A Salad of Business Thinking (Part 1)

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I have a bunch of ideas to share today. There's thread tying them together, other than them being about business, so I'm just referring to it as a "business thinking salad." Hopefully, it's good and you don't spend your time picking out the metaphorical red onions.

The first two headings are about personal/family stuff... along with some blog direction. Feel to skip them if they are not your thing. I, personally, love to learn more about the people behind the blogs I follow.

Freedom?

My 3 year old has his first day of camp today. This ends a 10-week string where I was a stay-at-home dad. As Retire By 40 put it, "Any stay at home parent wants a little more time to do what they want. RB40Jr was out of school for two weeks and it was rough... By the end of the two week break, I was getting easily irritable and I didn’t like that."

I don't know how other stay at home parents do it, but I'm guessing they aren't trying to balance 3 other businesses and most of the household chores as well.

The grandparents chipped in with a several days of help, but it was often 2-3 days of overnights. The needle moved sharply in the other direction and I missed him. It's almost like starving a person for weeks and then giving them all-you-can-eat lard. There's no balance... it is simply not healthy.

All the time, there was a looming feeling of Cat's Cradle (Chapin, not Vonnegut)... I'm sure I'll want to have all this time back with him in a few years.

Expect action on this blog to pick up. I'm going to start by looking for a new writer (my old one got a new job). If you think you're a good fit reach out to me here.

Father's Day and the 2-year old Competitive Eating Champion

I had a great Father's Day... two of them actually. My wife took me and the kids out for lunch... the best BBQ in town (there's not much competition). The 2-year old slept through it, so he had lunch when we got home. Three hours later, we all went out again for my father-in-law's celebration. Because I had just eaten, I ordered the cheapest thing on the menu, a half-pound burger, to split with the 2-year old. (The 3-year old had fallen asleep this time.)

When the burger arrived, I almost got sick as it was so big and I was still so full. Fortunately, my 2-year old is the next Joey Chestnut as he ate 90% of the burger, not to mention quite a few chips and fries. The running joke for the next couple of hours was, "So how was your burger?"

Enough family stuff... let's move on to the business ideas.

Ever Wonder? Is This Business Idea Any Good?

I wonder that all the time. In fact, I'm often so paralized by the question that I can't move forward. Well, I may have found the answer.

Pat Flynn had his Will it Fly book on Kindle available for 99 cents this weekend. That price is no longer available as I write this, but there's arguably a better deal.

The Audible book is still $1.99. (I hope that's still the case as you read this as it seems an oversight.)

You could can pay around $15 to read a paperback or have your Amazon Echo read it to you for $2.

Good Marketing, Bad Marketing, and False Marketing

I'm often annoyed by marketing. I can understand a company explaining why people should their products. That's good marketing. Sometimes the companies use misleading information and a bunch of psychological tricks. This morning I was reading Root of Good's article on focus groups and some examples of these were brought up. I considering this bad marketing.

There's sometimes a very thin line between the two.

Then there's simply false marketing. There are probably at least 20 marketing statements I hear a day where I think, "That can't be right." When I have the time to look into them, I find that 90% they simply aren't right.

To give you an example of what I mean, I watched John Oliver on Brexit (warning: very adult language) this morning. He pointed out a commercial that appears to have blatantly lied, stating that there are 109 European Union regulations to making a pillow. He shows that's simply not true.

This stuff probably seems like common sense, but it's odd that the first two articles I read today had significant mentions of bad and false marketing.

Should You Get an MBA?

I looked into this question over a decade ago. The more I looked into it, the more it seemed that the value was mostly in networking with others, not the education itself. I feel like you can get much of the education through books like The Personal MBA.

It was kind of gut feel from all my reading, but there was never one specific thing that I felt I could point to. This weekend I found an article on The Atlantic that is the closest thing to it: The Management Myth. The article should open your eyes about how weird "management" is.

Sometimes my wife brings up the idea of getting an MBA to pair with her pharmacy degree. I cringe a little bit, because it doesn't feel like the time/money investment is worth it.

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Posted on June 20, 2016.

Financial Case Study: Effectively Wild

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[The following is an article that I requested from Kosmo after reading about a similar topic in this GREAT NY Times article. This article goes behind the scenes to before the nerds ran a baseball team on statistics.]

