Creative/Generalist

“Avoid generalisations” – that’s what were taught from the very beginning.  If you generalise, you’re either racist, sexist, ageist, appearancist, intellectualist or some combination of the many other undesirable ‘ists’ with which we’d rather avoid being labelled.  As any serial generaliser already knows, ’sweeping generalisations’ most often get swatted down with a “you can’t say that”.Technically, you can say anything you want, so what’s really meant by “you can’t say that” is more like “you can’t conclude that”, or in a slightly more mathematical-socialogical way: “you can’t extrapolate the characteristics of one individual to an entire population or subset thereof”.

Whilst generalisation is one of those crimes of reasoning, logic or simply attitude with which we all get familiar from a young age, its opposite concept, specialisation or particularisation, is most often overlooked and it’s something we’re all guilty of to a greater or lesser extent.

Specialisation, for our purposes, means extending the perceived characteristics of a group to oneself.  The consequences of deciding that a certain rule applies to you because you have observed it or heard that it applies ‘in general’ can lead to, at best, errors in decision making, and at worst, personal catastrophe.  And it’s something I see happening more and more around me.  People say things like:

- Now is a good time to buy, but if I wait for the housing market to drop even further, I’ll get a better bargain.

- Populations with high levels of fat consumption in their diets tend to exhibit high levels of obesity.  Fat consumption makes you fat, so I’ll go on a low fat diet.

- The economy is bad at the moment, I’ll wait to sell my business.

- I can’t afford to go out and eat, this country is in the middle of a financial crisis you know!

Last year, I was looking around for a small flat to buy in order to make a smart financial investment for the future.  The housing market in Spain has fallen massively since its peak in 2007 and there were some very good value potential purchases out there.  Yet I argued almost weekly with my father-in-law.  “The market still hasn’t hit the bottom yet, you should wait more,” he’d say.  “Prices are predicted to fall another 10% within the next 12 months – if you wait you’ll get a better bargain”.

Here’s the thing though.  I don’t care whether the housing market drops another 10% or rises 15%.  These percentages are averages of millions of properties up and down the country.  I wasn’t planning on buying the whole available housing stock of Spain, or even a statistically significant representative sample of it.  I was looking for one flat.  I only needed to find one emergency sale, conduct one successful negotiation, or find one isolated anomaly and I would have my bargain.  It wouldn’t matter if the price of housing were to drop 10% in the 6 months after my purchase – as long as I could get the flat under value I would have done well.

Don’t get me wrong, finding a bargain is significantly easier in a buyer’s market, but concluding that a general 10% fall in house prices will mean you can get the house you are interested in for 10% less is a mistake is a fallacy of specialisation.

Of course there are markets with such low variance in the value of transactions that the general is a perfect indicator of the specific.  If I want to sell some shares and their price is 10% lower this month, then to a very tight degree of accuracy, I’ll get 10% less for them.  If I partake in a fund that invests in a basket of shares and suddenly 50% is knocked off the value of the stock exchange, then I just lost about 50% of my money.

But even if the stock market falls 50%, somebody always comes out winning.  Why?  Because the headline statistic is always just an average.  And averages are made up of a lot of stuff in the middle that follows the trend pretty closely, and then a few outliers that do crazy stuff.  In the stock market example, there were probably a load of stocks that fell by about 50% along with a few that fell by much more and a few that actually rose.

Therefore, your task is to be on the positive side of average.  To rise when everything else falls.

The current employment situation in Spain is bleak and has been for a long while.  Youth unemployment is up somewhere around 50%.

What does that actually mean?  Well, on average, across the whole country, only half of the young people eligible for work are actually in work.  That’s the general picture, and it’s a genuine tragedy for the current ‘lost generation’.  But that’s just the group perspective.  If I am a young person looking for a job, what should I read into this static which is trumpeted loudly on the news almost every single day on national television?  Should I assume that I have only a 50% chance of getting a job?  Should I assume that I will have to wait 50% longer to find a job?  That I will earn 50% less?

