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Craft strategy from both inside and outside

Craft strategy from both inside and outside

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The economic playing field has gotten complicated enough that it’s foolish to step on the field without some idea of how you’re going to win. In sports, you have a playbook, which lists the plays you can make. In business, we call these “tactics.” You also need a strategy, a way to combine those plays so you win the game. While it’s possible to win without a formal strategy, having a good strategy can often give you a leg up. You’ll form the best strategy by looking both inward and outside.

Look inwards to your resources

Looking inwards tells you what you have to work with. Your strategy must deploy your resources to get the most from them. The book Top Management Strategy: What It Is And How to Make it Work by Tregoe and Zimmerman is my favorite book about creating at internal strategy. They list out twelve different ways you can concentrate your efforts.

For example, you may have invented an electric car that you sell to shipping companies. That’s given you expertise in creating electric cars, and you have expertise selling to shipping companies. You can grow your business by concentrating on bringing your technological expertise (electric cars) to new markets. You can also grow your business by developing new products to sell to shipping companies. In the first case, you’re organizing your strategy around your technology. In the second, you’re organizing around a particular set of customers. Which you decide to do is entirely up to you.

When I worked at Babson College in the team formulating the strategy of the school, Babson was ranked the #1 school for entrepreneurship, world-wide. This gave us an explicit decision: do we ignore the ranking, and (try to) build some other brand for the school, or do we concentrate in entrepreneurship. Babson chose to continue building on entrepreneurship. It didn’t have to, however. Making the choice explicit led to initiatives that would never have happened without that self-examination.

Look outwards to the environment

Great resources aren’t enough. You might have the biggest bank account in your industry, but if your competitor also owns your industry’s largest distributor, you’re going to get creamed. Your landscape determines which (if any) of your resources can help you win.

The most famous model for understanding the strategy landscape for crafting your business strategy is Michael Porter’s “Five Forces” model. My favorite is a later extension of Porter’s model, the “value net,” presented in the excellent book Co-opetition by Adam Brandenburger and Barry Nalebuff. With a value net, you look at the world around you: competitors, substitutes, suppliers, customers, complementors, and barriers to entry. You design your strategy taking into account what each part of your value net brings to the table, and how that meshes with your business goals.

For example, your industry might be dominated by two or three suppliers. That gives the suppliers tremendous negotiating leverage, and the ability to cut you out of the market if you don’t agree to their demands. Furthermore, it makes your business vulnerable if one of the suppliers encounters a disruption, since you don’t have many alternatives.

Good business strategy sometimes happens by magic, but you don’t want to bet the farm on Tinkerbell being in the right place, at the right time. Formulate your strategy by deciding how you can best deploy your internal resources given how your industry’s value net looks today. Times change quickly these days, and an integrated approach to keeping your strategy current will keep you at the top of your game.

Why business models matter: Understanding health insurance

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When you’re making business decisions, one of your most powerful tools is to understand business models. A business model is, simply, how a company makes money. If you want an in-depth definition with examples, check out my article on business models that was written during the first internet bubble, back when PayPal was a startup, Amazon only sold books, and cameras still used film. Almost every example in the article has since captured its market or gone out of business. (Challenge goal: read the article and consider how the companies’ business models did or didn’t change, and how that led to success or doom. Hindsight is a powerful learning tool!)

Become a compulsive business model collector

Often, a company’s business model constrains what it can and can not do. That, in turn, gives it strengths and weaknesses. Learning to spot business models, and do quick back-of-the-envelope calculations on them, will help you become a ninja at spotting opportunity.

When you see a hot pretzel vendor at a ballgame, ask yourself: what’s that person’s business model? How do they make money? How much product or service do they need to sell to make that money? How much does it cost them to make it? Is it a good business? Hot pretzels being one of my favorite foods as a college student, I was astonished to learn that the hot pretzel vendor cleared a six-figure income.

When you pass the neighborhood bookstore, ask how they stay in business? What’s their business model? Why does it work for them, and not for the bookstore down the block that went out of business five years ago?

When you use Facebook, ask and consider: what’s their business model, and what does that imply about the actions they’ll take? Or eBay? Or Uber?

Business models give policy insights

In a recent Facebook flame war, we were discussing different kinds of health insurance systems. Understanding the business model of an insurance company might give you some insight into their incentives and potential actions:

Health insurance companies make money through underwriting profits (premiums minus payouts and expenses) and investment income on the premiums they collect.

Insurance must ALWAYS be priced higher than needed to pay out because all that administrative overhead, salaries and buildings, needs to be covered.

Furthermore, a for-profit insurance company wants to grow profits. That means raising revenues and/or cutting costs.

How can they cut costs? By streamlining operations and finding ways to avoid paying out on existing policies.

How can they raise revenues? By increasing premiums above what’s necessary to pay out on their pool of premiums.

(They can also find ways to increase their investment income, but that’s longer-term and much less under their control. They can even play in the the $1.2 quadrillion derivatives market, which no one really understands, and Warren Buffett considers a ‘Weapon of Mass Destruction’.)

Now, when we formulate our own opinions about healthcare policy (which we all do, rather than simply parroting our favorite pundit, right?), we can at least understand that the business model of insurance companies constrains their actions.

Your assignment:

Every time you interact with a business today, ask yourself:

  1. How do they make money? Where does their cash come from?
  2. In order to make that money, how much do they have to spend, and from where?
  3. What are the levers that their business models allows? What are the risks and benefits of their model?

Pretty soon, you’ll discover you can spot opportunities to bring business models to places they’ve never been used. Often, you’ll discover there’s a reason they weren’t used there. But other times, you’ll find that a shift in business model just might make you the next PayPal.

If you want to read more about [my thoughts on the insurance example implications, keep reading…

Health Insurance Business Models Drive Policy

IMPORTANT DISCLAIMER: This is intended as an example of how understanding a business model leads to confidence in predicting the behaviors of people who use that model. This post reflects my layman’s understanding of insurance business models. If anyone knows better, please please correct me.