A few years ago, I began listening to a baseball podcast called Effectively Wild.  The hosts are Ben Lindbergh (formerly of Baseball Prospectus and the now-defunct Grantland and now of FiveThirtyEight) and Sam Miller of Baseball Prospectus.  It's a show that is ostensibly about baseball, but is as much about the behind the scenes aspects as the on-field action.  A few topics that have been covered:

  • Why isn't the increase in defensive shifts lowering BABIP?
  • Catcher framing (Lindbergh is an acknowledged expert on the topic)
  • A cold call to a 90 year old former pitcher (Ned Garver) in search of an answer to a question about a specific game.  (Episode 722 - it's a classic.  Ned is tremendous.)
  • A discussion about an effort to recruit former minor league players to play cricket (Switch Hit 20)

Ben and Sam have a tendency to look at many different perspectives before settling on an answer.  Instead of just seeing the finished result, you also see why other possibilities are disregarded - and that can often be even more informative.  Over the years, the show has grown to over 10,000 listeners and a Facebook group of more than 3,000.  It slows down a bit in the winter, but there are still multiple episodes every week.

Show me the money!

For years, the sole source of revenue was a single sponsor, the Play Index from Baseball Reference.

After volunteering their time for about 850 episodes - about 400 hours of air time, to say nothing of the additional work required to put the show together - Ben and Sam asked for money.  They used Patreon to solicit donations, quite clearly stating that this was voluntary and that those who didn't have the money to spare should not contribute.

At the moment, 788 people have pledged a total of $6,434 per month.  It's quite likely that will drop somewhat.  There are some rewards for being at various levels for a period of time, and some people will drop to a lower level after getting that reward.  Other people will find themselves in financial situations where they need to stop contributing or lower their contribution level so that they can keep food on the table.  For the sake of argument, let's assume it stabilizes at around $4000 per month.  The podcast has about 20 episodes per month, so that is about $200 revenue per episode.  That's overstating their hourly rate in a couple of ways.  First of all, they often do research before the show (well, Ben does, anyway).  Second, some of this money will go to hosting costs.  However, at the end of the day, these guys are going to be able to take home a decent chunk of change for their podcast.  A very fair reward for the entertainment value they provide for thousands of people.

The Stompers Experiment

Last season, Ben and Sam tried their hand at applying the principles of baseball analytics and took over the baseball operations department of the Sonoma Stompers, an independent league team.  For those of you who aren't familiar with how baseball works, the independent leagues are where players go when they can't find a home in the minor leagues.  The players make almost nothing as they chase the dream of catching the eye of a scout for a big league team.  The teams themselves are often run on a shoestring budget, and it's unfortunately to see teams or entire leagues go bankrupt.  If you want to see baseball at it's most pure level, indy ball is the place to go.  There are no millionaire players.

The GM and the announcer of the Stompers become members of the Facebook group and were welcomed with open arms.  Facebook members bought merchandise, attended games, donated their voices for commercials, and even contributed cash toward a full page ad in the Stompers program.  The group adopted the team as their own, following the broadcast on the internet when possible.

Ben and Sam wrote a book about their experiences.  Perhaps the best thing about the book is the fact that I am one of the people they thank - extending a somewhat odd streak of being listed in the acknowledgments of a baseball book for the third straight year.  The official release date of "The Only Rule Is It Has to Work" is May 3rd (yes, that's today).

The spin-off

The podcast is a sideline for Ben and Sam - they both have "real" jobs - but they have turned it into something that will actually generate revenue for them.  That's great for them, but does the buck stop there?

Of course not.  All good things need a spin-off.  For Effectively Wild, that spin-off is Banished to the Pen.  An innocent discussion about where one reader could host his content quickly turned into a discussion of having the Facebook group operate their own site.  I'm proud to be one of the founding members of the group that created the site. We have dozens of people creating and editing content, and the work of many of the writers has been acknowledged by some of the leading writers in the business.  We've had a half dozen writers snatched away by other sites.  Since the site was intended to be a non-profit (in fact, zero revenue) incubator for aspiring writers, this makes us quite happy.

Thus, Effectively Wild isn't just making money for Ben and Sam - it has helped launch the writing careers of people who are now being paid for their work as well.

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Posted on May 3, 2016.

Are Quick Loan Companies Bad?

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There's a lot of negative talk in the personal finance space about quick loans, often called payday loans. I think most of this talk is justified, as many people get trapped in loans with high interest rates. The rates are so high that sometimes people can only pay the interest on the loans. They can't pay the principle and get themselves out of the loan. It can be like trying to dig yourself out of quicksand.

