Why Your Business Needs More Weird Ideas — Part 3
In Part 1 we discussed two kinds of innovation: Disruptive Innovation (D.I.) and Incremental Innovation (I.I.).
I introduced my thesis that there’s enormous untapped potential in the way we innovate because right now there’s a premium on logical reasoning.
So, weird things that may have tremendous ROI are systematically overlooked, creating this undervalued gap.
In Part 2, I introduced two kinds of value creation: Technological Economic Value Creation (TEVC) and Psychological Economic Value Creation (PEVC)
Two different paths that are, outcome-wise, indistinguishable.
We covered how companies are almost exclusively doing TEVC and the limitations that has:
Not everything is soluble by engineering.
The physical limitations of human perception.
In today’s final essay I’ll make the case for PEVC.
Enter Part 3.
Let’s start with a thought experiment: Say, I’m a beverage company.
I hire a consulting firm to help me grow my revenue.
Create the product faster and don’t make it exclusive. Increase the consistency of the product so users know what they’ll be getting every time. Decrease the cost by optimizing the process and packaging.
Seems perfectly sound.
Shipping faster means users get it sooner which means I get revenue faster.
By not making it exclusive I increase my Serviceable Obtainable Market size, the market segment I’ll try and capture. (I covered SOM in: Should You Worry About TAM And SAM?)
By increasing consistency, I decrease churn.
And finally, by decreasing the COGS (cost of goods sold), I increase my margin and therefore gross profit.
Yet wine breaks every single one of those rules.
The product is created slowly.
So slowly in fact that users value it the older it is.
It’s important to realize this is entirely subjective. You could make an objectively, vastly superior product in a lab yet people would still prefer the bottle of 1829 Château d’eezNuts.*1
It’s incredibly inconsistent. So much so, that the waitress lets you smell the bottle before she pours it. Which helps promote this image that it’s a hard-to-make, natural product that you, therefore, should find valuable.
(Imagine the waiter asking you: ‘’Do you wanna taste this steak to see if it’s still edible according to you?’’)
And the packaging is incredibly inefficient. I mean.. a cork in 2019? And the glass bottles are heavy. In fact, I wrote an entire essay about the literature on how wine perception is influenced by pricing and bottle weight.
We all hate waiting at the dentist.
The technological solution would be to spends millions in order to squeeze out ever more efficiency.
Make it function more like a well-oiled machine.
Have better processes in place to estimate and plan the day as well as possible and then give the dentist the right tools (software and processes) in order to bang out customers ASAP so they can reduce waiting for the rest of the patients to near zero.
But a much better way might be to spend a quarter of that money to turn the waiting room into a spa and relaxation room filled with models who’d hand-feed you grapes and bring you wine.
People would complain if their appointment was on time and churn would drop to below 0 numbers!
The assumption you’re making lies in the solution. You assume people hate waiting, therefore, the solution needs to be to eliminate waiting time.
But perhaps waiting isn’t the problem, perhaps it’s boredom and uncertainty about the duration that accompanies waiting. Which gives patients the feeling that they’re wasting valuable time.
Obviously, I’m joking about the models (partly). But I’m trying to illustrate a point here.
User happiness is the benchmark and they could care less about how we achieve that. Technological or Psychological.
Which is exactly why it strikes me as so naive that there’s this disdain towards PEVC.
People don’t consider it a ‘real’ solution.
Were we building things for machines, I’d agree. But we’re building things for humans. More specifically, for the perception those humans have.
If we can find a way to increase user happiness at a fraction of the cost then we should do that even though it’s seemingly less sexy.
And as we saw from the wine story and the hypothetical dentist story, it can be extremely powerful.
At Yale University, Professor Ben Polak teaches Econ 159: Game Theory.
In those lectures, he describes a game:
You and your friends, colleagues or classmates are gonna write down a natural (whole) number between 1 and 100.
You’ll take the average of all those numbers and multiply it by 2/3.
The one who gets closest to that number wins.
So if Sally writes down 8, Ben writes down 56 and Melany writes down 35, the average is (8+56+35)/3 = 33.
2/3 * 33 = 22, So Melany was closest.
Before I spoil it.. You can see the game here.
The key here is to realize that you can eliminate numbers above 68 because even if everyone chooses 100, then 2/3 *100 = 66.66...
So the highest possible correct answer is 67. This means that no one would write down say 80 because it’s illogical (or a weakly dominated strategy in game theoretic terms).
Hence, the game is essentially just being played between 0 and 67.
2/3*67 = 44.66…
But then by the same logic, we can essentially rule out all numbers between 46 and 67.
You can follow this line of reasoning all the way down to 1.
But there’s a catch.
So far we’ve been reasoning from a world where everyone behaves perfectly logical, free from biases and irrationality.
You need to behave rationally (to eliminate numbers above 67), you need to know that others will behave rationally too (to eliminate the numbers 46–67), you need to know that others know that others will behave rationally, and so on. (This ongoing process is called Common Knowledge.)
This is not the case so we need to correct for that and adjust our final answer accordingly, depending on the irrationality of our friends.
This is what we’re doing in business right now.
We’re taking a complex world with many variables that are all interconnected and reduce it to an overly simplistic model.
We then pretend that, in that simple model, all players behave perfectly rational.
And finally, we lose sight of this pesky thing called reality that’s interfering with our model until the whole thing collapses.
When we realize that the science we need to understand human behavior is more like meteorology rather than Newtonian physics, it’ll become more acceptable to test counterintuitive things.
Things all of your competitors aren’t testing because they’re bound by rationality.
Therefore, the big upsides in the coming decades won’t be found in the crowded pond of rationality but in the vast ocean of irrationality.
*1 This is the very problem Impossible Foods is facing with their lab-grown meat. People would rather eat meat produced by the meat industry in a disgusting and unethical environment than lab meat under the most sterile and safe conditions. This is not a problem you solve with engineering by making a better burger. You solve it with behavioral psychology by shifting the narrative and therefore perception of their food.
** To learn more about innovation, I suggest looking into the work done by Professor Clay Christensen. To learn more about value creation by irrationality, I recommend everything by Rory Sutherland.