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I recently came across this anecdote about how 1% marginal gains add up:

In 2010, Dave Brailsford faced a tough job.

No British cyclist had ever won the Tour de France, but as the new General Manager and Performance Director for Team Sky (Great Britain’s professional cycling team), that’s what Brailsford was asked to do.

His approach was simple.

Brailsford believed in a concept that he referred to as the “aggregation of marginal gains.” He explained it as the “1 percent margin for improvement in everything you do.” His belief was that if you improved every area related to cycling by just 1 percent, then those small gains would add up to remarkable improvement.

In 2012, Team Sky rider Sir Bradley Wiggins became the first British cyclist to win the Tour de France. That same year, Brailsford coached the British cycling team at the 2012 Olympic Games and dominated the competition by winning 70 percent of the gold medals available.

The story and graph illustrates a simple but powerful point — success or failure isn’t a single event but an accumulation of small gains and losses. It reminds me of my favorite Al Pacino’s monologue as a football coach on how we fight for those inches to win:  

To win as a startup team or sports team, those inches or 1% gains are what will make the difference between winning or losing. 

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imageOne of my favorite tales in business comes from the early days of Fedex. Here’s an account by one of the first employees:

By mid-July our funds were so meager that on Friday we were down to about $5,000 in the checking account, while we needed $24,000 for the jet fuel payment. I was still commuting to Connecticut on the weekends and really did not know what was going to transpire on my return.

However when I arrived back in Memphis on Monday morning, much to my surprise, my bank balance stood at nearly $32,000. I asked Fred where the funds had come from, and he responded, “I took a plane to Las Vegas and won $27,000.”

I said, “You mean you took our last $5,000 — how could you do that?”

He shrugged his shoulders and said, “What difference did it make? Without the funds for the fuel companies, we couldn’t have flown anyway.”

They were either going to be able to operate with the jet fuel or go out of business without the jet fuel. This is a quite literal example of gambling with the company’s future though sometimes it really makes sense to double down and take a big chance — especially when the outcome is effectively binary anyways. 

Startups often have to make crazy bets because if they don’t, they are going to be obsolete or bankrupt anyways. It doesn’t mean they do it recklessly but they need to figure out when they face the same risk between decisions but can get better outcomes with one than the other.

I sometimes lose sight of how amazing the technology industry is. The economic definition of technology is an improvement of how to do things (whether it involves machinery, software, or means of organizing things). So at it’s heart, this sector is all about trying to change how the world does things for the better. 

Since moving to San Francisco a few years ago, it’s been great immersing myself in the tech capital of the world. When you’re working on big, hard problems that perplex the world, it can feel lonely and almost laughable in your attempt to solve them but being surrounded by peers attempting to effect world changes, makes it easier. That’s why San Francisco is so great and what this video captures so well.

San Francisco is where the world changes. For anyone toiling out there to effect change through technology, this is where it’s at!

What makes customers happy? Most people think it’s simply delivering the solution that solves the functional problem of customers the best. For example, search engine marketing ads deliver prospective customers from point A (another website) to point B (your website) arguably in the most efficient manner and this form of advertising is widely now adopted. Yet, for many search engine marketing service sellers, they lose 50% of their customers every year. 

Why aren’t these customers happy?  It’s been baffling the local ad industry for years. I think it is because people can care more about form than function.

In an interview with the CEO of Prada there was a great anecdote about this phenomenon. Prada makes a variety of shoes such as ballet flats and high heels. In the city of Milan, most streets are made from cobblestone, making it incredibly uneven and difficult to walk on. You’d think that based on utility and function, the best selling shoes for Prada in Milan would be the most comfortable ones like ballet flats. However, high heels by far outsell everything else. 

Form wins over function once certain utility is reached or after a certain spending level. More comfortable shoes may get a customer from point A to point B faster but they don’t give the same emotional feeling. Customers are purchasing based on the image they have of themselves by owning the product and the image others have of them as a result.

It’s the emotional experience that customers are purchasing — not the physical good. Prada has learned to sell esteem, not just a shoe. It’s the difference between Foxconn selling an assembly service and Apple selling an assembled experience.