For you gentle readers who also don’t know the inner workings of the industry, read this to understand how a business model leads to predictions of behavior. Do not read this for accurate information about the insurance industry.

For-profit health insurance companies must overcharge

I’m guessing that competition will not produce efficient health insurance. Health insurance companies make money only two ways: through underwriting profits (premiums minus payouts and expenses) and investment income on the generated float.

Insurance will always be priced higher than needed to pay out because all that administrative overhead, salaries and buildings, needs to be covered.

Furthermore, as long as we have a market that defines “healthy” profits as profits that grow yearly, there will be ever-increasing pressure to raise profits. That means raising revenues and cutting costs.

You can only cut costs so far on the admin side. But you can reduce your payouts by writing ever more complicated policies that in fact cover less and less. You can also challenge payouts, make the reimbursement process deliberately more cumbersome, lower the ceilings of what you will cover, etc.

And of course, regulation caps permitting, you can always raise revenue by raising premium prices.

Every year, due to the market expectation of continually growing profits, all these forces will come into play. (Premium prices will rise, and people will blame Obamacare or the lack of Obamacare or greed or whatever. It’s just the way growth-oriented markets work.)

Any for-profit insurance company will feel all those forces as a simple matter of doing business. So any for-profit insurance company in a competitive market will be pressured over time to do these things.

Even if their investment income is reliably positive, they can’t control that nearly as quickly, easily, and reliably as all these other forces. And if the company is heavily invested in derivatives (which Warren Buffett calls “Weapons of Mass Destruction”), well, at some point there may be a “correction.”

There are competitive pressures at play, as well. Price wars. When a competitor lowers premium prices below the actual rational value for a given policy, a company is pressured to match that pride and write unprofitable policies in order to compete … resulting in pressure to make up profits from one of the other sources1.

That’s why private mutual insurance companies are a good thing. They still have these pressures, but at least the policyholders own the company so the company’s goals are more aligned with the goals of its members.

  1. This is one source of Warren Buffett’s wealth. When he acquire an insurance company, he gives them permission to stop pricing policies below expected payout values, even if there’s a competitive price war going on. ↩︎

Punt resolutions; use strategy, instead!

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It’s January, and we all know what that means: time to set New Years resolutions that we’re going to break! The main things resolutions are good for is causing the gym to get way too crowded for the first six weeks of the year. You have a tool at your finger tips that will do far more for you than simply setting resolutions.

Skip your resolutions and set strategy, instead.

A strategy is a 50,000-foot view of your life or business. A good strategic plan gives you a roadmap for where to put your time and effort this year. It tells you what to say “yes” to and what to say “no” to.

As you know from my article on how vision and mission relate to strategy, your strategy for a year answers the question, “How can we further the company vision, given the realities of the markets, customers, and resources under our control right now?” Strategy is how vision plays out in today’s real world context.

But when you’re setting your strategy, make sure to approach it from both the outside and the inside.

Look Outside to Set Strategy

Your strategy depends on what’s going on outside your company walls. You need to develop a plan that makes you more desirable to customers than any of your competitors. That means knowing:

  • How do your customers think of you? What product category do they put you in? (Don’t assume you know. A yacht isn’t necessarily a vehicle. Rather, it may be a status symbol.)
  • Who else is in that product category? If you’re a yacht, are you competing against Toyota and JetBlue (transportation) or are you competing against Jetstream and Sotheby’s (status symbols)?
  • What advantage do you have over your competitors?
  • How can you best communicate that advantage to the market?
  • Who has the power in your ecosystem, and how can you increase your power?

One of my favorite books on external strategy is Co-opetition by Adam Brandenburger and Barry Nalebuff. If you’ve ever heard of Michael Porter’s “Five Forces,” Co-opetition goes one step further and deepens the model. Just the way Brandenburger and Nalebuff define competitive and complementary relationships is worth the cost of the book.

Strategy Looks Inside

Looking outside is only half of the equation. You also need to look inside when you formulate your strategy. If strategy is vision made real now, part of “now” is the resources you have under your control. You need to take stock of your resources and decide which resources will form the foundation of your strategy.

When you make ultra-yachts, two of your assets are your customer list (oodles and oodles of rich people), and your yacht design capabilities. If you base your strategy off your customer list, you will expand into other products and services that your current customers might want. Like platinum dinner place settings. If, however, you base your strategy off your design capabilities, you might instead expand into other kinds of yachts, or other sea-faring vessels.

My favorite book on internal strategy is Top Management Strategy by Tregoe et al. The book is 30 years old, but is pretty much just as relevant today as when it was written.

Treat yourself to a 3-martini lunch

If you don’t have a formal strategy session planned, then at least take a long lunch. And over lunch, review the vision/mission for your venture. Why are you in the game in the first place? Then ask yourself how that gets expressed in the world of 2017. Review your external factors—competitors, customers, suppliers, and so on. Review your internal resources, and decide which you plan to base your strategy on.

Then go for it. Give shape to your plans for the next year. Make sure to build in time to review and course correct, and get your year off to a good start. A New Years resolution might only last a couple of weeks, but a good strategy will support you for a year.

JetBlue speeds towards brand destruction

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The essence of a strong brand is differentiation in a way that makes customers want to use your product or Service. JetBlue has announced a decrease in legroom and increase in baggage fees in an attempt to boost lagging profits. All I can say is, “idiots.” The entire key to branding is to have strong differentiation from your competitors. In Airlines, the only differentiators are where you fly, your prices, and your service experience.

For JetBlue, service experience has long been a serious differentiator. I would go far out of my way to fly JetBlue instead of other airlines, and I’d pay more, because the experience was just so nice. The fact that the fares were competitive was nice, but I would have paid a premium for the level of service I got.