If there's so much money to be made by charging people high interest rates, why wouldn't everyone open up a payday loan company and get rick quick? Let's ignore the ethics of the high interest rates for a thing for a second. There are a lot of less than honest people willing to take shortcuts to get rich quick.

I've had a little experience lending money on Prosper. From that experience, it is necessary to charge an outstandingly high price to the high risk people with very low credit grades. Even when I was getting 29% interest, I lost money because so many people defaulted on their loans. I can't imagine the rate I'd have to charge to make money on what Prosper deems high risk or no credit borrowers. Well I can, and it's about the rate that payday loans charge.

If it was really easy to make money in the payday loan fields, there would be tons of entrepreneurs entering the field and undercutting them by a few percentage points to grab all the business for themselves.

That doesn't happen because numerous payday loan companies exist still charging tremendously high rates. I believe they need to charge these rates because a large number of their clients never repay their debt or interest at all. It may sound like conjecture on my part and in some ways it is. However, I can't recommend that people get payday loans. When you compare payday loans, it's too easy to get trapped into a hole you can't dig out of. Still, I think that payday loan companies aren't nearly as predatory as they are made out to be. I think they are just charging what needs to be charged to make an honest profit. If people were more responsible and didn't default on their loans, companies that provide cash loans wouldn't need to charge such high rates.

I think it's up to the consumer to educate themselves about credit before they find themselves in such a situation.

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Posted on March 28, 2016.

Healthcare (Sigh…)

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Short of clearly negative terms such as homelessness and domestic violence, I can't think of a more depressing topic than healthcare. The topic is so immense that I'm not even going to attempt to cover it in any kind of detail. I'm only going to address healthcare billing.

You'd think billing for something would be easy. We've been billing for things for hundreds of years without issue. It can't be difficult, right?

Let me tell you how I spent Tuesday morning this week.

In March, the wife and I went on a vacation in Silicon Valley to visit with some old friends. As luck would have it, I got pink eye. I'm going to blame the Extended Stay America in San Mateo, which was one of the worst motels/hotels I've ever been at... and I like Motel 6.

What idiot gets pink eye when they are away from their kids for a few days? This idiot, I guess.

My wife, being a pharmacist, knew that we just needed a cheap, generic antibiotic. However, to get that antibiotic, you need prescription. That's when everything went to hell in a hand basket.

My understanding is that some 99.9999% of the insured US population can go to some kind of non-urgent clinic for something simple like this and have it covered. I even hear that it is relatively quick. Our military insurance is great, but the compromise is that you have to go through emergency rooms for something that should be quick. It means that I often wait six hours for a visit that can be as quick as 5 minutes. (I think emergency room triages could learn from grocery store check-out lines of 12 items or less. Oops, broke my promise to stick to billing.)

In any case, such visits are always covered 100% from by my understanding. This is the way the health care plan wants it to work.

Since we lived in the area for years, we knew just the hospital to go to. It was the one my first son was born at a few years back. As far as vacation illnesses go, this is going to be easy, right?

The visit itself was uneventful. I didn't even have to wait the usual 6 hours. In fact, I was almost unhappy to have to leave the waiting room that had a new episode of Undateable on.

A couple of months later, the bill came in the mail. We owed $400. Hmm, that doesn't seem right. I gave them my insurance card. Turns out they ignored what I gave them and used what they had in their computer system. That was no longer an active insurance due to our move. So it churned out a bill of $400 to be sent to my house.

Fortunately my wife works in this area every day and as the sponsor of the plan called up to fix things. I'm never sure who you are supposed to call in this scenario, the hospital or your insurance. In any case, she got the problem solved...

... until Monday when I get a new bill from the hospital for $330, the balance of the portion that my insurance didn't cover.

This is called "balance billing" and in some states and for some forms of health insurance (such as Medicare) it is illegal.

I had never heard of balance billing before. In my quick research it seems very controversial. For example, I think my bill would have been a lot cheaper if I hadn't gone to the emergency room. It can't be $400 for 5 minutes of someone to look at my eye and tell me what I already know, right? However, my insurance requires that I go to the emergency room. On the other hand, is it fair to the emergency room to take only $60 for what they deem is a $400 service? In this case, I think $12 a minute is still very good money, but I bet there are other cases where the insurance doesn't cover the hospital's expenses well.

