate customers from around the world. You leverage the speed of the internet to get product to your door faster than any other kind of ordering. You leverage the automation of the internet to … etc.

Click here to read about “viral marketing,” another hot buzzword.

Fund Raising Destroys Value! Do it wisely and carefully.

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“I just hit a major home run!” exclaimed the entrepreneur.
“Did you ship product? Did you make your first sale? Did you get a large contract?” asked his friend.
“No, no. Something much better: today we closed on a $20 million round of financing.”

Congratulate yourself for raising money, but don’t think it was time well-spent. You need money to stay in business, but raising it destroys value: money changes hands, with a big chunk siphoning off to lawyers, filing fees, travel expenses, and phone calls. You’re left with less than when you started, and that’s before buying your first paper clip! Money may make the business viable, but it doesn’t make it valuable.

Nor does fund-raising use your time wisely. Your investors are betting on what you uniquely bring to the table. Your competitors have all raised money. Most entrepreneurs out there have raised money. fund-raising ability doesn’t distinguish you one whit. Spend your time bringing your vision to life by building your organization.

Actually, your investors would love it if you never raised money again! Every new share of stock issued dilutes current shareholders. With every dollar you raise, your investors wince. In the late 1990s, many companies raised so much capital that they’ll need to be in the Fortune 10 to give investors a decent return. Some may make it. Most won’t.

And beware! Successful fund-raising can snare a CEO. It let’s them avoid their real challenge—building a stellar business—in favor of the “success” of a $20 million closing. You see, fund-raising is easy: the customers are VCs, angel investors, and banks. Their buying criteria is simple and public; most of them will even outline it on their web site. And the product, your business plan and sales pitch, can be created by one or two people.

Running a company is much more challenging. You don’t necessarily know your customers. In fact, you may find they don’t even exist! If you do have customers, you may not know their buying criteria. In fact, they may not know their buying criteria! And delivering your product and services means coordinating dozens of people, each with different priorities and demands on their time. Yet knowing the customer and delivering the product will make or break you. fund-raising is a stressful—but much safer—place for an entrepreneur to spend their time.

So yeah, you have to do it. You have to raise money. Businesses need money to operate. If you aren’t yet profitable, that means pitching investors, haggling over terms, and repricing your round at the 13th hour. Just remember that getting the money merely opens the starting gate. Then it’s time to add value, and you add far more value as a leader and manager than you do as a fund-raiser.

So raise your money, then run your business. Run it well and profitably and you’ll repay your investors a dozen times over.

What is a Business Model? The anatomy of how a business makes money

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Note: This article was written several years ago, when PayPal.com was a humble startup, Eudora Pro was still a leading desktop e-mail client, and cameras still used film.

Q: Many people say that they want to see your business model. What exactly do they mean by that? Do they want to know your target market and strategy, or do they need financial information as well?

A: A business model is quite simple: it is a brief statement of how an idea actually becomes a business that makes money. It tells who pays, how much, and how often. The same product or service may be brought to market with several business models.

Here are several sample real-world scenes, showing how similar products can have very different business models.

Consumer Reports vs. TIME Magazine

Consumer Reports makes money solely from grants and subscribers . It has a subscription-based business model.

TIME makes money both from subscribers and from advertisers. It has more of an advertising-based business model.

The difference in business models tells you a lot about the two businesses. Consumer Reports is going to concentrate on selecting content which will be of high enough value that people are willing to pay a subscription fee. Since it doesn’t depend on ads for income, no one but the editorial staff influences the articles.

TIME Magazine, on the other hand, also must take advertisers into account. TIME needs content for its readers, but it is largely concerned with growing a demographic for the advertising it sells. Since TIME makes most of its money from ads, an advertiser’s threat to pull advertising may put pressure on the magazine to pull or rewrite a story that the advertiser finds objectionable.

Movie Theaters

During the first several weeks of a movie’s run, almost everything in a theater’s box office goes to the film’s distributors and producers. The theater makes its money from the concession stand! The business model: sell tickets at cost, and make profit on refreshments.

This model implies that staffing the refreshment stand should be high priority. When the theater is crowded, bring in extra staff to keep refreshments flowing. Since that’s where the money is made, losing sales from too-long lines is losing the only profitable sales the theater makes.

A theater near my house rents second-run movies that have been out long enough for the theater to be able to keep most of the ticket revenue. They make much more of their money on ticket sales, and put far less emphasis on the refreshment stand.

Razors vs. Shavers

Gillette is happy to sell you their Mach III razor handle at cost, or even below cost. Because they then sell you the profitable razor cartridge refills. Again and again and again… Their business model is virtually giving away the handle and making their money from a stream of razor blade sales.