So now that profitability is lagging, how does JetBlue choose to respond? By attempting to maintain low price position and moving towards a low service position too. Heck, what are commodities for, if not as a dying place for once-strong brands who bow to the short-sighted idiocy that has become the financial markets.

The current JetBlue executives should have their salaries and bonuses clawed back in five years if this does, indeed, herald the beginning of the end of a once-strong brand.

Good businesspeople oppose free markets

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A friend on Facebook posted an article about New Jersey outlawing Tesla’s direct-to-consumer car sales. My friend was decrying how Gov. Christie is being anti-free-market. And I agree 100%.

From what I’ve been able to see, it’s pretty clear that the big conservative political donors hate free markets. What they love is whatever give them, personally, the ability to get more wealth. By “free market” they mean “don’t do anything that interferes with my personal ability to make money.” For example, the Koch brothers compete by using their money to alter laws so they win. They don’t compete by being better businessmen.

When it comes to competition, they hate it and undermine it at every opportunity, unless they’re the winner.

When it comes to level playing fields (supposedly the bedrock of markets), they hate it.

When it comes to producing the best product at the lowest cost, they hate it.

When it comes to contributing to the infrastructure they use freely that was funded by the public, they hate it.

Business People Should Loathe Competition

It’s a real education to go to business school and ask: how much of this education is devoted to finding ways to gain a market advantage without actually having to do a better job? The answer: most of it. It’s called “business strategy.” We teach our students how to be anti-competitive and anti-free-market, all in the name of free markets.

This works, however. It works because with the right playing field, pitting anti-free-market forces against each other results in more efficient companies through market selection of companies that are fundamentally better than other companies. This produces better ultimate outcomes for the consumers and society who created the markets to begin with.

But never miss the critical point: free markets work because the players are all trying to gain market advantage by doing a better job than each other. The players themselves are not striving to have a fair market, they’re striving to win and eliminate the competition (and thus the market).

It’s the job of government to make sure the playing field is level enough to keep enough market participants that the market continues to function. Players all want monopoly, government wants thriving market participation.

Mr. Christie’s error is that he’s acting as a businessman. That’s not his job. His job is to take care of all his constituents overall, not just the business ones.

In Praise of the Corporation

I’m in awe. Normally, I’m not a huge fan of big corporations. I think they often (but not always) dehumanize the people who work there. They can ruin communities in the name of efficient and cost-cutting, and they distribute wealth in truly bizarre ways. But… But… They’re amazing! Not just a little amazing; they’re frickin’ mind-blowing amazing!

Today I was getting lunch at Subway and the regional manager was there helping them tune up their processes so they can deliver the same quality as measured by customer feedback as several thousand other franchises. Not only do they do it today but they will do it every day going forward, rain or shine.

Have you ever thought about that? How incredible it is? There’s never before been a civilization that could do that on such a scale once, much less thousands of times. And we take it for granted that any large company will be able to scale like that.

And the things we do… Building the ancient pyramids is considered a Wonder of the Ancient World. We build buildings that are a thousand times more complex and sophisticated, on a regular basis. We rarely even ask “is a half-mile high building feasible?” Of course it is. We’ll find a way to do it; the limitation we focus on is funding. We know we can master the technological challenges. We know we can get the supplies made to spec. We know that we can coordinate the hundreds or thousands of people it will take to pull it together. And that’s unprecedented in human history.

The modern corporation has taught us to create systems larger than any one person could ever create. It has taught us to create flows of materials and information that span the globe, enabling us to coordinate people and projects on a level that can change the whole planet. And most astonishing, these organizations keep working even though the people who comprise them come and go. Popular business mythology aside, our ability to create and share process has made our achievements largely independent of any single person. The skills and abilities reside in the structure of the systems as much as (or more than) the individuals.

Tomorrow I’m sure I’ll be back to battling the not-so-nice parts of business. But today, I celebrate the corporation, an invention that has raised the human race to levels of accomplishment we have never before dreamt of. Savour it. Appreciate it. Enjoy it. Because it has enabled you to live in the most extraordinary time ever in human history.

Can you align business with ethics?

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Is business anti-ethical by nature? I’m reading an article today about how it’s in no one’s business interest to help protect consumers whose cell phones get stolen. Cell phone companies make more money when a customer’s phone is stolen, since the customer has to buy a new one. Furthermore, this logic applies to all cell phone companies, so even though it’s technically possible to permanently identify and deactivate a stolen cell phone, no player in the industry has the incentive to implement the technology.

Given that the technology certainly exists to disable a stolen phone, and customers spend hundreds of dollars on a phone, is it ethical for the cell phone providers not to help stop this, when (a) they could, and (b) they are the only people in the system who can?

This is a case where business interests and consumer interests clearly diverge. It’s a rather extreme version of Frito-Lay designing Doritos to give a rapidly-vanishing burst of flavor that psychologically hooks eaters into eating another chip. They know it’s unhealthy for people to stuff themselves on refined carbs, but they create a product designed to encourage exactly that. The cell phone companies, by not implementing theft protection, are encouraging cell phones to become the high-cost, high-tech equivalent of Doritos.

(How’s that for a tortured metaphor?)

I’m of mixed minds on this one. On one hand, I don’t know that it’s fair to force the phone companies to implement theft-protection on their phones, even thought it would stop an entire category of crime. But at the same time, no one else can do it, and I don’t know that I like the precedent of saying that business interests trump the societal interests of eliminating an entire category of theft and black market trading. (At the end of the day, I believe that we allow business to operate to benefit society, not the other way around.)

What do you think? Should phone companies add anti-theft technologies to their phones? Why? Is it morally/ethically appropriate on the part of the government/consumers to require companies to act? Is it morally/ethically appropriate on the part of the companies not to act?

Discuss.

Recommended Books

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Click the book name for details about a book. Click buy to order a book.

The books listed here are all books I have found valuable. They have either enabled me to accomplish more in my life, or given me important ways of approaching problem solving, management, business, and life. The books are listed by topic. Books which fall into more than one topic are listed under each topic.