If you really want to have your mind blown, you should read this Forbes article on balance billing. The patient planned a $2000 procedure with an out of network provider which is listed as being covered 50% by her insurance. She saved up $1000 for the procedure. However, she got a bill for $1600.

What happened?

The insurance decided that the procedure should only cost $800 (their negotiated in-network rate) and decided to reimburse her 50% of that (or $400). That left a balance of more than $1600. It's a double whammy as she was penalized with a higher rate for going out of network and also only reimbursed 50%.

The Forbes article cites research that says only 16% of people were able to accurately estimate their bill in one study.

I can't imagine that anywhere else in life. The closest I can think of is my mechanic, but even then I get a fairly estimate before work is done. I can understand not having billing details when you are bleeding from multiple knife wounds (or some other urgent situation). However, that wasn't my case with pink eye and certainly not the case with the person in the Forbes article that saved up for her procedure.

Getting back to my case... I was in California and the Forbes article specifically points out that emergency rooms there can't balance bill. So I'm not sure how their computers even allows for the scenario. As an extra layer or protection, my insurance seems to say that I can't be balance billed. So it seems that the hospital is break the state laws and their agreement to take my insurance.

How can we fix this

From a technology standpoint, it should have taken all of 15 seconds for me to swipe my insurance card and have their computers tell me what it is going to cost for a pink eye emergency room visit. Maybe it's 30 seconds. I'm even happy to run it myself during the hours that I'm usually waiting in the emergency room. The could even take this to the next level and make a mobile application where it saves my insurance in the app. Then I'd only need to enter my condition and GPS could tell me nearest providers and final costs (with my insurance) in the area.

This technology is thousands of times easier than programming to Siri to understand what I'm saying and respond relevantly back to it.

Is this anything new?

Not for me. Twice before, I've gotten in conversations that went back-and-forth between the two a few dozen times over a span of several months.

One was for an ambulance ride when I almost died choking on pizza crust. The ambulance company couldn't figure out how to take my insurance. They couldn't work it out with my insurance company who had conversations with them. While they went back and forth to resolve the technical issue, my bill went into collections where it started to damage my credit. I was financially held hostage by two organizations who weren't even disagreeing with each other.

Another time, there was a disagreement between the hospital and the insurance for how the procedure should be coded. Under one coding it would be covered. Under another one it would not be. It was another case where it wasn't an urgent condition... yet they couldn't have told me beforehand whether my insurance would cover it.

So now, whenever I have something come up, it's a game of medical bill roulette. I've been fortunate enough to win the disagreements, but I think the process to resolve the financial aspect is far worse than the medical condition itself.

Healthcare... (sigh...)

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Posted on July 9, 2015.

Coke and Free WiFi

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Recently, Coke announced that they will begin offering free WiFi to some rural villages in South Africa.  The internet acess will be provided by a Coke machine.  Depending on the success of the program, they may expand the program to other locations in Africa and beyond.

This struck me as an interesting idea.  Naturally, I did what I usually do with interesting idea - kicked it around with Lazy Man for a bit.  We came to different conclusions on the best way to profit from WiFi enabled machines (the discussion was not tied to the South African machines, but to a more general model).

Lazy Man's thought was to require a purchase to get internet access.  There are very obvious benefits with this plan.  You lock in the sale immediately, and you're not spending money providing access for non-customers.  That sale is immediately "banked" and you can't lose it.  Makes sense.

On the other side of the coin, my thought is to have unfettered access to the free internet.

It's certainly true that there are some people that would never buy a Coke, and you're going to lose money providing free internet access to these people.

However, there are also many people who simply don't want to buy a Coke at this exact moment.  I may not be thirsty now, but I'll be thirsty in twenty minutes.  Give me free WiFi and I'll settle on a bench and probably still be there when I get thirsty - at which point I'll buy a Coke from the machine.  The basic concept is to keep a potential customers in your vicinity for as long as possible.  Anything you can do to "bait the trap" helps avoid having customers defect to your competitor.  Keep a potential customer around long enough, and it becomes increasingly more likely that they'll buy from you.

It's even better if you can turn the machine into a gathering spot ("Meet you by the Coke WiFi, Yordano").  As the group grows, you're likely to draw in people who don't have a strong preference on their beverage choice - but if they're hanging out with Yordano's group, the closest drink is going to be an ice cold Coke.  At first, Buster and Hunter may only drink Cokes when they're hanging out with Yordano, but before long, they may be drinking Coke at home.

