Start-up Strategy: To Change the Game, Change the Economics of How It's Played

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(photo: laffy4k)

Several weeks ago, I found myself in the passenger seat of a car going nowhere fast.

My friend, Peter Sims, who had earlier introduced me to the Stanford D.School, was leading the charge into the unknown, hurtling us (hopefully) towards dinner in exotic Burlingame, where people from SF and Palo Alto compromise to break bread.

The “us” included Alan M. Webber, whom I’d never met. He sat behind me, and — as getting lost tends to promote — we ended up talking about nothing in particular and everything in general: publishing, the game of business, Mr. T, you name it. I didn’t know Alan, but it soon became clear that I should listen as much as possible.

Alan was co-founder of Fast Company magazine and former editorial director of the Harvard Business Review.

More specifically related to this post, Alan developed a very interesting habit more than 20 years ago, when he began to carry a supply of 3 x 5 index cards wherever life took him. He wrote down and collected the lessons and insights he gleaned from his experiences travelling the world and in his interactions with people ranging from CEOs and spiritual leaders to basketball coaches, novelists, and stars from dozens of other worlds…

His new book, Rules of Thumb, is a collection of 52 truths he’s culled from these notes specifically related to winning in business. I asked him if I could have an exclusive excerpt, and he graciously agreed.

Here is Rule #24, one of my favorites.

RULE #24 – If you want to change the game, change the economics of how the game is played.

Say what you will about the Grateful Dead, in my book Jerry Garcia was one smart businessperson. Here’s a guitarist who was missing a piece of a finger, played in several other bands besides his own, found time to sell paintings, had a line of neckties with his name on them, and even got an ice cream flavor named after him. He also articulated a competitive strategy for the Grateful Dead that put him at the top of my list of management gurus: “You do not merely want to be considered just the best of the best. You want to be considered the only ones who do what you do.”

The Grateful Dead principle of “being the only ones who do what you do” is what I decided to borrow when it came to devising Fast Company’s Web strategy. If you’ve ever been to a standard rock concert, you’ve heard the announcement they all make before the show: “No photography, no recording, enjoy the show.”

Except for the Grateful Dead. They had a different theory of the economics, which led to a different business model, which led to a different announcement before the show: “Tape all you want! Make all the bootlegs you want, trade them, swap them, sell them to each other.”

Their fans enthusiastically complied, creating one of the earliest versions of a social network focused on live bootlegs of their favorite band. Did the band object? Not at all. Because they knew the more traffic their fans created—even if they didn’t get a penny from it directly—the more tickets, T-shirts, stickers, CDs, and other Grateful Dead paraphernalia they would eventually sell. Give away the bootlegs, charge for everything else. By the way, it worked: the year Jerry Garcia died, the Grateful Dead was the highest-grossing rock-and-roll band in the United States.

Of course, Jerry Garcia wasn’t the first to change the economics of his industry this way. Cyrus McCormick did it with the reaper business in the 1840s.

McCormick is remembered for patenting a reaper in 1843—but that wasn’t his real innovation. McCormick had quite a few competitors, but at the beginning nobody was selling any reapers, including McCormick. The problem was farmers couldn’t afford the machines. So McCormick changed the economics: he invented an installment plan that let farmers buy his reaper and use the savings the machine produced to pay him back over a three-year period.

Once you start to look you’ll find companies in every industry that have changed the economics to change the game: from razors to cameras, computers to airlines, magazines to nonprofits. Companies that start by redesigning the economics of an industry often finish by redesigning the whole industry—and owning it.

So What?

The game today is all about changing the game. Competing head-to-head on products and services is table stakes. Innovators are looking for a new business model that will destabilize their rivals and produce a breakthrough opportunity. In fact, in a recent survey of top-level executives in established companies IBM found that the biggest shared concern is that somewhere in the world—in a garage or a dorm room— someone is coming up with a new business model that will overthrow their established way of doing business.

How do you do it?

Start by analyzing the status quo. What’s the standard economic model the industry uses today? When you pull it apart, how does it work? What are the assumptions that it’s based on? How and why has it become the industry standard? Take a look at it from the point of view of the customer. Exactly what is the customer paying for? And where does the business make its real money? Go back to Business School 101 and ask the fundamental question: what business are you really in?

After you’ve analyzed the standard business model, take a look outside your own industry. You may be able to learn some new tricks—or at least borrow some inspiration. What would Craigslist founder Craig Newmark do to your industry? What would happen if the whole business moved to the Web? If things that customers paid for now became free? Free, as the saying goes, is a pretty good price. What if you did a King Gillette and gave away the razor? What could you charge for? Take it one more step: are you hurting your business by charging for something you should give away free? (As daily newspapers watch their circulation numbers decline, some critics argue it would make more sense to give the papers away for free.)