I’ve heard all of these conclusions.

The truth is that these statistics are almost irrelevant to any one individual.  Yes, we should worry about them from a point of view of social consciousness and group economic prosperity.  But to an individual, averages are just that, averages, and any individual has the ability to buck any trend with relative ease.  You are one in ten million,  a hundred million, 2 billion, do you think that the statistical world will implode because you have managed to find a flat for 20% less than its value, or find a job when 50% of your competitors can’t, or lose 10Kg on a high fat diet when the general advice is that high-fat diets make you, well, fat?

Did you know you have a 1 in 119 chance of dying by suicide?  Damn, better be careful then.  Or perhaps just don’t commit suicide.

Let this be our little secret.  You are you, and that’s it.  You are not representative of the average.  The general does not apply to you.  Be wary of generalisation, but be even more wary of specialisation.  When the news tells you that taxes, divorce rates and the cost of of living have gone up, that educational standards, living standards and life expectancy have gone down, and that we’re in for a rubbish summer, turn off the TV and say “I don’t care – this year I will be richer, happier, smarter and healthier than ever”, and go out and do something to make that happen.

Picture a fresh-faced entrepreneur breaking into the world of business for the first time and you might imagine them as being inspired by their personal interests or hobbies, and motivated by their passions. The custom car enthusiast opens a tuning garage. The footwear freak starts selling shoes on Ebay, the horse lover opens an online store selling riding accessories. By far the most popular advice that I hear when people ask “What business should I start?”, is a resounding “Identify your true passion in life”.  The internet is currently bumper-to-bumper with courses and self-help packs designed to get you in touch with your inner passions with a view to making a business out of them.

Of course, it would be cynical to argue with that. There’s no doubt that doing something you love is part of the recipe for success. You’re much more likely to stick at it, work harder, and give more of yourself.  But being passionate about what you sell is not an instant ticket to profit.  In fact, it may not even be the most important factor.  How many people do you think start business selling a product they are incredibly close to and passionate about, only to find that there’s actually no market for it, or worse still, the logistics of selling it are a complete nightmare.  By the large number of startups that bite the dust each year, I’m willing to bet that it’s a lot.

There is another way – it’s much less sexy than following your dreams and I doubt very many people would be turned on by it – but it might just produce better results.  I’m talking about bottom-up business design.

For the reasons just discussed, it’s highly likely that most small businesses selling a physical product start off as a dream in someone’s head.  Some would-be entrepreneurs probably dive right in, without studying the demand or the practicalities of selling their particular product.  Others, inspired perhaps by their studies, or experience in the commercial world, might undertake a feasibility study or do some market research, and then may or may not choose to proceed.  This idea-based approach to starting a new venture might be termed top-down business design – the product or idea starts it all off, the rest just follows (or doesn’t).

So how do you do this backwards?  Easy – start with all the crap and work your way up to the product.  Let’s say you wanted to start selling widgets, and I’m going to assume, if you’re reading this, that you’re going to want to do it online (if you want to open a shop, you’re in the wrong place – try www.dinosaurbusinesses.com for help).  What would the be ideal characteristics of the widget you are going to sell?  I’m not talking about what interests you, or what you have experience in (that’s top-down).  I’m talking about the essential and defining characteristics of a widget that would make a good, if not great, internet retail business.  From my experience in selling what is probably the worst product to retail over the net (food), as well as talking to others who sell less than ideal merchandise, I’m going to suggest a few pointers.

Realistically, you’re never going to be able to fulfil all of these conditions – consider them a checklist for the absolute holy grail of internet retailable products.  The closer you can get, the better.

It’s something people are actively searching for

The web is bursting at the seams with online retailers and they’re all vying for a piece of your eye-time.  That means tons of dancing, flashing ads wherever you look on the net.  If what you are selling is the type of product that depends on browsers, the kind of thing people buy on an impulse or the sort of article people don’t know even exists, you’re going to struggle more than those selling stuff that people are actively searching out.  Those buyers go to Google and type in ‘Buy Widget’.  Sellers of such widgets set up AdWords campaigns with the keyword ‘Buy Widget’.  They spend a bit, but are instantly visible to everyone in the market for a widget.  Easy.