Electric shavers have a different model. They cost a lot more than the Gillette handle. They cost enough that the manufacturer makes all their money up front, rather than from the stream of blade refill sales (electric shaver blades do wear out, but it takes a much longer time).

Digital vs. Film Cameras

Traditional film cameras cost a bunch of money. And then, you buy roll after roll of film to take pictures. Then you spend even more getting the pictures developed. If you’re using a Kodak camera, Kodak film, and Kodak developing, then Kodak will be very happy. Their business model makes them money from camera sales, film sales, and processing fees.

Digital cameras eliminate film sales and processing fees. Kodak needs to find a new business model before the cameras catch on more widely. And they are working on it. They are establishing digital printing centers, where you can have your digital camera pictures printed on genuine Kodak paper. The business model that was based on film sales and processing is becoming a model based primarily on photograph printing.

paypal.com … who knows?

Sometimes a business’s business model is not obvious. The web site www.paypal.com allows you to send money to a friend via e-mail. The money is either charged to your credit card or taken in cash from your cash account at paypal.com The intriguing twist is that paypal takes no commission on the transfer.

How do they make money? What’s their business model?

I don’t know, yet. From interest, perhaps? If enough users deposit money with paypal before paying it out, they collect interest on that money until the recipient finishes the transfer. If this is their business model, then they should concentrate on increasing float: getting more interest on their money, encouraging people to fund their paypal accounts long before they will send money to friends, and encouraging people to leave the money sent to them in their account just a bit longer.

Other models they could use:

Charge a fixed transaction fee on each transaction. Resulting business goals: encourage lots of small transactions.
Charge a transaction fee that is a percentage of the transfer. Resulting business goals: encourage large transfers, since they make as much as many smaller transactions, but without the overhead of doing many transactions.
Or, since electronic funds transfers are cheaper for banks than processing check, paypal might have banks give them a percentage of the savings from doing transfers by EFT rather than by check.

Brick-and-Mortar Brokers vs. E*Trade

Traditional brokers make money by charging a commission on purchases and sales. The commission is a percentage of the transfer amount, so brokers may be happy with clients who trade infrequently, as long as they buy and sell enough at a time to generate a nice commission.

E*Trade charges a low, fixed amount per trade. Their business model is to attract high-trade-volume customers. The customers are more likely to trade often when commissions are fixed and low, and E*Trade is pushing to make up in volume what the traditional brokers make by charging a percentage.

Adware: take your choice

First pioneered in the late 1990s by Qualcomm’s e-mail program Eudora Pro, some software lets the customer choose the business model! A customer can install and use the software for free, and ads will be shown as they use the program. Or, they can pay full price and install the program without the ads.

For users who elect ads, the business model is that Qualcomm provides software for free to build an audience, and then gets income from advertising. They must spend their time selling ads and distributing their software widely to create the audience.

For users who pay for the program, the business model is the same as for any shrink-wrapped software: Qualcomm gets paid up front for a product which the customer can use forever. Qualcomm then spends their time coming up with later versions which they hope will entice customers to upgrade, sending more money into Qualcomm’s coffers.

Retainer vs. Hourly Consulting

Some freelancers charge by the hour for services delivered. Others charge a flat fee retainer which entitles a client to a certain amount of the freelancer’s time. Once again, they deliver the same service, but the different business models will result in their negotiating businesses, administering their business, and controlling costs in a very different way.

Don't Judge a Business by its Distribution

A folly of 1996-2000, which still doesn’t seem to be going away

Today, Red Herring’s “Catch of the Day” missive observed its latest trend. The main headline proclaims:

The once-hyped ASP business is wearing out its welcome, and may be in for a rough 2001.

It’s probably accurate. Which is pretty pathetic, since there’s no such thing as “ASP Business.” But Red Herring seems to think there is, and the professional investment community happily agrees. Three years ago, B2C was sexy. Then it was B2B. Next it was ASP(1).

But these will all fail for the same reason: they aren’t businesses. They aren’t business structures, nor are they even business models! They just describe a distribution channel. Do businesses that share a distribution channel have much in common? Fine diamonds and toilet paper both distribute through BJ’s Wholesale Club (a discount club), but few investors would consider them the same kind of business. It just doesn’t make sense.

When talking about groups like ”the B2B companies,” the group members need enough in common that we’d expect them to behave the same way. Think Biotech. Now that’s a real industry. Different biotech companies have similar characteristics. They sell to similar customer bases, they have similar business characteristics—including huge up-front R&D investment, FDA approval process, patent-protected monopoly for 17 years for successful drugs, the need for extreme chemical expertise, etc. There’s a case that there is a real sector there.

