Why do so many websites offer 3 levels / plans for their SaaS product?

A random conversation I had this week at the Canadian Football League reminded me of a question I was asked and looked up the answer to nearly a decade ago: Why do so many websites offer three levels or plans to choose from when it comes time to purchase their product? And really, what is the optimal amount of choices to make available to a potential client?

The answer is multifaceted, but as you’d expect, the prevailing wisdom is that 3 choices – and elevating one as the best or most popular – works best. Here’s a quick rundown as to why.

The Centre Stage Effect. Formal psychological studies have been done on the positioning of products on a page, and it appears that consumers infer that the middle option is placed there because of its popularity (a self-fulfilling prophecy if there ever was one).

The Compromise Effect. UXmatters has a great paper on shortcut decision making; it mentions a research study that had one set of study participants be offered two microwaves at a $110 and $180 price point; participants chose fairly evenly, with a small majority preferring the cheaper option. But when a second set of study participants was offered three options, a clear winner emerged: The middle price point. The conclusion? When a consumer can’t decide whether to go high or low, a compromise option that sits in the middle is what our mostly logical minds push us towards.

Also: The Bandwagon Effect. Further, studies have illustrated that when consumers are pointed towards a choice and given the information that it is the most popular choice amongst their peers, the middle choice becomes even more compelling. Basically, consumers who may have little information at the time of their purchase as to what “level” fits them best will use whatever information is at hand – like the popularity of a choice – to finalize their decision.

Costco: An internal promotion trumps an MBA any day of the week

I noticed this as well, but it took a blog post in The Washington Monthly to crystallize it in my mind.

The Washington Monthly – Political Animal – The secret of Costco’s success revealed! (hint: no MBAs need apply)

… Costco does not hire business school graduates—thanks to another idiosyncrasy meant to preserve its distinct company culture. It cultivates employees who work the floor in its warehouses and sponsors them through graduate school. Seventy percent of its warehouse managers started at the company by pushing carts and ringing cash registers.

Those sentences speak volumes. They tell you that Costco is a company that values its own hard-won experience over trendy B-school subjects like management theory and Econ 101 abstractions. They’ve found a formula that works and they’re not going to mess with it. I’ve long found the typical B-school curriculum to be problematic. On the one hand, you have management “theory,” which frequently is not well-supported by rigorous research, and might be characterized as more theological than anything else — Tom Frank has often been insightful about the ideological function served by this kind of business literature.

Then, on the other hand, you have B-school economics. One of the great sins about economics as a university subject is that, particularly at the introductory and intermediate levels where people are most likely to study it, the econ that gets taught tends to be almost entirely theoretical, not empirical. Few economists understand how businesses work, because few of them have actually bothered to ask businesspeople how they make business decisions. Instead, they make assumptions. But even assumptions that seem highly plausible in theory can turn out to be wildly off-base in fact.

Getting back to Costco: the abstract theorizing that MBA students learn in microeconomics courses often has little relevance to practical business situations. The simplified textbook models teach the lesson that policies like unions and the minimum wage are inefficient and wrong — that message comes through loud and clear. Economics as it’s taught in most American colleges today more or less encourages poor labor practices.

Costco: Secrets of the cheapest, happiest company in the world

I occasionally read an article about deplorable call centre conditions, or most recently about how difficult work in Amazon’s fulfilment warehouse is. And I always think: Why not take a small hit to the company’s margins and ease things back towards being a workplace your employees don’t dread going to? (Offhand, I’m fortunate to be able to say that in my own field of software development, working conditions are usually somewhere between good to ridiculously luxurious.)

In an era of global competition it’s hard to justify not maximizing shareholder revenue, but with the below there is a spark of hope: Evidence that companies that treat their employees better also perform better.

Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World

Despite the sagging economy and challenges to the industry, Costco pays its hourly workers an average of $20.89 an hour, not including overtime (vs. the minimum wage of $7.25 an hour). By comparison, Walmart said its average wage for full-time employees in the U.S. is $12.67 an hour, according to a letter it sent in April to activist Ralph Nader. Eighty-eight percent of Costco employees have company-sponsored health insurance; Walmart says that “more than half” of its do. Costco workers with coverage pay premiums that amount to less than 10 percent of the overall cost of their plans. It treats its employees well in the belief that a happier work environment will result in a more profitable company. “I just think people need to make a living wage with health benefits,” says Jelinek. “It also puts more money back into the economy and creates a healthier country. It’s really that simple.”

Jelinek earned $650,000 in 2012, plus a $200,000 bonus and stock options worth about $4 million, based on the company’s performance. That’s more than Sinegal, who made $325,000 a year. By contrast, Walmart CEO Mike Duke’s 2012 base salary was $1.3 million; he was also awarded a $4.4 million cash bonus and $13.6 million in stock grants.