Highly recommended because hey, it’s a great book

Stever’s book, It Takes a Lot More than Attitude…to Lead a Stellar Organization.

Branding

Business plan writing

Communication skills

Decision making

Entrepreneurship

Foundational life skills

Hiring

Leadership

Life balance

Management skills

Marketing

Operations

Politics

Psychology

Sales

Self-development

Strategy

Made to Stick

Made to Stick is a book about stories. Specifically, stories that are memorable, and what makes them memorable. In an amazing–and I’m sure unplanned–coincidence, their framework is memorable, as it spells “SUCCESS.” Messages that stick are simple, unexpected, concrete, credible, emotional, stories. Though each of their points seems like common sense, the power of their framework comes from having the checklist so you can make sure to bring every one of the tools to bear on crafting a memorable message. The book is easy to read, fun, and has lots of examples. It’s a real keeper.

Order “Made to Stick”

Positioning: The Battle for Your Mind

This is the book that introduced the concept of marketing “positioning.” It approaches brand building and marketing dominance in a powerful way. Ries and Trout look at the psychology behind product recognition, and lay out some simple principles for building strong, enduring brands.

This book is good for marketers, and probably even better for non-marketers. It’s very readable, makes a ton of sense, and sure matches what I’ve noticed about the world. I am not at all sure that traditional marketing curriculae make senses or correspond much to the real world. Many, many Internet companies need this book badly. Some of the multi-million dollar brand-building efforts out there are … scary, to say the least.

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The 22 Immutable Laws of Branding: How to Build a Product or Service into a World-Class Brand

Book about branding and how to build strong brands. Speaking of branding, the title is clearly building on the successful 22 Laws of Marketing by Ries and Trout.

This book was written after Ries and Trout ended their collaboration. It lays out succint principles about brand building and marketing in an updated format from the early Ries & Trout books. The book is in late-20th-century checklist/sound byte format. Great for traveling, when you want something you can read when you have 5 minutes free at a time.

Order “The 22 Immutable Laws of Branding: How to Build a Product or Service into a World-Class Brand”

New Venture Creation

An excellent book which will walk you rigorously through the steps you need to turn an idea into a real business plan. The 1995 edition is a workbook which gives you the questions to ask to find out if your idea is a true business opportunity. If you do, indeed, have a business opportunity, the book then steps you through the creation of all major sections of a business plan.

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The Venture Cafe: Secrets, Strategise, and Stories from America’s High-Tech Entrepreneurs

Teresa Esser brings an engaging, funny perspective on entrepreneurship from the men and woman of Boston’s entrepreneurial community who are (and sometimes aren’t) building great companies.

Order “The Venture Cafe: Secrets, Strategise, and Stories from America’s High-Tech Entrepreneurs”

Blink

Gladwell presents many of the ways in which people do and don’t make excellent snap decisions.

Order “Blink”

Difficult Conversations: How to Discuss What Matters Most

Some conversations just aren’t easy to have. Whether it’s because you let someone down, or they let you down, or the news is unpleasant or whatever… This book lays out a framework for having the conversation and is packed with specific tips for helping things go smoothly.

For all people managers and anyone who ends up having to mediate difficult situations, this book is a must-read. It’s written in clear, concise English, and has great content that I haven’t seen presented elsewhere.

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Emotions Revealed : Recognizing Faces and Feelings to Improve Communication and Emotional Life

This is a somewhat dry book, but quite good. Ekman spent several decades studying the relationship between emotion and facial expressions. He looked across a wide range of emotions, across many different languages and cultures. With a variety of pictures, the book illustrates and distinguishes the involuntary muscle movements that accompany strong emotion.

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Frogs into Princes

Frogs into Princes presents many of the underlying concepts in neuro-linguistic programming. The sections most useful to businesspeople: establishing rapport and understanding and using communication styles.

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Hardball for Women: Winning at the Game of Business

Pat Heim lays out the rules of politics step-by-step. This book is aimed mainly at women and concentrates on how men and women are brought up differently, and those differences come out later as political behaviors in organizatons. In fact, the book is pretty good for anyone who doesn’t quite get the rules by instinct. Dr. Heim is a bit wordy in places, but the content is worth the read.

Order “Hardball for Women: Winning at the Game of Business”

How the Way We Talk Can Change The Way We Work

Ever complained? Ever wanted to do something but just weren’t doing it? Kegan and Laskow guide you through a process of changing the language you use to think about issues to uncover the unconscious assumptions that drive (and override!) your behavior. The techniques work, and work well! I’ve used them with clients and with my own issues, and very quickly have developed an understanding of the beliefs and assumptions I’m making about the world that are holding me back.

While the book is great at helping you uncover your Big Assumptions, it falls down a bit at telling you what to do with them. The authors’ message seems to be, “understand and appreciate your mental dynamics and eventually breakthrough insight will be achieved.” For better or worse, I’m action-oriented once mental dynamics are uncovered, and would have liked more guidance on how to address my Big Assumptions.

(That’s why I’m a fan of cognitive psychology and neuro-linguistic programming. Both are pretty good at helping you change, once you’ve found your core beliefs.)

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Learned Optimism: How to Change Your Mind and Your Life

Dr. Seligman discusses the phenomena of optimism and pessimism, and how one can explicitly adopt each attitude where it’s most needed. The book includes detailed discussions of the business, health, creativity and productivity effects of optimism and pessimism. The reading can get a bit dry at times; Seligman sometimes gives more background than needed about the politics of the scientific world, but the results are worth it. This book presented a (scientifically-validated) framework for understanding how to shape your attitude and what effects you can expect.

For business leaders, understanding optimism and pessimism is not academic. Too much pessimism and people won’t perform well, persistance will lag, and things grind to a halt. Too much optimism and a brick wall just might be headed your way at 1,000 miles per hour [Seligman says there is considerable evidence that pessimits, despite all their problems, are more accurate judges of reality than optimists]. You’ll need to master both to be able to motivate your workforce, keep them going through tough times, yet do so in a way that’s responsible and real.