There's also a brand perception aspect to this.  If you force me to make a purchase before I get the WiFi, I'm going to perceive this as the WiFi costing me money.  If there's no purchase required, I'll see this as you giving me a gift - a much more positive vibe.  I'll like your company more, and will be more likely to buy your products.  That may not be completely rational, but that's irrelevant - companies often benefit (or are hurt) by irrational consumer behavior.  Understanding what makes consumers "tick" is  key to any successful marketing effort.

Requiring a purchase may produce a higher profit margin, but giving away WiFi in an effort to cast a wider net may produce higher total profits.  A business decision does not have to increase your profit margin in order to be a smart decision - it merely needs to produce a profit margin that exceeds the expected rate of return for your other options for that investment.

[Editor's Note: I certainly see the value of giving stuff away. I give away information on this website and the money comes back to me via advertising. It's just that in this scenario, I found the giveaway so valuable, internet access in rural area, that bundling with your product's purchase for free would create the same positive vibe. I figured the person would say, "Before I got a drink. Now I get a drink and this awesome internet access for the same price! Wow!" If I were in the business of selling Coke products I'm thinking, "Is there a percentage of people who just want the internet access who may pay for that? Would these people then drink the Coke to not be wasteful, get addicted, and lead to future sales? Maybe!"

I don't think there's necessarily a wrong answer, but I thought it was an interesting business idea to think about. Maybe someone out there can tell us what their business professor would say on the subject.]

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Posted on October 30, 2014.

Use Terms and Conditions to Prevent Disputes

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If you are like me, you've scrolled past thousands of terms and conditions without reading them. If my website's traffic is any indicator, almost no one cares about the terms and conditions of this site. Nonetheless they are important for several reasons. Here's one very important reason: my advertisers require that I have one. I have to keep those people happy.

Terms and conditions and all the other digital paperwork are needed because eCommerce transactions are not as simple as walking into the local grocery store and picking up a loaf of bread and a quart of milk. When you go to a store, make a purchase, and walk out of the store, you probably disregarded some terms and conditions without knowing it. For example, you might have missed signs stating the refund policy or that the management reserves the right to refuse service to anybody. Those are terms and conditions in real time, and by completing a purchase, you have agreed to them. Last week, I was at Universal Studios in Orlando and I noticed a sign that said that by entering the park, I was granting them a license to use my likeness in their marketing. It made me wonder if a celebrity that endorses Disney can go in. Imagine the can of worms it would open up if Universal put out a commercial involving that celebrity.

Create Your Own Terms and Conditions

When you create your terms and conditions, you could review a dozen sites and "Frankenstein" your own terms and conditions. With any luck, the results will be better than they were for Frankenstein and his monster. At the very least there won't likely be any torches and pitchforks.

Now there's a online terms and conditions generator from companies such as Shopify. It would have made my life easier. If I were a small business starting from scratch, I'd start there.

Be Careful with your Terms and Conditions

When a purchase made through a website has more purchasing steps and nearly infinite space for them, the terms are more complicated. In fact, they are complicated enough to trip up large companies like Zappos who had its entire user agreement voided by a federal court. I highly recommend reading that article to avoid their pitfall.

Terms and conditions that are termed "browse wrap" have been thrown out of court, as in the case of Harris v. Blockbuster, for being what the court termed "illusory and unenforceable."

Cover Your Assets

Terms and conditions such as privacy policies, terms of use, terms of sale, and refund policies are meant to protect the sellers and service providers from losses. By clearly stating what you will and will not do, how you use the customer information entrusted to you, and what policies cover your activities on your website, you are limiting the financial harm that you might experience in a lawsuit brought by a disgruntled customer who feels wronged or injured by your company or the goods or services that you're selling. In a sense, such documents act like a fence setting out legal boundaries to your liability. They play a part in protecting you from litigation so long as you have fulfilled in good faith all your responsibilities to your customers. Of course, the definition of "good faith" in the case of a merchant transaction is open to interpretation.

Acting in good faith require some effort and transparency. This is why I have a "Quick Non-Legalese Version" section to start my terms of conditions. I want to make sure that I'm transparent. I recommend you do the same.

