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About the Author: John A. lath
Professor of Economics at the University of Chicago and Chief Economist at Transportation Services Company Lyft. He is best known for his contribution to the field of field research in economics. His best-selling book, The Voltage Effect, published this year, deals with the application of large-scale ideas.
For years I have been at the forefront of the movement known as the application science. In this article we try to understand why some products, companies and social programs thrive as they grow while others fade away.
When a seemingly promising idea loses effectiveness Or profitability as it expands, we call it a “voltage drop”. There is never a single reason for these expansion failures. Over the past 25 years as a behavioral economist, small and large corporate advisor, and former White House economic advisor, I have identified five signs of these stress drops.
1. False positive result. A false positive result occurs when data are interpreted as proof that something is right – when in fact it is not true. Sometimes a false positive result is obtained due to a statistical error, as was the case with the famous drug use prevention program, DARE After an independent study showed promising short-term results, the program received funding from the U.S. Department of Justice. However, there were some problems with the study: First, it did not include drugs like alcohol and marijuana. Second, it was based on a small sample. And the third reason, later studies could not replicate the results.
In other cases, false positive results result from intentional lying. Think of Elizabeth Holmes and Thranus’ seemingly groundbreaking blood-testing technology, which did not exist in practice.
To avoid false positive results one must have at least three independent copies of the idea showing an early promise. In companies with secret research, employees should be offered financial rewards that encourage them to question the results.
2. Biased representation of the population. Once you have reliably proven the effectiveness of the idea, the next step is to answer the question “On what scale can it work?”.
In every venture one must understand who the potential audience is. The first way to do this is to make sure the sample you made reflects a larger scale population. Otherwise, you will be like McDonald’s, which fell victim to biased representation when it launched the unsuccessful Arch Deluxe. Focus group participants liked the new product, but they did not represent the majority of Americans, who simply wanted to continue eating their Big Mac.
To avoid such biases, make sure the sample in the study is random. You should also make sure that the respondents to the survey have appropriate incentives to tell the truth. A participant in a focus group who says he will purchase the product if it is launched, he may have just meant to say, “I would love to consider the possibility of purchasing the product in the future.”
3. Non-duplicate components. To know if an idea or company will hold up, you need to know if you can duplicate the “non-negotiable” ingredients, that is, your success subscription, on a large scale. In other words, is your secret sauce the chef or ingredients? People, even talent-focused initiatives can not be replicated.You will not be able to afford to employ all the talents you will need as you grow, so you will hire fewer good performers and the quality will go down.
This sign is about much more than just people. As you grow older, regulatory constraints, resource constraints, loyalty issues, and a host of other issues can arise. Ultimately, we need to put these constraints back on the petri dish and make sure the idea works with them on a large scale.
Negative leakage. The leakage effect is the unintended effect of a particular event or outcome. A classic example is when a city opens a new plant, and the air pollution it produces affects the health of nearby residents. As you grow, the likelihood of leakage increases dramatically. I first saw this when I was Uber’s chief economist: a coupon that led to more travel in one area of Seattle failed when we expanded it to the entire city as price increases began, and users found cheaper ways to get around.
There are also positive leaks, such as network influences, that make a social media platform more valuable as more people join it. When planning an idea, you should expect negative leaks and look for opportunities Benefit from the positive ones.
5. The cost trap. To expand, one needs to determine not only how many people like the idea, but also how much they are willing to pay for it, and most importantly, how much it will cost to provide it.
You need to consider two types of costs: pre-determined costs, such as the one-time investment in research and development of a new product or service, and ongoing operating expenses. Pre-determined costs can be reimbursed, but operating costs can lead to a reduction in voltage. This is what happened to the scientific health start-up Arivale, which dealt with preventive medicine services and found itself bankrupt a few years later, because no worthwhile price was found for its services.
One strategy to get out of the cost trap is to make sure you benefit from the size advantage, a skill that Ayalon Musk excels at in all his ventures. Since he helped change the world of online banking with PayPal, every major innovation he has made is thriving on a large scale.
You can also look at Tesla. Its massive success can be attributed to the size advantage that its two most important components have: batteries and solar power generation cells, both of which can be produced cheaper in larger quantities. In addition, everything at Tesla is aimed at increasing the efficiency of the “machine that makes the machines,” or what Musk affectionately calls his “alien heavy cannon” – that is, an advanced and fully automatic production facility.
Another strategy is to create models that do not rely on top-notch talent. As you grow, locating and paying high-performing performers will become impossible. The solution is to create products that can give their full value to customers even when average performers provide it.
When it comes to expansion, there are five major obstacles you face. If you watch them, you will be able to adapt your idea to the highest possible tension.
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