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Patterns of the Hypnotic Techniques of Milton H. Erickson

The appendices that form the second half of this book present the best summary I’ve ever seen of using language for artful communication. The book itself concentrates on presenting a model of how Milton H. Erickson, widely considered one of the best medical hypnotists in history, used language to help people make powerful changes.

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Sway: The Irresistible Pull of Irrational Behavior

This book presents several common fallacies in how we make decisions, snap judgments, and let irrational forces guide us to do, well, really stupid things. Most of what’s covered in this book has been covered elsewhere as well, but I found this presentation unusually accessible. Several of the concepts were framed in a way that had instant action implications for me. For example, people care as much about fairness of process as goodness of outcome. Knowing that, I can now take care to use full transparency and participation in designing the process, as well as making actual deciisons.

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Decision Traps: Ten Barriers to Brilliant Decision-Making and How to Overcome Them

Two experts in business management show how to avoid the ten common pitfalls that trap decision makers. The book is based on research into social and coginitive psychology and managerial decision making. The authors do a superb job of translating the results into practical “how-to” information that you can use immediately to improve your decision making.

This book is a wonderful companion to Influence by Robert Cialdini.

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First, Break All the Rules: What the World’s Greatest Managers Do Differently

A real research-based book on superb management techniques! The Gallup organization looked at 80,000 managers across 400 organizations and did extensive statistical research to figure out what the truly high performing managers did differently from the merely good managers. The results are often counter-intuitive, and this book presents them all.

One of the most intriguing notions in the book is that people’s behavior patterns don’t fundamentally change, and the best managers find ways to fit employee behaviors to jobs, rather than trying to develop “weak areas.” This result is explored in depth in the sequel, “Now, Discover Your Strengths.” Check out this book. I learned a lot from it, and given that it’s actually based on extensive, statistically sound research, its advice is likely to produce results.

One warning: the book is dry in places. It was clearly written by statisticians, not by great business writers. So skim the boring parts. The gems are well worth it.

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How We Know What Isn’t So

Gilovich explores a number of ways in which humans reason incorrectly and reach faulty (though often emotionally-satisfying) conclusions. He draws examples from phenomena where people develop strong belief systems unsupported (and often contradicted) by data: ESP, UFO sightings, winning the lottery, etc.

This book, along with Influence by Cialdini and Decision Traps by Russo & Schoemaker make a great trilogy for anyone interested in understanding how we’re miswired.

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Influence

This book outlines social psychology phenomena which are responsible for all kinds of irrational behavior. This book is a must-read for marketers, to learn compliance tactics that will manipulate the masses into mindlessly buying their combination electric toothbrush / toenail clippers.

For managers and leaders, this book gives important insight into the origins of motivation, and how you and those around you might be influenced by the marketplace, the media, and your competition.

For everyone, Cialdini points out several ways in which our mental “shortcuts” interferes with our ability to make good decisions.

This book is a good companion to “Decision traps.”

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Make Your Own Luck

What a great book!

My background is in engineering and science, then business. As an engineer, I really liked that there’s a “right answer.” Or at least, there are clear wrong answers (the bridge will collapse if we make it out of tissue paper, period). In business, things aren’t so easy. Most situations have too many factors to identify, let alone consider deeply. Shareholders interact with managers who interact with technology and customer service people and engineers and operations and … it’s tough to know how to think about all this.

Make Your Own Luck lays out a 12-step process (hmm…) for taking risks. Some of the steps sound simple: Know your big goals before you begin, so when you make bets in your life, you’re betting on what you actually want. Sounds obvious? Yeah, but in my own work with executives, I’ve found that people easily lose sight of their real goals(1). The power from Shapiro and Stevenson’s approach comes from having a rigorous checklist to consider when making risky bets.

Some of their tools help evaluate risks that I’ve never known how to tackle. For example, the authors reject the conventional wisdom that “reward requires risk,” and give us “prediction maps,” a tool for identifying low-risk, high-reward opportunities. Simple, elegant, and practically useful.

Their other big new tool is “uncertainty grids.” Uncertainty grids let you quickly test your plans against combinations of uncertainties to realize whether you’ve unconsciously anchored yourself to a single scenario, or whether your plans can survive multiple uncertain events.

The writing style is fun, with thought experiments between the chapters, a final chapter of scenarios to analyze using the 12 steps, and haiku or other verse at the start of each chapter. I found it a pleasant change from the overly heavy style of most substantive business books, and it was an easy read cover-to-cover that did justice to its excellent content.

(1) Being a professional, of course, I never, ever lose sight of my own goals. *grin*

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Nudge: Improving Decisions about Health, Weath, and Happiness

Nudge is one of those books I like so much that documents all the little things that cause us to make decisions, and how to influence them without resorting to such inconvient things as, say, logic. Nudge talks about how the way we present and frame choices (our “decision architecture”) dramatically changes the way we finally decide.

The material is mostly different from the decision fallacies literature. The authors cover things like physical presentation of choices, deferred gratification, structuring complex choices, incentives, and deferred contribution plans. Examples were drawn from very real, relevant examples like helping people choose health plans wisely, organ donation, and presenting fuel estimates to make it easy for people to understand environmental impact.

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Smart Choices: A Practical Guide to Making Better Decisions

The best book I’ve ever read on rigorous decision making. As much as I like to believe I make decisions based on data, I don’t. I gather lots of data and then ignore it all and rely on my gut.

Hammond, Keeney, and Raiffa outline a structured process for making decisions that can help reduce uncertainty and increase the likelihood that you’ll make better decisions under uncertainty with incomplete data. Like anything else, you have to practice to get good at their technique. But once you’ve learned how to make a high quality decision, many of the techniques begin to become second nature.