After you’ve looked at the economics from inside the industry and from other industries, try looking at new platforms. Can you imagine new revenue streams that reflect changes going on in customer habits, customer experiences, or customer loyalty? Is emerging technology opening up new ways of connecting—or making customers pine for the good old days when things weren’t so high-tech? Don’t forget, everyone agreed that retail outlets were dead and all commerce was shifting to the Web. Then Steve Jobs opened up Apple stores with their Genius Bars. Counterintuitive can be a great economic model.

There are a lot of ways to reinvent an economic model. But most established companies are unwilling to do it because it would mean destabilizing their own operation.

Which is exactly what those innovators and entrepreneurs in the garages and dorm rooms are counting on.

###

From Tim: I’ve included one of my other favorite rules — Rule #38: If you want to think big, start small (an interaction with Muhammad Yunus) — here on the experimental Tim Ferriss site. Rules of Thumb is now available at retail or through Amazon.

Posted on: May 13, 2009.

Watch The Tim Ferriss Experiment, the new #1-rated TV show with "the world's best human guinea pig" (Newsweek), Tim Ferriss. It's Mythbusters meets Jackass. Shot and edited by the Emmy-award winning team behind Anthony Bourdain's No Reservations and Parts Unknown. Here's the trailer.

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113 comments on “Start-up Strategy: To Change the Game, Change the Economics of How It's Played

  1. Wow! Fascinating read. I finally got around to purchasing the book. I accidentally ordered the audio version, which I like, but I think I’m going to have to get a print copy for my second read so I can do the Questions & Actions sections more effectively.

    Like

  2. “You do not merely want to be considered just the best of the best. You want to be considered the only ones who do what you do.”

    Wow, I really connected with this quote. For me, this is an ‘ode to finding your own unique voice. Modeling is awesome and effective, but only to a certain point. If we want to achieve high levels of success and fulfillment we need to reach above and beyond where modeling alone can take us.

    Like

  3. When I say purchased the book in the previous comment I mean 4 Hour Work Week, I will also probably pick up rules of thumb.

    Thinking about this make me wonder if there are any other bands that managed themselves successfully. I know Mick Jagger manages the Rolling Stones (at least financially) because he dropped out of the London School of Economics.

    Like

  4. Great post! I’m going to buy the book right now!

    How do you meet people like Alan Webber? I am trying to find motivated young people in my city(Birmingham, Alabama) but they are scarce. Should I find try to find them or should I just be the prime example of a motivated young person in my city? Thanks!

    Like

  5. Tim,

    Do you consider Twitter a startup that is in the process of changing the current economics of web applications?
    I mention this because, like the open attitude of the Grateful Dead, they have a very open application and API that allows traffic to be moved through the site, third party applications, and mobile devices.
    They do not seem concerned with keeping users on their website unlike the approach of facebook and other ad-revenue based sites that depend on creating viral loops in their applications in order to boost their revenue streams. Any thoughts?

    ~Rahul

    Like

  6. Thanks Tim for sharing this preview of Alan’s work. To build on this rule #24, It might be interresting to apply the MC Cormick Model to the IT consulting Business.
    Fibol

    Like

  7. I love this post, and am heading over to Amazon to get the book. In just those examples from this excerpt I’ve already got a head full of ideas! You totally got my psychic page this morning! I was looking for a way to explain the concept of moving the free line for a speaking gig I have on Friday and here you hand me the Jerry Garcia bootleg concept! As always, exactly what I need when I need it! Thanks again!

    Like

  8. Breaking the economic model requires a level of innovation many people have had drummed out of them. By breaking down the dynamic interactions at each stage of the value chain we can often reveal where to unleash value and alter where we harvest it. But, even though we see these things, it is a riskier proposition than the status quo. Innovation then is not enough, it also takes the balls to risk doing what may not succeed, and have fun regardless of the outcome.

    Like

  9. Music wise I like where Amazon/MySpace has taken things. Listening to a song before wasn’t enough to prompt me to spend 15$ on a CD, but now listening to multiple songs I find I’m buying more.

    Will have to check out this book, especially with trying to get a startup going myself.

    Like

  10. As usual, great post Tim. How do you think this stuff up?

    I always thought of Gerry Garcia as a great business person. Today, I believe we are looking at an economy revolution more significant than the Industrial Revolution.

