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April, 2009

  1. Moving a boat

    April 26, 2009 by max

    This is a story about what it takes to start a company. It may not seem like it, but it is.

    I live on a boat in a harbour. It’s an amazing place with just the right mix of artists, yacht owners and fishermen. As in all small communities there’s a strong invisible pecking order. The fishermen are on top. They are the real men. They have survived force gale 12 storms in the bay of Biscay, they haul cod out of the freezing water with their bare hands in the winter, they move crates around the harbour like children moving toys across the lawn. And, of course they know all there is to know about boats. When it comes to boats they are the unquestionable authority. They have seen it all before, and they are always right. They are where you go for buying, selling, moving and fixing boats.

    I like the fishermen. Without them I would have no idea how to fix all the things that inevitably break on my old boat. And I can tell they enjoy sharing their vast knowledge. But to them I’m not a real man. I’m an academic. I can’t lift the heavy crates, I’ve never been in a real storm. And I can’t haul cod, not even in the summer. To them I’m a boy.

    On the outer edge of the harbour there’s a small man-made island to break the waves coming in from the sea. Like many small man-made islands and piers it’s surrounded by heavy stones that are piled up around the edge of the island to keep the waves from washing it into the sea. I imagine that a hundred years ago when it was established the local fishermen would start by collecting huge stones and throw them in the water from their boats, slowly building the perimeter. Once an atoll of stones were sticking out of the water they would have filled the middle with soil, gravel, and old garbage. If you dig a bit you can still find old bricks, wood and heavy chains hidden in the belly of the island. It’s a beautiful island, with wild roses, long grass and willows hanging over the water. It’s great for barbecues in the summer, and just perfect for chilling out. And best ot all, it’s accessible from one of the piers that leads from the harbour right out to the island.

    So one day when the fishermen were scrapping an old wooden fishingboat I asked whether I could put it on the island. The wheelhouse and deck was gone, and all that was left was the hull. It was pretty small for a fishing boat, around 20 feet. When I looked at it I saw the old oak planks meticolously carved out and stuck together to fit just right. Once a talented boat builder had taken a lot of pride in building it. Now it had reached old age, but it still had the smell of tar and sea, and if you closed your eyes you could almost see the old fishermen out to sea hauling cod from it. It would fit well on the island. I imagined that it should sit on the side of the island, and that there should be a small table, a few chairs and a barbeque inside it. Then you would be able to sit in the boat, looking across the railing and out over the sea, dining with friends, telling stories about storms in the bay of Biscay. It would be perfect.

    So I asked the fishermen if I could put the boat on the island, and told them how perfect it would be. They smiled and agreed, and told me that if I could get it there I was very welcome. I sensed that I was somehow being held for a fool, but didn’t quite understand why. So I asked what was the matter. “Listen son, that old boat weighs in at maybe a tonne, it doesn’t float because it’s so full of holes, the pier is too narrow to haul it across, and it’s gonna be pretty darn hard getting it over the wave breaker stones. It would take at least ten strong men a day to get that done, and we’ve got better things to do. But if you think you’re man enough we’d love to see you give it a try.” They smiled. They had just told me I couldn’t do it. “Doesn’t seem so hard” I tried. They smiled. “Oh yeah, watch me, give me a week, and I’ll be having a barbeque in the boat on the Island. I’l do it, and I’ll do it without your help. Or anybody elses for that matter.” More smiles. I had taken the bait, and was now on the hook.

    The ruling class of the harbour had told me that this couldn’t be done by boys, only men. A lot of men. And they knew, they had done this kind of thing for decades. There were unwritten rules and tricks passed from one generation to the next without much change, and according to these rules I wouldn’t be able to do it. Much less do it alone. But I had to. I didn’t have a choice. It was my test of mandom. My generation against theirs. And I wouldn’t fail.