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Sources of Power: How People Make Decisions

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The Answer to How is Yes

This half-philosophical, half-practical book does a superb job at presenting a challenging, engaging perspective on how to create community and openness in (workplace) groups. Block gives specific questions that can be used in bringing a group together and transforming a conversation into one of responsibility and accountability.

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The Brainsmart Leader

Tony Buzan has written several books bringing recent discoveries in brain science to practical application. His various books concentrate on speed reading, increasing comprehension, and improving your memory. In this book, he brings his understanding of the brain and applies it to leadership.

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Yes or No: The Guide to Better Decisions

This book lays out a simple framework for making effective decisions. The real power of this book is that it addresses the emotional side of decision making as well as the rational side. Whether you make decisions based on your head or your heart, this book will help you learn to use the other. Written by the co-author of the One Minute Manager, Yes or No is a quick read.

My recommendation is to start with Yes or No and use Johnson’s framework for a while. Then read Decision Traps to learn how to avoid common mistakes your brain makes. Then finish up with Smart Choices: A Guide to Better Decisions, which will give you very high-powered research-validated techniques for beating a decision to death.

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Never Eat Alone

Keith Ferrazzi started life as a working class child. He learned early that opportunities came as much through who he know as through what he knew. So he began cultivating relationships as one of his life cornerstones. By his 30s, he was the Chief Marketing Officer and youngest partner ever proposed at Deloitte & Touche. Shortly thereafter, he became the youngest Chief Marketing Officer at a Fortune 500 company.

Keith’s book is part autobiography, part “how to” manual for networking. I ran into Keith when we were both presenting at a conference in mid-2004. I applied a few of his principles and they worked. Well. I became such a convert that I went to work with him for several months. Watching him in action is … astonishing, to say the least. He is truly one of the most amazing networkers I’ve ever met.

Some of Never Eat Alone’s techniques can be found in lots of the networking literature. But I’ve found tremendous value in internalizing his attitudes about giving without keeping score, using my network as a tool to help my associates become more successful, and realizing that it’s possible to do business with friends and make friends with business associates. Never Eat Alone got me thinking of success as a community sport, not just a lone-wolf endeavor.

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Authentic Happiness

This book is the finest research-based discussion of what makes people happy that I’ve yet to come across. Seligman quickly moves past the fairly trite (does money even correlate with happiness at all?) into an examination of what makes for truly happy people.

Surprisingly, I was reading this almost as a business book. Happy people make for great culture and environments, which make it easier to attract and retain good people. And it turns out one of the keys to happiness is having the opportunity to contribute in a meaningful way using your best and highest skills. This is a nice complement to “Now, Discover Your Strengths,” which was purely a business book, and it shows that creating an environment where poeple can play to their strengths is not only good business, but also good for everyone as human beings.

Every chapter of the book has an associated online inventory you can take at Seligman’s web site, so it become more than just an examination of what makes happiness—it’s a self-reflective exercise as well.

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Get Everything Done and Still Have Time to Play

In this book, Mark Forster lays out reasons why the standard time management systems all fail. He debunks “quadrant 2” planning (important-but-not-urgent), prioritization, do-it-now, touch-everything-once, etc. What he presents instead is a system based on understanding why we resist things we know we have to do, and how we can start doing them while making sure that the urgent and the important all get handled.

Mark’s system is rather unusual, and I’ve found it a bit challenging to retrain myself, but every time I use it, I get more done in 2-3 hours than I would typically get done in 2-3 days.

Combine this with Getting Things Done by David Allen, and you have the best time management / inbox management combination I’ve found.

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Getting Things Done: The Art of Stress-Free Productivity

David Allen’s book is the best book I’ve ever read on dealing with the overwhelming barrage of incoming email, voice mail, faxes, etc. He lays out a system for dealing with everything in your life and keeping your inbox, desk, and mailbox clear and empty. While I found the book a bit convoluted at times, I’ve been using his system for two years now and it works like a charm. Even when I fall off the wagon occasionally, I can get my life back in order in a couple of hours with this book.

The one failing is that he gives very poor guidance for how to decide how to use your time. The book covers inbox management, but not moment-by-moment action steps. For that, check out Get Everything Done and Still Have Time to Play by Mark Forster, which deals beautifully with the moment-by-moment.

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The Power of Full Engagement

Tony Schwartz and Jim Loehr review how your energy level actually drives productivity. They present research showing that managing energy is more important than managing time in becoming productive. Of course, if you follow their advice, you’ll become much more productive… and will promptly find all that newly acquired free time filled with even more demands from daily life. But hey, at least you’ll experience a period of great productivity.

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You Can Have What You Want (UK edition)

Michael Neill’s book is a step-by-step guide to adopting an attitude of fun, enjoyment, and joy in your life. Michael puts forth a whole series of techniques and ideas that help you let go of stress and reorient to the things that cause you deeper satisfaction. He is a friend of mine, and I can attest that he is a living model of the principles, as well. Along with Are You Ready to Succeed and The Power of Now, Michael’s book has been one of the most impactful books in my own personal development. (I read it in draft form in mid-2005 and dramatically changed my life and business afterwards.)youcanhavewhatyouwant

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You Can Have What You Want (US edition)

Michael Neill’s book is a step-by-step guide to adopting an attitude of fun, enjoyment, and joy in your life. Michael puts forth a whole series of techniques and ideas that help you let go of stress and reorient to the things that cause you deeper satisfaction. He is a friend of mine, and I can attest that he is a living model of the principles, as well. Along with Are You Ready to Succeed and The Power of Now, Michael’s book has been one of the most impactful books in my own personal development. (I read it in draft form in mid-2005 and dramatically changed my life and business afterwards.)

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Your Best Year Yet: Ten Questions for Making the Next Twelve Months Your Most Successful Ever

They say that having written goals greatly increases your chances of achieving them. This book isn’t about far-reaching goals; it’s about making the next year of your life the best year you’ve ever had. Ms. Ditzler leads you through a structured goal setting process designed to help you clarify what you want, and set out a path to get there.