It’s something techy

I don’t have the stats to prove it, but I’m sure that technologically savvy buyers are more likely, by an order of magnitude, to search for something on the web than tech cavemen.  I’ve got to admit though, that this is fast changing in countries who are already used to buying online – a Google UK search for ‘Knitting Supplies’ would appear to prove that point.

It’s something that appeals to under 40s

On the same note, internet users are, on average, young.  That’s not me being ageist.  It’s just the way it is.  Again, it’s probably changing quickly in lots of countries.  Here in Spain, where I live, I barely know anyone who would buy something over the internet, let alone anyone over the age of 30.

It’s something mid-priced

Really cheap stuff, like products in the £1-£5 range, has a very unattractive price-to-postage cost ratio, especially if it’s not really small and light (see below).  You probably don’t want to pay £3 postage and packaging for something that only costs £1.99.  Bundling together such small, cheap products into packs could provide a solution, but in general I’d say you don’t want to depend on products in that price range.  Of course, unless they have a huge margin, you also have to sell thousands of them to make any money.  On the flipside, really expensive products, like high-end jewellery, or perhaps cars, will usually have to be physically viewed by customers before they decide on a purchase, so they don’t make for the best e-commerce items.  For me, over the last  5 years, the average transaction value has been about £25, and the top end of the range is a little over £120.  We don’t sell any single item priced more than about £80.  I get the feeling we’re in quite a good price bracket.

Something with a high price-to-weight ratio

On a similar note, If you’re going to be doing logistics like 99% of internet retailers, you’re going to be using a courier and that means weight-based billing for shipping.  The more something weighs, the more it’s going to cost you to send to your customer.  That might not be a huge problem if it’s a high value item, but for cheap products, you’re going to have the same problem – the price of P&P is not going to be attractive compared to the price of the item.  Believe me, customers hate paying for delivery at the best of times – they’re not going to be happy about £5.99 to deliver a bottle of mineral water.

The same advice applies to bulky or funny shaped objects – you’ll pay more to ship them, and unless you can recuperate that in the price, it’s a no-goer.

It’s something not fragile

Fragile products mean one of two things, but probably both:  either extremely high packaging costs (which are constantly rising, by the way), and/or lots of breakages.

Breakages are the bane of any e-commerce operation – the costs implied are unimaginably high.  Firstly, the customer unavoidably gets a bad impression of you (although it wasn’t your fault).  Then there’s the cost of the replacement stock, to which you’ll have to add another shipping cost (because you can’t charge the customer shipping for replacing a breakage).  Finally, administrating customer complaints due to breakages and suchlike can become a full time job for someone if the problem is bad enough.

I recently had a customer who was going out of her mind because of breakages.  They had entered a product into one of these group buying offers – the margins were extremely tight and they had calculated costs to the penny.  Unfortunately, the courier was smashing all the little jars of olives, which meant a tonne of losses and then the need to invest in much more expensive packaging, effectively wiping out her margins and then some.

For me, a fragile product would be a non-starter.

It’s something not normally prone to failure

In the tight-margin world of e-commerce, anything that causes the need for administrative intervention is going to cost you more than you can afford – and product returns will do just that.  Not only are you going to be paying collection costs, re-shipping costs and possibly replacement stock costs (if you can’t recoup them from the supplier for some reason), but managing the whole returns and complaints procedure can become a black hole for your company’s cash.