    I knew that I wouldn’t be able to do it on their terms using brute force. I knew that they were so superior to me that if I ever got in a barfight I would rather have a 50 year old fisherman than Chuck Norris on my side. I never had the guts to go to the joints where you get in barfights in the first place. I had to use my own strong sides to make up for my vast inferiority of raw strength. I had to be smart instead of strong.

    So I came up with a plan. The fishermen would lend me their crane to lower the boat on to a barge for me, but the rest I would have to do myself. The plan was to get the boat to stand on its stern with the bow pointing straight up in the air and the keel pointing to the heavens. I would fasten it with ropes to the sides of the barge to make sure it didn’t fall over. I would then tow the barge to the island, and moor it alongside the wave breaker stones, cut the ropes and let it fall. Hopefully it would fall with the keel across the stones, and onto the grass on the other side. From there I would use an intricate system of pulleys and sticks that could leverage my missing raw strength to pull it into place. I thought it was a good plan.

    I got the boat onto the barge using the crane without much trouble. It did take me some time to secure it in its awkward position pointing straight up, but I did it. The fishermen watched and laughed. It would never work. If the keel of a boat isn’t horizontal you’re in trouble. It’s against the unwritten rules. Nothing good had ever come from a keel being vertical instead of horizontal. I didn’t care, and happily towed the spectacle across the harbour out to the island. Cameras snapped and fingers pointed my way, but I just knew it would work, so I swallowed my pride and reminded myself of who would have the last laugh.

    I got to the the island, and moored the barge alongside the stones, as close as I could to the spot where I wanted the boat to find its final resting place. It was only ten meters away. When I tipped the boat from the barge I would get the keel across the stones, and the worst part would be over. I started cutting the ropes, and the boat fell, exactly as planned. Then something terrible happened. One of the ropes holding the barge to the island slipped, and the boat started drifting outwards away from the stones. It slipped down over the stones and into the water, and came to rest halfway into the sea before I could throw a rope around it and secure it to a tree.

    This was catastrophic, my plan for getting across the stones had failed miserably. It was the hardest part of the venture, and I had no idea how to proceed. I knew the fishermen were expecting me to give up, and that I would have to endure their mocking for years to come. They would happily come and pick me and the half sunken boat up just to ridicule me. I didn’t know what to do, but what I did know was that I couldn’t fail. The stakes were too high, I had made a commitment and told everyone about my venture. My pride simply wouldn’t allow me to give up.

    I tried to move the boat, but it was wedged between the stones, and didn’t move an inch, even when I put in all of my strength. But I knew that I had one thing the fishermen didn’t: Brains. I could think my way out of this, I wasn’t held down by their inbred old beliefs. I could come up with some clever scheme that would save me. Maybe their unwritten rules about what could and couldn’t be done were just crap. Maybe nobody really tried to do things differently.

    So I sat down on a stone and assessed the situation. The boat needed to be pulled one metre up and two across to get over the stones. From there it would need to be pulled five or six meters across grass and on to the small hill where I was determined to have a barbeque in less than a week. I had some four by fours that I could lay on the stones with one end in the water below the boat, and the other up on the grass. That way I would have something to slide it on, over the stones. On the small hill where the boat would end up there was a tree. If I tied one rope to the tree and another to the bow of the boat, and had some kind of leverage system connecting the two ropes I was sure I would be able to pull it all the way up to the tree. The rope needed to be strong, and the leverage system needed a big exchange for it to work. The boat weighed as much as a car, and it wouldn’t be easy to pull it across the stones. I started working on my leverage system.

    I took an old oar I had lying around and cut the upper part of it in two. Now I had two pieces of round wood. I took a length of rope and tied it to one end of one of the pieces of oar. Then I brought the rope around the tree and back to the piece of oar where I tied it to the other end. Now I had a piece of oar secured by a rope at each end in a loop around the tree. I did the same thing on the boat. One piece of oar was secured with a rope to the boat, and another to the tree. The two pieces of oar were roughly five meters from each other. The idea was that if I tied a rope to one of the pieces of oar, and pulled it back and forth across the two pieces of oars I would have a pulley system. If I put the ropes three times back and forth between the pieces my exchange would be three times. I would have to pull the rope three times as far, but only with one third of the strength. I had replaced ingenuity and hard work with raw power.