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Forty Five Effective Ways for Hiring Smart!

Who to hire is one of the most important decisions facing managers and entrepreneurs. Yet few know how to do it or do it well. A professional psychologist, Pierre Mornell takes a different tack to hiring altogether: he gives tips for designing behavioral tests for candidates, which give you indications of how someone will actually act on the job.

Personally, when I hire people, I do only a so-so job. I tend to be influenced far too much by whether I like the person, and not nearly enough by whether they can/will do the job. This book gave me a whole set of tools to use to make the decision a bit more rigorous.

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Recruit or Die

Chris Resto, Ian Ybarra, and Ramit Sethi have created an excellent book that helps you romance top recruits as successfully as you romance your top customer prospects (or maybe more!). Written from over 1,000 student interviews, they’ve captured the mindset of graduates at top universities and how to win over the candidates who would otherwise fall prey to the consulting firms and investment banks of the world. They cover the entire recruiting process, from pre-contact to post-hire, with specific how-to information for recruiting on top campuses, reaching top students, and doing it all on whatever budget you have available.

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Changing Belief Systems with NLP

A rather dry book that nevertheless presents several techniques for changing belief systems. The book presents material and then illustrates the material with transcripts from workshops. The emphasis is very much on teachnig therapists to assist others in changing beliefs, but I’ve found that with a bit of flexibility, you can use the techniques to change your own belief systems as well.

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Don�t Shoot the Dog

This volume is a fascinating introduction to the psychological principles underlying training and behavior shaping. Pryor is an animal trainer, and it turns out that many of the underlying attitudes and theories of animal behavior also apply to humans. Such principles as positive reinforcement, spending time building the trainer/learner relationship, and shaping behavior incrementally are all tools that can be used to build high performing human organizations. For anyone whose job includes motivating people or building culture, this book will provide an excellent set of tools.

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Hard Facts, Dangerous Half-Truths, and Utter Nonsense

This is a great management book for people serious about doing an exceptional job at business. A bit dry, the authors critique what passed for business knowledge (fads, buzzwords, etc.) and point out how much of the conventional wisdom spouted as common sense is, in fact, just plain wrong. The book discusses adopting “evidence-based management” as a way of doing better in business. To get the reader started, they address six dangeous Half-Truths:

* Work and life should be (or are) somehow separate. * Hiring the best people will lead to the best organizations. * Financial incentives drive company performance. * Strategy is destiny. * Change is an imperative! * Great leaders are in control of their companies.

In each case, the conventional wisdom just doesn’t hold. For details, proof, and other fascinating tidbits (such as why merit-based pay for teachers and schools doesn’t improve learning), grab this book!

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Leader As Coach: Strategies for Coaching & Developing Others

This book present leadership skills framed as the ability to coach employees into their best possible performance. A companion to Development First, this book is about how to help others through the professional development process.

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Mistakes Were Made (but not by me)

Two of the world’s foremost social psychologists explore how we distort our lives via cognitive dissonance, commitment and consistency, and self-justification. principles. The authors explore how these principles impact politics, law, medicine, and predjudice. If you’ve read Influence or other social psychology books, you won’t learn about new prinicples here. What you will learn (which is well worth it) is the measurable impact these have on the policies and professions that are critical to our lives.

This is a pretty scary book. There’s substantial evidence, for example, that once someone is convicted of a crime, even DNA evidence and confessions by the true perpetrator won’t change the minds of police and judges.

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Are You Ready to Succeed?

This is the book for the extraordinarily popular course Srikumar Rao teaches at Columbia Business School and London Business School. In the book, Sri examines how our mental models affect the way we approach the world and our success. He does a great job offering new ways to engage our lives that produce more satisfaction and fun. I found this book highly impactful in my own life (along with The Power of Now and You Can Have What You Want).

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Do It Tomorrow

Mark Forster’s books on time and life management are a great read. He starts by noticing that no matter how hard we try, we always seem to fall behind. Then he applies a great deal of common sense, uncommon psychology, and intriguing systems to lay out alternative ways of working that will get everything done. This book, his third, returns to the question of time management, and leads you through simple exercises to confront your limits, your demands, and balance the two so you’ll be able to catch up with your own life.

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Feel Happy Now (UK edition)

Michael Neill’s book lays out many different way to achieve happiness. This is a very tactical book in which Michael gives exercises, mental frameworks, and techniques for making yourself happy. In some ways, I find his underlying assumption most powerful of all: that we can feel happy regardless of circumstance, and much of our challenge is simply giving ourselves permission.

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Loving What Is

Loving What Is lays out a simple and effective techniques I’ve used for detaching from negative thoughts and reorienting on the positive and on what’s present in the moment by questioning the thoughts you have that keep you in pain. I’ve been training myself to use the four questions automatically, and have been happier, more peaceful, and more forgiving than I’ve been in a long time.

(Except when it comes to “helpful” automated phone trees. But by the end of the century, I will have made my Peace with those, too.)

You can view Byron Katie’s work on YouTube (seach for “Byron Katie”) and at http://www.TheWork.com.

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The Power of Now

This best-seller has just one message: the more present you are in your life, the most fulfilling and powerful your life will be. The book was transcribed from workshops in which Eckhart mainly answers questions, taking the reader through different scenarios where it would seem impossible to apply “The Power of Now.” In each case, he shows how to remain present yet still effective. I’ve found this to be one of the most personally valuable books in my own development (along with You Can Have What You Want by Michael Neill and Are You Ready To Succeed by Srikumar Rao).

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Your Money or Your Life: Transforming Your Relationship With Money and Achieving Financial Independence

Are you driven/stressed/confused about money? I am. And as much as I enjoy having money, I can’t say my relationship to it is especially healthy.