Quite literally, terms and conditions are cheapest insurance policy you can get. Don't be "Lazy" and put it off.

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Posted on April 4, 2014.

Monkey Butlers Reviewed: Real Savings or Monkey Business?

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Over the last month, I've been participating in a program to review monkey butlers from Ambler's training program. They've been working on this monkey butler training program for close to five years now. It started out as something at their resort, but now they're expanding to bring the monkeys home to you. Ambler contacted me to see if I'd be an alpha tester and write a review. (Note: I did not receive compensation for this review.) My guess is that they saw the name Lazy Man and decided that I was a natural match for a monkey butler.

They weren't wrong. If I weren't so darn frugal, I'd be their ideal customer. You aren't reading this to know about me, so let's dig right into this monkey business.

Meeting my Monkey for the First Time

When my monkey butler arrived in his crate it was love at first sight. You can't go wrong with a tiny tuxedo on anything. Monkeys are no exception. First smell was a completely different story. The best thing I can say is that my dog really seemed interested in him. My wife and I? Not so much.

Getting Down to Monkey Business

Optimistically, I decided to name my monkey, Dobby after one of my favorite Harry Potter characters. As I soon found out, this Dobby was no Dobby. The first task I gave him was to write a section of this blog review. What better way to learn about monkey butlers than from Dobby himself, right? He broke two keyboards and didn't get any further than: "It was the best of times, it was the blurst of times." Given my deadline for this post, I had to scrap this project and move on to something easier.

Laundry has always been my nemesis. The washing, drying, and folding of cloths is just so repetitive. I long for the day of eco-friendly disposable clothes. Alas until that day comes, laundry is a necessary evil. Could Dobby be the answer to my prayers?

Unfortunately when it came to the washing and drying, the answer was no. In fairness, my washing machine and dryer is extremely complex. I'm happy when I have a 15% success rate with them. Aside from that, he couldn't separate the clothes into appropriate piles of lights, darks, colors, and delicates. Again, in fairness, my performance in this area is so terrible that my wife relieved me of that duty years ago.

However, I can fold clothes. I don't like doing it, but at least I'm successful. Dobby was fairly successful well. The only problem is that he kept on mixing up my Celtics and Red Sox socks. After contacting Ambler's tech support they told me that monkeys are red-green color blind, but that they are working on gene therapy to solve this for their beta program due out later this year. In the meantime, I'll just be slightly more fashion-challenged than I already am. Some may say it is an improvement.

Hidden Costs of the Monkey Butlers

The great thing about monkey butlers is that they don't ask for money. They don't take up a lot of space and don't require their own room. However, they eat a ton of bananas. Worse, they throw a lot of bananas. I've been told it is a well-known problem in the monkey butler industry. They call it the Banana Eating Efficiency Ratio (BEER). The greater the BEER the better. Ambler claims to have one of the highest BEERs in the industry. If Dobby is any indication there's still a lot of room for improvement there.

That's not all monkeys throw. They've been known to throw their poop. I've got two children under 20 months of age. There's not too much in the way of poop I haven't seen or experienced. However, throwing of poop is indeed a level beyond what I was prepared for.

If you want a taste of what it is like watch this:

Like the BEER ratio, the monkey butler industry is working on this one as well. They call it Feces Under Control Ratio (FUCR). I'm told that over the last few years they've been able to raise the FUCRs considerably.

Unfortunately, I don't think they've got the FUCRs where they need to be. It seems like the monkeys create as much work as they save.

Real Savings or Monkey Business?

It is really difficult to a full cost analysis since Ambler didn't give me a price of the monkey butler to begin with. However, considering that they don't seem to be very helpful at this point, I'm going to put it in the "monkey business" category... for now. Give it 5 or 10 years and maybe we'll see more practical improvement.

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Posted on April 1, 2014.

How Will Amazon Pay For Drones?

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Amazon CEO Jeff Bezos has been tinkering with his Erector Set lately, and his latest erection has the media buzzing.  Within 5 years, Amazon plans to be doing deliveries via drone.  Drone deliveries will be to locations within a few miles of Amazon's fulfillment centers, meaning that the folks in Box Elder, Montana are not likely to see Amadrones whizzing at by their heads in the near future.