    As to analyzing business models and looking for the “Craig” way of doing things…. Tim, do you really think most folks (example Michael Dell) saw the future, or were they just in-the-right-place-at-the-right-time?

    Captain-Rob

    Like

  11. I can’t even remember who said it to me, but a maxim that I try to live by when setting out on any new venture is, “There is always room for the best.” And the best are always looking for a way to change the game. Now, more than ever, this is especially important. The internet makes commoditization easier than ever – so you have to work to maintain an image of value rather than commodity. Easier said than done…

    I love the Grateful Dead example of letting information flow freely. We’re living in a world where pretty much anything can be found for free anyway. I think the leaders right now are those that are figuring out ways to deliver “free,” but are also delivering value on the back end for profit.

    Cheers,
    Adam

    Like

  12. Thanks for the post Tim! And thanks for the feedback! The question is, how do you meet people like Tim? My theory is, they’re everywhere! In fact, Rule #52 is: Stay alert! There are teachers everywhere. That first ride with Tim was one hilarious, smart, unstructured learning journey–a lot like life. He’d say something, and I’d want to write it down on a 3 x 5 card, but then he’d say something else and the way Peter Sims was driving, well, forget it! The other thing that’s true is What Adryenn says: you always find what you’re looking for! When I ran Fast Company, people would ask, where do you find all those cool companies and people to write about? The answer was, they’re all out there–you just need to adjust your lenses so you bring them into focus. One last comment: the difference between Twitter and the Dead is that the Dead had a product they were charging for–the bootlegs were great viral marketing, but the rest of the business model was all about real revenue. So far Twitter is the opposite: very viral, no (apparent) business model. Thanks again, Tim and everybody!

    Like

  13. Your posts on here always amaze me. I have already read your four-hour workweek book and I’m surely going to pick up this book also. It is always interesting to read the thoughts of different people and what rules work for them and what didn’t.

    Like

  14. Simply, love this post. Very nicely illustrate with examples on how to change the economics of the business you are in. I am sure it can be applied on every businesses and would be good to see how various businesses would apply to their stardand practices.

    I also liked the post on yr website: “If you want to think big, start small.” It has so inspiring stories from Muhammad Yunus and Jessica and Matt (Kiva.org founders). The message is loud and clear. Sometimes we just wait for everything to be in placed and forget that we can learn while actually doing it. We just have to start and things will be in placed later on. Instead of thinking and planning on how to make a big project and wasting time on it, it’s better to start from small and make it big while actually working on it. There are so many things we would like to do, why not start from one and do second and third later on??

    I am sure that I would buy this book before end of the day.

    Thanks..
    Pritesh

    Like

  15. I’m going to order his book, very exciting! By the way Tim, I haven’t taken off the VFF shoes since last Wed. Feels like I’m cheating somehow walking around barefoot. Very curious looks in meetings as well.
    Peace

    Like

  16. This is important to keep in mind as any of us think about the economic games we play and our goals to get ahead, improve our selves (or just our perception of self), and design the perfect life.

    http://www.storyofstuff.com/

    P.S. I have no personal connection to the link, just a genuine post.

    Cheers,
    Lukas

    Like

  17. Great post Tim! That’s been my thinking with my current website…this particular industry has been charging for information already out there for free and mostly because a big name Derek Jeter or Ryan Howard endorses it. And most of the time, it’s basic information, no secrets. And then there are those who claim secrets, but only disappoint the reader because the information is regurgitated over and again.

    I love your site and spread the word every chance I get, if you’re ever in Central California email me and we’ll have a beer;-)

    It’s funny you talked about Jerry Garcia in today’s post because I just sold 3 Grateful Dead shirts on eBay today, and hadn’t sold one in quite awhile!

    Like

  18. I’ve been trying to figure out the best way to change the rules of the game for deal-making. Right now everyone seems to dislike lawyers, and startups find that legal fees are one of their biggest expenses. Regular consumers often can’t even afford legal help. The sad truth, at least when it comes to contracts, is most of the time you’re paying for the lawyer’s word processing and arguments over saying the exact same thing but in different ways. In doing so, they spend a great deal of time reinventing the wheel as they piece together the clauses.

    We’re systematically providing the key clauses for deals with automatic drafting software on our site, and trying to change the rules of the game by giving it away for free (we’ll be selling premium services to this audience). But so far we’ve found little interest among lawyers to grow their practice with enhanced productivity for the exact reason you note above: “it would mean destabilizing their own operation.”

    So now we are focusing on going straight to businesses and freelancers. Do you think there is a good market for us there?

    Like