    I strung the rope three times around the oar pieces, and started pulling. Nothing happened. The leverage wasn’t enough. Five times. Still not enough. Eight times. That did it. The boat creaked and the ropes whined as it moved an inch or two out of the water and came to a stop. It was too hard, and I couldn’t pull anymore. I took a look at my pulley system, and found a flaw. The ropes around the pieces of oar were so strecthed that I couldn’t move them sideways at all. The tension as they dragged over the old oar was too much. I got an old can of grease from my boat and smeared it across the rope to make it glide easier over the oar. I tried pulling the rope again, and after a few false starts it started working. The boat slowly but surely rose out of the sea, and started its journey across the stones. It worked. It was hard work, and every half meter or so something would get stuck. I was sweating, covered in grease, working like a horse, and didn’t even notice the sun setting over the harbour. I was busy doing what couldn’t be done. It was midnight before the boat arrived on the little hill, but arrive it did. I was exhausted, and felt like most of my bones were broken. But it didn’t matter. I had done what the fishermen said couldn’t be done. I went to bed and fell into a long dreamless sleep almost before I hit the sheets.

    When I woke up the next day I felt on top of the world. My body was hurting, I had ripped my trousers, and bruised my hands. But it didn’t matter. I had used ingenuity, leverage, determination and hard work to achieve what the unquestionable authority of the harbour said could only be done by men. A lot of men. And I had done it alone.

    In the afternoon when the fishermen came in from the sea they saw the boat standing on the small hill on the island as a monument to my triumph. I knew they would see it, because they sailed right by the island on their way in. But they never mentioned it. Maybe they couldn’t acknowledge the fact that an amateur could beat them at their own game. Maybe they couldn’t swallow their pride. Maybe they thought I had cheated somehow. But the result was there for all to see, and the next day I invited some good friends over for a barbeque in the boat.

    Over the next few weeks I did notice small changes. I would be invited in for a beer more often, and the fishermen would tell me stories from their youth about storms in the bay of Biscay.

    And whenever I looked one of the old fishermen in the eyes we both knew that he wasn’t looking into the eyes of a boy. He was looking into the eyes of a man.


  2. Getting product pricing right

    April 16, 2009 by max

    Setting the right price for a product has always been one of the most difficult hurdles for startups. Of course it only makes it worse that the pricing of your product is one of the most important decisions you as a businessowner will ever make. So how do you do it?

    If your product happens to be webbased, here’s an interesting idea. But first some basic economy on what the right price is.

    According to classical economics the higher the price you charge for your product the less people will buy it: as prices rise demand decreases because less people are willing to pay the higher price, and supply rises since producers can get more for their wares. The market price is where the two meet. This is how a free market with perfect competition works. On a graph it looks like this:

    Your goal as a businessowner is to maximise your operating income, which is the amount of money you have left when you have paid for your operating expenses. Operating expenses can be divided into variable and fixed operating expenses.

    So your operating income can be defined like this:
    Operating income = units x (price-variable expenses) – fixed expenses

    Your fixed expenses are pay, rent, and other things you have to pay no matter how many customers you have. (Strictly speaking your fixed expenses will of course become variable as you grow since you need more people, bigger offices, etc.)
    Your variable expenses are the expenses that can be related directly to how many units you sell. Support calls, server costs and delivery fall into this category. (again, strictly speaking most variable expenses are incremental: you either have one or two servers, not 1,4 servers)