There are obviously some technical constraints.  Even with GPS, the drone would need to have some spatial awareness to know exactly where to deposit a package (unless you had some sort of Bat Signal that would serve as a data collection device for the NSA beacon for the drone).  Packages that needed a signature would also present a challenge - the drone would need to be at least as lifelike as the UPS delivery guy (I'd recommend extracting algorithms from old episodes of King of Queens).  They may also need to dodge incoming fire from people trying to score a free gift (shields up!).

Beyond the technical constraints is the cost.  The drones are expected to make one delivery at a time and then return to home base.  From a logistics point of view, this is really inefficient.  You may have noticed that UPS trucks often carry more than one package, and that they don't return to home base every 20 minutes.  There's a good reason for this.

As I see it, there are two main options to keep the drone budget under control.

Option 1: Limit the expenses

Amazon may consider using cheap, disposable drones.  If they were to take this Erector Set Drone, beef it up a bit, order in bulk (tens of thousands), and utilize preschool labor to assemble them, they may be able to get their costs down to $10-$15 per drone.  As a bonus, the buyer would get a free drone with every purchase.  Honestly, this is hardly a new idea.  Look no further than your own mailbox.  How many of your messages come with a free delivery mechanism?  Envelopes, and sometimes even boxes!  Back in the olden days, you could build a small menagerie from pony express and carrier pigeon deliveries.  Ah, those were the good old days. [Editor's Note: In more recent times, people build furniture from FedEx boxes.]

Option 2: Maximize revenue

Option 1 is thinking small, though. There's huge potential for revenue maximization with these drones.  Sure, Amazon could make throwaway drones for fifteen bucks, but it might actually be more profitable to build a small air force of hardy drones, even if the cost could soar well into the millions.  Sometimes you need to spend money to make money.

First of all, Amazon could create barriers to entry for competing delivery mechanisms in an effort to corner the market.  Am I suggesting that Amazon arm the drones and open fire on delivery vehicles?  Yes, yes, a million times yes.  Of course not, that would be unethical and very dangerous.  I'm simply suggesting that they use the quick delivery turnaround in their marketing campaigns.  Hard drive crashes at 11:15 PM on a Sunday night?  You'll have a new one in your hands in 30 minutes, or your next pizza hard drive is free.

Amazon could also make a few extra bucks while doing a solid for Uncle Sam.  Outfit these suckers with spy cameras and heavy artillery and take recon photos while also taking out a few strategic non-cvilian targets.  You're already spending the money on drone fuel - why not kill two enemy combatants birds with one rocket stone?  Of course, offering your services to a single buyer isn't a great way to create a market, as you give the buyer a lot of leverage.  There are probably a few other countries that would like to have photos of American command bunkers landscapes.  Canada and Denmark immediately come to mind.  Get the leaders of the three countries together for a brunch of pancakes, Canadian bacon, and Danishes and hold an auction after the dishes have been cleared.

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Last updated on December 3, 2013.

Hindsight View: How HP Could Have Succeeded With the TouchPad

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I realize you are probably little bored about articles on the HP TouchPad. If that's the case, I've got some good news. I think I'm down to only two final ideas for TouchPad articles left in the hopper and this is one of them.

If you are wondering why I keep writing about the TouchPad, it's simply because I think it's the most interesting business story in the last ten years. You rarely have a nearly universally critically acclaimed product fail at two companies for entirely different reasons... only to watch it become so extremely popular after it being discontinued, that consumers can't find it in stock anywhere. People snap up art and music (Nirvana and Michael Jackson come to mind) after the artist dies, but that doesn't happen with technology very often. Usually, it's the opposite reaction, if the technology won't be continued, because don't want to invest in it.

In fact, the demand has been so strong that earlier today, Reuters had an article with the following quote: "[HP's Personal Systems Group head Todd Bradley] said the company could resurrect HP's short-lived TouchPad tablet computer, which was introduced on July 1 before being terminated only about six weeks later."

That was followed up by HP announcing it will "produce one last run of TouchPads to meet unfulfilled demand". Of course their next sentence was, "We don’t know exactly when these units will be available or how many we’ll get, and we can’t promise we’ll have enough for everyone." That leads me to wonder if HP understands the meaning of the phrase "meet unfulfilled demand."