If you want to lump businesses together, many times you can group them sensibly: Lump businesses by customer base. Then the businesses will share the common problems of that customer base. Or group them by business model; the businesses will share financial characteristics over time. Or lump by the organizational capabilities they need—companies that all require top engineering talent will all be affected by talent availability.

But let me suggest a shocking idea: resist the urge to lump! That’s right, don’t lump. Learn about each business individually. Consider it on its own merits. Research its market and product. Does it have a product that its market wants that creates value well over the cost to deliver the product? Will the business model produce high profits that can be reinvested in the business? Is it backed by a management team that can successfully build an organization to deliver to that market? Does the company have patents or other barriers that make competition difficult? If the answers are “Yes,” it’s probably a business worth starting. So start it. Or invest in it. Or write about it. Because it’s a real business. And it doesn’t matter if it’s B2C, B2B, or ASP. What matters is the one thing it won’t end up being—an IOU.

(1) See asp-flame.htm for an April 2000 essay I wrote noting that ASPs were less than revolutionary. Maybe I should become a pundit. If I had $10,000,000 for every time I’ve predicted a trend correctly, I’d be rich! back

Tax cut obsession is absurd; vote for tax increases!

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Tax cut obsession is absurd; vote for tax increases!

The paper was full of Democrats promising middle-class tax cuts yesterday. I really don’t understand why the national obsession with tax cuts. People seem to think about taxes as if the government is stealing from them. As much as I believe the government does steal on occasion(1), mostly, the money is going to needed common goods and services.

We’d love to believe that cutting taxes makes the government efficient. Nonsense. If a simple lack of money could make an organization efficient, then increasing taxes would make all our families more efficient because we’d have less money. It doesn’t. It just means we feel more pain, can do less, save less, and live our lives at poorer quality.

Do we want an efficient government? If so, we need to train people how to be more efficient! Government employees have neither the training nor the incentive to streamline their operations. In fact, exactly the opposite: when running on less money this year means you get less next year (often the case in government), “lean and mean” becomes a recipe for waste. But money cuts without adequate training and reorganizing won’t do much except kill the quality of the services that remain.

Of course, it would sure help if those cutting the budget demonstrated some money-savvy themselves. They don’t. The Bush Administration granted Halliburton several billion dollars worth of contracts in a no-bid decision. Halliburton promptly spent an extra $61 million on gas, either through incompetence (paying a supplier twice the market rate) or through willfull overcharging. Either way, the message to the rest of the government employees is clear:cost-cutting and efficiency aren’t the measures that matter in doing a job.

And by the way, people, cutting your income taxes won’t even make a big dent in your tax bill. If you make less than about $200,000, your social security (FICA) taxes make up as much or more of your tax burden than your income taxes. And while your employer pays half of your FICA, it’s still taxes being paid that could have been money in your pocket instead if your employer didn’t have to pay Uncle Sam.

Your overall tax bill is probably higher after the tax cuts. Do you own your own home? The federal tax cut meant Massachusetts got less federal aid. The state promptly raised property taxes to help close the gap. My property taxes went up more than I saved on federal taxes, and we still laid off teachers and cut services like graffitti cleanup. And oh, yes, subway prices took a 25% hike as well. Nice. I’m now paying more in taxes overall and receiving fewer services.
(If you rent, don’t gloat too much. Your landlord will be passing through that tax increase momentarily.)

I’ve had fun with all this, of course. We’ve seen an unusually large number of teenagers begging for money for their sports teams, uniforms, etc. this year. I educate them. Their parents got a $300 tax refund. That’s the money that would have paid for their school programs. If their parents chose to blow the $300 on something else, rather than saving it to make up for the services their kids lost, then it’s kind of silly for me to show more care, love, and financial commitment to these kids than their parents showed. It’s a cold, cruel world out there. And taxes are how we join together as a community to make it a warmer, friendlier, and happier world for humans.

Let’s have clean streets. Let’s have decent schools that prepare our kids to succeed(2). Let’s have food inspection that can afford to use “healthy for you” as a standard! That all takes money, and that’s where our taxes go. Instead of blindly voting for tax cuts, think for a few minutes about which services you benefit from. Street cleaning, perhaps? Sewer systems? Water treatment? Toxic waste cleanup? Because when services get cut, the military and terror budgets stay steady and it’s the quality-of-life budgets that get decimated.

(1) See http://www.nytimes.com/reuters/news/news-iraq-halliburton.html?ex=1075349072&ei=1&en=763f8032abf2c364

(2) Except for graduates of 4-year colleges, the U.S. ranked near list in the world in terms of literacy. See the National Institute for Literacy resources: http://www.nifl.gov/nifl/facts/reference.html#sum2002