In my company’s world of advertising, this lesson explains a lot. It turns out advertisers don’t just care about function of getting from point A to B (or in this case, getting customers from website A to website B). They care about form to a degree as well. Advertisers care about their image and how it portrays them to others and themselves. 

Seeing your own ad out there in the world is fulfilling for ego. At PaperG, we’ve observed that customer who have seen their own ads are much happier customers than ones who don’t.

Everyone wants to be important. Everyone wants people to notice them. Display advertising gets customers from point A to B but like high heel shoes, it may not be the fastest way of doing things. It says something about the buyer. It tells everyone around them to pay attention. It’s a classic example of form over function. Search on the other hand is great in efficiency and functionality but provides almost none of the form that advertisers value. It could make customers much happier if it adapted some of its form.

I’m sure this insight isn’t limited to just advertising and fashion. So, when thinking about your customers and why they might not be happy with your efficient product, ask yourself:

Are you selling form at all or just function?

When I was an intern at an multinational bank, the managing director once took me aside and asked me if I could guess why one of the vice presidents was being promoted and the other wasn’t given that both just sold equally large multi-million dollar loan products to hedge funds. He explained that one of them won the deal even though he didn’t bid the lowest price for financing. The other guy won after offering the lowest price.

My boss gave me a powerful insight: Anyone can win on price. Not everyone can win on product.

To win on product, you have to differentiate which can be extraordinarily hard. A product is not simply the code or physical object that the customer pays for but it is the entire experience of purchasing it and using it. 

For something as commoditized as providing cash like at the multinational bank, you have to sell the buyer on your reputation, ease of doing business, and network of additional benefits like other relationships. In essence, you are selling a better experience which commands a premium.

For advertising technology, many people see the different ad stacks as interchangeable. As a result, many people throughout the supply chain have been commoditized and primarily compete based on price. $5 CPM not low enough to win the business? Most people lower the price to win the RFP. Very few companies have resisted the temptation to race to the bottom in their attempt to scoop the deal. Everyone has lost out as the technology deteriorate and the only thing being optimized for is the pricing.

I’m always incredibly proud of my team when we win a deal and aren’t the lowest priced product. There have been a great many times when we’ve been $100,000 or more expensive than our competition — yet, we still win the deal because we offer the best ad tech experience for our media partners. We can offer best practices from our 100+ partners, best ad designs that work for 20,000+ advertisers, and best training from our experience with 3,000+ ad sales reps/ops. We’re offering the best in class service and technology so we charge for it, which customers can and do appreciate.

So if you want to know how good your whole product really is, see if you can be the more expensive option and still win.

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The Wall Street Journal this weekend covered the trend of Silicon Valley start-ups focusing on consumer electronics rather than consumer Internet businesses. One great example cited is a “$359 kitchen appliance dubbed Nomiku, which people can use to sous-vide food—that is, cook meats and vegetables in airtight plastic bags in a water bath.”

This item isn’t sold anywhere yet because it’s still being made. It is in development and validated as a potentially great product idea thanks to crowd sourced funding. Nonetheless, it’s the perfect example of what huge retailers should be selling — products without UPC codes which Amazon can always underprice and outsell.

Traditional retailers need these products to sell but don’t know how to innovate on their own or figure out what will be a hit product. They should be funding their development or outright buying ones that are getting early traction — effectively strategically investing or acquihiring. By doing so, they will begin to tap into amazing cutting edge products, gain merchandising talent for years to come, and differentiate from Amazon. 

Retailers have the enormous benefit of distribution for these products and can market them in a way few startups can hope by putting it physically in front of millions of consumers who don’t even know to search for these unique items.

When turnaround plans are discussed for traditional retailers like Best Buy, it’s just shocking to me that no one is talking about actually doing something other than cutting some cost or relabeling UPC products so shopper can’t price compare with Amazon. Best Buy needs to be selling amazing products that no one else has if it ever wants to take back marketshare and actually increase profits.

If retailers are daring enough to adopt this radical idea, we could start seeing a whole new frenzy around physical product startups as a result and maybe even a revival in traditional retailers’ fortunes.