Costco has no public-relations staff. Jelinek conducts an interview with a journalist alone, an anomaly at major corporations, and afterward Costco Chief Financial Officer Richard Galanti calls to inquire whether the boss inadvertently said anything negative. Sinegal returns a reporter’s phone call on a Saturday morning, leaving his cell number.

Costco’s constitutional thrift makes its generous pay and health packages all the more remarkable. About 4 percent of its workers, including those who give away samples and sell mobile phones, are part-time and employed by contractors, though Costco says it seeks to ensure they have above-industry-average pay. And while Walmart, Amazon, and others actively avoid unionization, Costco, while not exactly embracing it, is comfortable that the International Brotherhood of Teamsters represents about 15 percent of its U.S. employees. “They are philosophically much better than anyone else I have worked with,” says Rome Aloise, a Teamsters vice president.

Most retailers “see their employees as a cost to be minimized and typically end up underinvesting in them,” says Zeynep Ton, an adjunct associate professor of operations management at the MIT Sloan School of Management. She thinks that ends up creating operational problems that shoppers are all too familiar with: surly employees in stores engulfed in chaos, an environment that makes ordering online look a lot better. One solution to surly cashiers is to get rid of them completely. Walmart said that this year it would add 10,000 self-service checkout systems (though it did not say whether these systems would displace workers). Costco has also experimented with self-service checkouts, but Jelinek says he’s now removing them because employees do the work more efficiently. “They are great for low-volume warehouses, but we don’t want to be in the low-volume warehouse business,” he says.

Many conscientious companies such as Costco are performing well financially. Over the last few years, Nordstrom (JWN), the Container Store, Sephora, REI, and Whole Foods Market (WFM), all of which are known for treating employees well, have outpaced rivals. “This is the lesson Costco teaches,” says Doug Stephens, founder of the consulting firm Retail Prophet and author of the forthcoming The Retail Revival. “You don’t have to be Nordstrom selling $1,200 suits in order to pay people a living wage. That is what Walmart has lost sight of. A lot of people working at Walmart go home and live below the poverty line. You expect that person to come in and develop a rapport with customers who may be spending more than that person is making in a week? You expect them to be civil and happy about that?”

The definition of “startup”

A startup is an organization formed to search for a repeatable and scalable business model.

Steve Blank: What’s A Startup? First Principles, January 25, 2010

5 questions great job candidates ask

There are lots of articles like these on the Web that have terrible questions in them and exist solely as SEO bait. As a rare exception, I thought the first three of these five questions were terrific, and something I personally experienced during my interviews when I was looking for jobs in Pensacola.

Inc.com – 5 Questions Great Job Candidates Ask

What do you expect me to accomplish in the first 60 to 90 days?

Great candidates want to hit the ground running. They don’t want to spend weeks or months “getting to know the organization.”

They want to make a difference–right away.

What are the common attributes of your top performers?

Great candidates also want to be great long-term employees. Every organization is different, and so are the key qualities of top performers in those organizations.

Maybe your top performers work longer hours. Maybe creativity is more important than methodology. Maybe constantly landing new customers in new markets is more important than building long-term customer relationships. Maybe it’s a willingness to spend the same amount of time educating an entry-level customer as helping an enthusiast who wants high-end equipment.

Great candidates want to know, because 1) they want to know if they fit, and 2) if they do fit, they want to be a top performer.

What are a few things that really drive results for the company?

Employees are investments, and every employee should generate a positive return on his or her salary. (Otherwise why are they on the payroll?)

In every job some activities make a bigger difference than others. You need your HR folks to fill job openings… but what you really want is for HR to find the right candidates because that results in higher retention rates, lower training costs, and better overall productivity.

You need your service techs to perform effective repairs… but what you really want is for those techs to identify ways to solve problems and provide other benefits–in short, to generate additional sales.

Great candidates want to know what truly makes a difference. They know helping the company succeed means they succeed as well.

What do employees do in their spare time?

Happy employees 1) like what they do and 2) like the people they work with.

Granted this is a tough question to answer. Unless the company is really small, all any interviewer can do is speak in generalities.

What’s important is that the candidate wants to make sure they have a reasonable chance of fitting in–because great job candidates usually have options.

How do you plan to deal with…?

Every business faces a major challenge: technological changes, competitors entering the market, shifting economic trends… there’s rarely a Warren Buffett moat protecting a small business.

So while a candidate may see your company as a stepping-stone, they still hope for growth and advancement… and if they do eventually leave, they want it to be on their terms and not because you were forced out of business.

Say I’m interviewing for a position at your bike shop. Another shop is opening less than a mile away: How do you plan to deal with the new competitor? Or you run a poultry farm (a huge industry in my area): What will you do to deal with rising feed costs?