It’s something uncomplicated

This is related to the above, because if it’s highly complicated, then it’s highly likely to fail at some point, even if it’s the fault of the buyer in some way (which they are not going to ever tell you, of course).  If your product comes in 250 pieces and needs to be built by the customer, imagine the aggravation because of missing parts and problems caused by sub-standard installation and usage.  More importantly, the more complicated and harder to use a product, the more requests for support you’re going to get and the more resources you’re going to have to devote to supporting the product.  Computers are complicated, so big computer companies have to hire armies of support staff just to avoid rampaging customers who are unable to identify the power button.  Do you have the resources to hire such an army?  Wouldn’t you rather sell wooden blocks? Or shampoo?

It’s something that won’t devalue (too much) with time

If you’re planning on holding stock, products that expire quickly are likely to do serious damage to your bottom line for obvious reasons.  If you can’t sell it on time, you’ll end up just giving it away.  This can be especially painful at the start, when volumes are low, or when launching a new product into the market.  Until you build up enough momentum behind a product, you might not be able to shift batches before they are obsolete.   The most obvious example of this is food, but nearly everything has a ‘shelf-life’ (think gadgets, or fashionable clothes).

It’s something one-size-fits-all

I have a lot of contacts working in fashion e-commerce.  They are almost universally unable to comprehend how their employers are still in business.  They tell me the returns rate is huge – up to 75%.  People see a shirt they like and they order one in every colour and in two or even three sizes, only ever intending to keep one.  The amount of customer service and logistics overhead this produces is enormous (and tells you something about the margins some fashion retailers work with).  Clothes are inherently problematic – what works for you might not work for me, and it is practically impossible to represent those variables (i.e., size) online.  If customers are not able to immediately identify whether the product you are selling will ‘fit’ them, the result is likely to be an administrative disaster and a high returns rate.  Food is pretty bad for this too – people complain that the sausage you sold them doesn’t taste the same as the sausage they tried in Spain.  Luckily, customers tend to understand that food is non-returnable, so it’s not a problem.  Subjectivity in e-commerce sucks – try to eliminate it.

It’s something exclusive

So, by now I can hear you all screaming at me – “Well done smarty, if there’s a product like that, everyone’s going to want to sell it!”  Of course, you’re right.  But not everyone will be able to sell it.  You must identify other barriers to entry that stop the market getting flooded – perhaps you invented it, perhaps it’s manufactured abroad and you can get an exclusive import deal, perhaps you need a special licence to sell it, perhaps it’s new and you can get a first-in advantage.  If it’s not exclusive to you, or somewhere close, you’re likely to drown in the competitive waters of today’s net.

OK, so please don’t come at me with a million examples of businesses that break all these conditions and are surviving nicely.  I don’t doubt they exist.  Hell, I even run one myself.  I’m not saying that you can’t make a success out of selling products that are cheap, heavy, fragile and complicated.  If you can make a big enough margin then you probably can.  You might argue that in the free market, the price of products will adjust to take into account these complexities and that this higher price will reflect the skill and added value provided by a retailer who attempts to sell them.  After all, if you’re not adding value, what are you doing? Just selling shampoo (my idea, I thought of it first).

Go ahead.  Give it a try.  Just don’t blame me if you go bald in the process.  I’m not joking, sometimes selling food online turns me into a raving psychopath.

When I first came to Spain, in 2004, it was a cheap country by most standards.  In some ways, it still is, but one of the most notable shifts over the past 5+ years has been a dramatic rise in the cost of eating out.  I remember visiting a bodega restaurant in Valdevimbre, Leon in 2006.  The bodegas in Valdevimbre are famous all over the province – good, rustic, home cooked food served in unique caves carved into the hillside.  And they used to be great value for money too.  We paid €26 for lunch for three of us, including a whole tortilla guisada (stewed Spanish omelette), grilled wild mushrooms, lamb chops, bread, wine, desserts and coffees.  I remember being so struck by the price that I kept the receipt to show people.

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Consumer surplus is one of those useful little concepts you learn about in elementary economics that, once understood, sheds light on all manner of commercial activities and pricing decisions.