    Since you know, or can at least estimate, your variable and fixed expenses it is possible to calculate what your operating income is at different prices. The right price is of course the one where your operating income is as high as possible. If you had a graph of the demand curve for your product this would be easy: You could just find the price where (price – variable expenses) x units sold is at a maximum. Since you sell your product at the same price to all consumers your supply curve is vertical, No matter where the demand curve meets it the price is the same: everybody pays the same price. By changing the price you can slide your supply curve left or right. For instance, if your product costs $1 to produce you would rather sell 10 units at $5000 ($4990) than 2000 units at $3 ($4000). The problem is that you don’t know how the demand curve slopes. Maybe your customers will start using your competitors cheaper product once you reach a certain price, maybe there’s a psychological price barrier somewhere, or maybe a large percentage of your customers are willing to pay much more than you anticipate. You just don’t know for sure.

    If the demand curve goes like this the best option may be to sell expensive to a few customers that are willing to pay big bucks.

    But if your demand curve goes like this you will be better off selling cheap, since none of your customers are willing to pay in buckets, but a large amount are willing to pay a decent amount.

    Since there’s really no way to know, except experience and looking at your competitors pricing most people and corporations just guess. Sometimes highly paid consultants are brought in to make a better guess. Large companies like Procter and Gamble have teams of experts committed to the game of guessing a price.

    But for upstarts that sell their wares on the net there might be a better way.

    Let’s say you start a company that sells socks on the Internet. You have one product: a ten-pack of beautiful blue socks. Your competitors sell ten socks for ten bucks. so should you follow their price, make it cheaper or more expensive?

    Webbased companies have done A/B split testing for many years to optimise their sites. The idea is that you show 50% of the users one page and 50% of the users another page and see which one performs best. Performance is usualy measured in terms of how many people buy something. Using this method you can continually test your site, try out new ideas, and micro-optimise it. Amazon is known for doing this.

    What if you do split tests to optimise your price?

    If you have a lower bound and an upper bound for the price of your ten socks you can hack a splittest together that will find the optimal price. The lower bound is the variable expense for the socks. The upper bound is a really high number. The program will start with a series of price points evenly distributed between the upper and lower bound. It will show a price of $10 to some customers, $8 to others, and maybe $20 to others still. Since you can capture how big a percentage of potential customers accept the price (by entering their credit card information and buying your socks) at different prices you will be able to micro-optimise the price. Using splittest technology and clever hacking you can actually test your way to the perfect price.

    You start off with random values between the upper and lower bound, calculating your potential operating income for each price.

    Let’s say you have 1000 visitors that are shown five different prices randomly, and thus have different percentages of accepting the price – the higher price the less visitors will buy.

    Price: $8 $10 $12 $14 $16
    Percent that buy socks: 30% 25% 22% 19% 14%
    Turnover for 1000 visitors: $2400 $2500 $2640 $2660 $2240
    Variable cost for 1000 visitors: $300 $250 $220 $190 $140
    Fixed cost: $1000 $1000 $1000 $1000 $1000
    Potential operating income for 1000 visitors: $1100 $1250 $1420 $1470 $1100

    This will give you a rough demand curve with five pricing points: $8, $10, $12, $14 and $16. And from this you can see in which range the optimal price is. In the above example it is obvious that the optimal price point is somewhere around $14, since that is where the operating income is maximised. Now you can repeat your test in the $12 to $16 range, and iterate with smaller and smaller numbers until you find the perfect price.

    I’m not oblivious to the potential problems of this approach, namely that in the test phase a number of customers will get wildly varying prices, which is probably not undesirable: It could affect your brand, customers might get angry hearing that they’ve paid twice as much as someone else, etc. But to get a statistically significant result you will probably not need to run that many visitors through the test. And I think you’ll be able to get around it by letting users know that that they’ve been part of a test, and they’ll gt the product cheaper than they expected.

    What do you think? Will it work? Is it insane?

    And if you’re thinking about actually building something like this shoot me an e-mail at max@maximise.dk. I’d love to consult :-)