Reading this book helped, a lot. It’s more than a book to read. The authors lay out a program for figuring out exactly how to maintain your current standard of living, and save enough so you can know the specific date at which you’ll retire with no drop in your standard of living.

Not only has the program been helpful, but the attitudes and beliefs about money that the authors pointed out to me helped me untangle some of my own hang-ups about making the Big Bucks (at which time I quit my high paying job and went to pursue my dreams instead…much less lucrative, but infinitely more rewarding!)

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Development First: Strategies for Self-Development

This book helps you put together a plan and tactics for developing in your professional life. It is quite short, but packed with plain-English prescriptions for how to break self-development into small enough chunks that you can actually find time to do it. I use this book with many of my coaching clients.

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Now, Discover Your Strengths

This book is a sequel to the excellent “First, Break All the Rules.” It delves much more deeply into the principle that you’ll build much more solid organizations by developing strengths rather than concentrating on shoring up weaknesses.

Buckingham and Clifton used Gallup’s research of over a million people to identify 34 core strengths that you might have. Strengths aren’t skills. Strengths are rooted in talents developed early in life. Talents are behaviors so innate that they come effortlessly and enjoyably. You can ultimately go much farther with your natural talents than with skills you learn. The neat thing about talents is that they’re automatic and they feel good to use. So designing a life based on maximizing your talents is likely to be a lot more fun than trying to learn skills that don’t grab your interest.

The book really doesn’t stand on its own. You must take the web-based StrengthsFinder assessment to identify your strengths, and then read the latter part of the book with your strengths in mind. But be warned: you can take the assessment just once for each copy of the book you buy, and you can’t buy additional licenses without buying the book. (Perhaps the best way to think of this is as a one-time $22 skills assessment with a free book thrown in.)

The assessment was useful to me. Everything it told me, I already knew. In fact, it pointed out characteristics so pervasive in my life that everyone around me will be equally unsurprised. And therein lies the power: it gave me names for strengths that I take so much for granted that I would never have identified them as strengths. And furthermore, it let me know that those are strengths that others may not share. Not until reading this book did I consider that my ability to focus and my achievement-based motivation might be talents others may not share.

Now as for using than information… the book was weak. Very weak. Each skill gets one page of description, and one page of “how to manage someone with this skill.” There’s little to help you appreciate the richness of the model or apply the knowledge in any deep way.

That said, however, find yourself a friend strong in ideation to brainstorm uses for the material, an activator to put the ideas into motion, and a good focus person to carry the ideas out.

In short, the assessment gets five stars and the book gets two stars. The self-knowledge was useful, as was the overarching concept, “You’ll go farthest by building your strengths rather than shoring up weaknesses.” Otherwise, the assessment gave me good information that it’s now up to me to use.

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The Goal

This book is required reading at several top business schools, and for good reason. Goldratt lays out an approach for thinking about your business’s operations in terms of operational constraints and measures. He shows why traditional cost accounting skews your ability to manage well, and how many organizational problems come from a misunderstanding of how a well-balanced system operates. If you’re an operational manager, read this! If you’re not an operational manager, please, please, please read this!

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Bottom-Up Marketing

In “Bottom-Up Marketing,” Reis and Trout address the need for marketing to be driven as much by tactics as by strategy. They make the case that marketing strategy is intrinsically linked to an understanding of how tactics drive behavior.

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Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers

What a great book. Moore asks why so many companies suddenly stall just when they seem to be taking off. He lays out stages of adoption for high tech products, and notes that as a product makes its way into the mass market, the market’s buying behavior radically shifts. Companies who fail to make the shift as well… will fail.

Moore’s experience is in high tech marketing, but I suspect his concepts apply across the board.

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Focus: The Future of Your Company Depends on It

This isn’t as good as the other Ries and Trout books. Focus is too wordy (not focused enough?), and relies a bit more on simply telling stories. The logic is a bit harder to verify. That said, the basic point of the book is that Focus is good in many areas of running a business.

It took me a year of struggling against my deep desire to preserve all options and keep myself as broad as possible, but I adopted a “focus” attitude towards my own business. Within three months, the business was doing better than I’d ever dreamt. Many of the results were directly traceable to the newfound focus in the business. Now, I’ve found that the more I focus, the more, bigger opportunities arise. Yes, I have to say “No” to some things, but at the end of the day, the focus strategy has created bigger and better opportunities, faster, than anything I’ve done before.

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Marketing Warfare

This companion to Positioning presents how a marketer can think about competition. Once again, Ries and Trout manage to present sophisticated concepts clearly and simply. For example, the book opens with a concise discussin of “The Law of Force.” They show that superior numbers will win on a battlefield, even in the face of higher hit rates by the smaller force. A simple concept, yet often overlooked.

You’ll probably hear people say that Marketing Warfare is outdated, and the New Economy changes all that, yada, yada, yada. Ignore those people. While specific prescriptions may be outdated, the underlying approach to thinking about the nature of competition is right-on.

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The 22 Immutable Laws of Marketing: Violate Them at Your Own Risk

Al Ries and Jack Trout, marketing strategy consultants, lay out some of the principles of marketing—including the Law of the Mind and the Law of Hype—with many, many examples of what has and hasn’t worked in the international marketplace.

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How to Become a Rainmaker

A very easy-to-read book giving lots of guidelinens for becoming a high-performing salesperson. This won’t be the only book on sales you’ll ever need, but its short chapters make it good reading when you have a few minutes here and there. I picked up a few good ideas and mindset shifts that could be immediately applied to sales efforts.

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Co-opetition

Brandenburger and Nalebuff’s book does a marvelous job making a new brand of corporate strategy accessible: strategy based on game theory. They examine various tactics used in business, such as the “we’ll match lowest price” strategies, and reveal how those strategies can change the industry structure in such a way as to result in the unexpected effect of higher prices. The authors also give rigorous definitions of competitors and complementors, which broadened my thinking about competition and cooperation considerably.

[This is my all-time favorite book on strategy.]

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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.