I got in a conversation with Kosmo from The Soap Boxers about what I thought HP should have done in hindsight with the TouchPad. (By the way, you should read his article on the HP TouchPad Chaos.) I proposed that they should have released the device with the following sales plan:

  • Sell the first million at $99 (16GB) and $149 (32GB). That's a combined one million - so 400,000 of one and 600,000 of another for example.
  • Sell the 2 million at $149 and $199.
  • Sell the 3 and 4th million at $199 and $249.
  • Sell the 4 through 6th million at $249 and $299.
  • After that it hits full retail price of $299 and $349. There is also an option for an accessory bundle
    (like a Touchstone and a case) or $75 app store credit sold in the $349 and $399 range.

Kosmo correctly pointed out that consumers probably wouldn't like the constantly raising prices. HP would have to reverse the pricing and say that it starts at $299, but those who act quickly can get it with an instant rebate of $200. That instant rebate would just keeps diminishing as product is sold.

Sure some consumers might not like the idea of paying more because they bought it later. I know I'd wouldn't. It rubs me the wrong way to pay more than I could have. However, I like to think that I'm a little odd in that I run a personal finance blog. I like to think that most people would think the following:

"I'm in the market for a tablet. There are these cheap ones from HP that have gotten a lot of media attention due to them launching with a $99 price. I know there's are a couple of million out there so this is a platform that people are going to be interested in it. I could pay $199 for this now, or double that for Android tablet, or even more for an Apple iPad2. Gizmodo says, "The TouchPad is the second best tablet you can buy, at any pricepoint." It seems to be the value for my money.

At this point, you have probably already had the thought, "It's easy for you to say to sell these at those prices, you aren't HP losing millions of dollars." That's a fair criticism. Let's look at what the cost to HP would have been in terms of hardware alone. (We can presume there are other costs such as development of the operating system and such, but in HP's conference call they specifically cited the hardware as being the big cost driving the decision. There's also the retailer's margins to consider.) Fortunately, we have details from iSuppli about how much the TouchPad costs to make. Their estimates are $296 for the 16GB and $318 for the 32GB. Using those numbers, I opened up Excel and crunched my estimated numbers. Here's what it looks like (assuming that consumers buy equal numbers of 16GB and 32GB):

The top of the spreadsheet illustrates how as the promotion sells, the discounts get fewer and fewer. After selling 3 million of the 16GB and 3 million of the 32GB TouchPads (6 million total), HP would have lost a whopping $548 million dollars. Is that number so large though? They paid 1.2 billion for Palm. The day HP announced they were getting out the hardware market, their stock dropped $12 billion dollars. That same day they bought Autonomy for what was between 7 and 10 billion dollars.

The most interesting thing to me is the next line after the losses. This is the line when the product sells at the retail price of $299 and $349. At this price point, HP actually makes $34 per device sold. It's not big money, especially considering the other costs (software development, retailers, etc.) that we glanced over. In fact, they are probably still losing money at these points.

However, what they've done is got the device in 6 million people's hands. They would have been able to do with very little advertising costs. The of the $99 tablet is still keeping it in the market. Also at a price point of $299 and $349, it would still be the second best tablet (Gizmodo's words) at a price that is just over half of the best tablet. The 6 million people are going to want accessories (cases, keyboards, Touchstones) and apps, both of which are higher margin products. They aren't going to sell enough to make it profitable. It's a failure right?

No, at this point, HP would unleash the secret weapon, the TouchPad 2 (or TouchPad Pro, or whatever). The IPad 2 cost of materials back in March was around $325. Presumably HP could do something similar for around $310, presuming component costs go down a little in the last 5-6 months and sell at a $399. This may be asking a little much and I'm guessing that those who bought $99 TouchPads aren't going to quickly upgrade to a $399 tablet. To justify the $399 price, I think you give people something they want, but Apple won't give them - an SD slot so that they can add as many movies as they want without having to buy a whole new device. You'd have to give them something else, like a faster processor while making it thinner and lighter. This device should hopefully make around $80 a sale, which would likely give HP a profitable product.

I think one of HP's biggest mistakes was thinking that it walk into the tablet market and just compete with Apple and Google when those two companies have a large installed base, years of advertising, and a ton of buzz. HP needed to get that mind-share, and I think putting aside a billion or two should have been budgeted right from the beginning to accomplish the task.

Let me know what you think of this idea in the comments. In the meantime, I've got a FedEx truck to stalk. My TouchPads should be just outside any minute now...

[Update: I was joking about stalking the FedEx truck, but it came ten minutes after publishing this post. Well played, FedEx. Well played.]

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Posted on August 30, 2011.

 
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