A great candidate doesn’t just want to know what you think; they want to know what you plan to do–and how they will fit into those plans.

All hail the generalist

I’ll have to buy Mr. Mansharamani a drink or two if I ever meet him at a bar. I’ve considered myself a generalist for nearly a decade, but I’ve at times had difficulty explaining how useful it is to have a broader viewpoint when looking at specific problems.

All Hail the Generalist

Approximately 2,700 years ago, the Greek poet Archilochus wrote that “The fox knows many things, but the hedgehog knows one big thing.” Isaiah Berlin’s 1953 essay “The Fox and the Hedgehog” contrasts hedgehogs that “relate everything to a single, central vision” with foxes who “pursue many ends connected…if at all, only in some de facto way.” It’s really a story of specialists vs. generalists.

In the six decades since Berlin’s essay was published, hedgehogs have come to dominate academia, medicine, finance, law, and many other professional domains. Specialists with deep expertise have ruled the roost, climbing to higher and higher positions. To advance in one’s career, it was most efficient to specialize.

For various reasons, though, the specialist era is waning. The future may belong to the generalist. Why’s that? To begin, our highly interconnected and global economy means that seemingly unrelated developments can affect each other. Consider the Miami condo market, which has rebounded quite nicely since 2008 on the back of strong demand from Latin American buyers. But perhaps a slowdown in China, which can take away the “bid” for certain industrial commodities, might adversely affect many of the Latin American extraction-based companies, countries, and economies. How many real estate professionals in Miami are closely watching Chinese economic developments?

Secondly, specialists toil within a singular tradition and apply formulaic solutions to situations that are rarely well-defined. This often results in intellectual acrobatics to justify one’s perspective in the face of conflicting data. Think about Alan Greenspan’s public admission of “finding a flaw” in his worldview. Academics and serious economists were dogmatically dedicated to the efficient market hypothesis — contributing to the inflation of an unprecedented credit bubble between 2001 and 2007.

Finally, there appears to be reasonable and robust data suggesting that generalists are better at navigating uncertainty. Professor Phillip Tetlock conducted a 20+ year study of 284 professional forecasters. He asked them to predict the probability of various occurrences both within and outside of their areas of expertise. Analysis of the 80,000+ forecasts found that experts are less accurate predictors than non-experts in their area of expertise.

Tetlock’s conclusion: when seeking accuracy of predictions, it is better to turn to those like “Berlin’s prototypical fox, those who know many little things, draw from an eclectic array of traditions, and accept ambiguity and contradictions.” Ideological reliance on a single perspective appears detrimental to one’s ability to successfully navigate vague or poorly-defined situations (which are more prevalent today than ever before).

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The skills gap myth: Survey reveals why companies can’t find “good people”

As a software developer I’m always bemused by the leaders of industry who lament the lack of skilled workers to fill open positions in my field. It seems that too many forget one of the most basic rules of capitalism: If demand is low, you’re not offering enough value. As it fits this scenario: If developers aren’t applying for your position, you’re not offering enough compensation.

This is rather cynical, but I imagine that these pronouncements aren’t for my ears anyways: They’re made to justify keeping “information technology professionals” on the overtime exempt list, or to raise immigration caps for technology workers. (Which is often well justified, but I wonder at the distortion it introduces to the domestic labour pool.)

TIME.com – The Skills Gap Myth: Why Companies Can’t Find Good People

The first thing that makes me wonder about the supposed “skill gap” is that, when pressed for more evidence, roughly 10% of employers admit that the problem is really that the candidates they want won’t accept the positions at the wage level being offered. That’s not a skill shortage, it’s simply being unwilling to pay the going price.

But the heart of the real story about employer difficulties in hiring can be seen in the Manpower data showing that only 15% of employers who say they see a skill shortage say that the issue is a lack of candidate knowledge, which is what we’d normally think of as skill. Instead, by far the most important shortfall they see in candidates is a lack of experience doing similar jobs.

Employers are not looking to hire entry-level applicants right out of school. They want experienced candidates who can contribute immediately with no training or start-up time. That’s certainly understandable, but the only people who can do that are those who have done virtually the same job before, and that often requires a skill set that, in a rapidly changing world, may die out soon after it is perfected.

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Heroku’s Adam Wiggins on how to scale a development team

Not much to say here; I think this is an excellent template for growing a software company and this is my way or preserving copy for when I need it.

Adam Wiggins – How To Scale a Development Team

As hackers, we’re familiar with the need to scale web servers, databases, and other software systems. An equally important challenge in a growing business is scaling your development team.

Most technology companies hit a wall with dev team scalability somewhere around ten developers. Having navigated this process fairly successfully over the last few years at Heroku, this post will present what I see as the stages of life in a development team, and the problems and potential solutions at each stage.