Without getting too technical, it’s the area under the demand curve and above the market price, as illustrated in red in the above diagram.  The traditional notion in economics is that demand starts low when price is high (red line, start at the top left) and increases as price comes down (follow the red line as it falls to the right).  What that suggests is that even at the highest price, at least one person is willing to buy it.  But as we know, goods are sold at the market (or equilibrium) price where demand equals supply (also shown on the diagram), which means that the one person who was willing to pay top dollar, and all the people who were willing to pay at least something above market price, have got themselves a bargain, right?  That quantity of money (all the people who were willing to pay more multiplied by the amount extra they were willing to pay) is the consumer surplus.

To an individual company, exploiting the consumer surplus means trying to charge each consumer just, and no less than, what they are willing to pay, which is notoriously difficult.  Astute traders have known this for centuries and exploit the consumer surplus essentially by letting you haggle.  Starting with a high price, a good commercial bargainer will quickly ascertain how much you are able or willing to pay for an item and try to sell it for you for just that.  Sell high to the people who can afford it, and sell low to the people who can’t.  Student discounts do exactly the same.  Companies know that students have less money to spend, so they sell them exactly the same products at a cheaper price.  This is not some seedy tactic – it’s going on in most of the shops in your local shopping centre.  Fair? Probably not.  Commercially effective? Definitely.

Once you grasp this concept, you’ll begin to see it all over the place.  Another of the tactics that companies use is to repackage the same (or very similar) product in some way so as to be able to sell it at different price points to consumers.  At your local supermarket, there are probably 3 or 4 different types of baked beans, or tinned tomatoes, ranging from the shop’s own brand, to some sort of gourmet brand in black packaging with gold writing.  Do you really think there is much difference in these products apart from the salt content and/or 2 cents worth of oregano or some other ‘gourmet’ ingredient.  No.  They do this so that people who can afford to pay 3 times the entry level price will.  And they’ll feel good about it too.  I think Apple do this with iPads and iPhones.  Does it really cost them anything significant to go from 16 GB to 64 GB? Probably very little.  But the products are priced hundreds of Dollars apart.  Why?  So there are options for consumers who can only afford entry level units, and there are options for consumers with money to burn.  Classic consumer surplus.

Anyway, why the hell am I rambling on about this on a Friday morning when I should be doing something more productive?  Well, Jessi ordered some stuff online yesterday, which arrived today.  We had a little theory about this order related to the concept of consumer surplus which proved, I think, to be correct.  Let me explain.

Stradivarious (at least in this context) is a clothing brand with a chain of stores and an online shop.  Jessi ordered some clothes yesterday (Thursday).  Since she spent more than 60 Euro, she qualified for free delivery.  When she got to the checkout, there were two delivery options:  the ‘standard’ (free) one, which was quoted as taking 2-3 days, and the ‘express’ option for 6.99, which was next day.  Since we operate an e-commerce business ourselves, we were pretty confident in thinking that mainstream national couriers, like MRW used by Stradivarious, do not offer anything other than an overnight service.  It wouldn’t make sense.  Since their infrastructure and procedures are built around getting a parcel from A to B in less than 24 hours, they’d probably have to work even harder to make it take longer.  No, I suspected that what Stradivarious were doing here was exploiting the consumer surplus.  Of course there will be customers who are very keen to have their stuff the next day, and will be willing to pay an extra 6.99 for the privilege.  But then there will also be customers who balk at paying delivery charges.  Great pricing tactic, no?

We tested the theory – Jessi chose the free delivery option.  Sure enough, at 9am this morning the courier turned up with the parcel, clearly labelled as having been sent on an overnight service.

So let this be a lesson.  To e-consumers – watch out for this tactic.  I’m not sure how widespread this particular trick is, so keep an eye out for premium delivery service charges that don’t seem to add up.  And to online sellers – depending on your degree of morality, perhaps this would be a good pricing tactic for you to milk a little more out of your customers.  We won’t be doing it though.

If you managed to get past the title of this post and are still here then this article could potentially be of great help to you.  If you’re bemused by the title but have stuck around thinking this might be an entertaining read, leave now – you are horribly mistaken.

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