Stage 1: Homebrewing

In the beginning, your company is 2 – 4 guys/gals working in someone’s living room, a cafe, or a coworking space. Communication and coordination is easy: with just a few people sitting right next to each other, everyone knows what everyone else is working on. Founders and early employees tend to be very self-directed so the need for management is nearly non-existent. Everyone is a generalist and works on a little bit of everything. You have a single group chat channel and a single [email protected] mailing list. There’s no real need to track any tasks or even bugs. A full copy of the state of the entire company and your product is easily contained within everyone’s brain.

At this stage, you’re trying to create and vet your minimum viable product, which is a fancy way of saying that you’re trying to figure out what you’re even doing here. Any kind of structure or process at this point will be extremely detrimental. Everyone has to be a generalist and able to work on any kind of problem – specialists will be (at best) somewhat bored and (at worst) highly distracting because they want to steer product development into whatever realm they specialize in.

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The Jane Jacobs theory of “import replacement”

In previous days I’ve argued that having a strong industrial/manufacturing base isn’t as important to a nation as it once was. But lately I’ve wondered if a loss of that base has greater implications than we think. I’m not a Jacobs devotee like many urban-minded Torontonians are, but I did think that this summation of her theory of “import replacement” is a very good explanation for why we may want manufacturing to stick around.

The Millions – Fifty Years On: Jane Jacobs and the Rebirth of New York

Why did a city like New York recover when a city like Detroit, which had a more durable industrial base, fell into blight and decay? The answer, Jacobs argues in The Economy of Cities, turns on the ability of a city’s inhabitants to innovate. Cities grow, she says, through a process she calls “import replacement.” This occurs when local tradesmen produce for themselves the goods and services they had previously been importing and then use the skills learned from this local production to create new products, which they can then export in great bulk.

Detroit, she notes, began as a port for shipping flour across the Great Lakes. Soon, local manufacturers were building their own steamships to make the lake crossings and got so good at it they began making ocean-going ships for use in other cities. This not only put money into local coffers, but supported the dozens of local engine-parts makers Henry Ford drew upon when he founded the Ford Motor Company.

But here’s the rub: the auto industry was so successful that once Ford arrived at his greatest innovation, the assembly line, the industry so dominated Detroit’s economy that there was no local market for further innovation, and, as Jacobs points out, it was only a matter of time before another city – in this case, cities in Japan – improved upon Ford’s ideas and made better, cheaper cars.

The Economy of Cities came out four years before the gas crisis that set Detroit’s long tailspin in motion, but it eerily predicts the dilemma the city faces today, in which a moribund auto industry, out-innovated by foreign competitors, had to be bailed out by the U.S. taxpayer to avoid collapse.

Like Detroit, New York began as a port city, but in New York’s case a principal byproduct of its shipping trade was a robust banking industry, which survived the city’s manufacturing collapse. Even as New York was begging for a bailout from the federal government in the mid-1970s, young hotshots like Ivan Boesky and Michael Milken, many of them children and grandchildren of immigrants who had filled the ghettos earlier in the century, were inventing new ways to own and finance large companies. Think of all the financial innovations of the last thirty years: junk bonds, hedge funds, leveraged buyouts, asset-backed securities, credit derivatives, subprime mortgage markets, and on and on.

Yes, bankers are evil, and, yes, the banking industry required a federal bailout even larger than that of the auto industry’s, but like it or not, New York is the safest large city in America, with a vital private sector and a buoyant real estate market, largely because the living, breathing organism we call Wall Street has spent the last thirty years innovating its way out of obsolescence.

How Microsoft avoided the IPO scam that LinkedIn just fell for

Anyone who’s current on technology or business news has seen an article this week like How Wall Street Hustled LinkedIn or Did Bankers Scam LinkedIn Out of Over $130 Million? which discuss the possibility that the LinkedIn IPO partners – Morgan Stanley, Merrill Lynch and JPMorgan Chase – may have deliberately underpriced the stock in order to score a sweet deal on it for themselves and their favoured investors. Such is the way of Wall Street, it seems.

By chance, today I came across a reprint of Fortune magazine’s 1986 cover story about the tale of Microsoft’s IPO. It’s interesting in itself, but what’s particularly striking is how coolly and calmly Gates and his people negotiated with their IPO partner, Goldman Sachs, to ensure the same little scheme didn’t work on them.

Of course, I could be attributing malice to LinkedIn’s partner banks when the cause for the underpricing could simply be ignorance – how exactly does one justify valuing a social networking company at $9 billion with earnings of $15.4 million last year?

Fortune Magazine – Inside The Deal That Made Bill Gates $350,000,000

Gates thinks other entrepreneurs might learn from Microsoft’s (MSFT) experience in crafting what some analysts called ”the deal of the year,” so he invited FORTUNE along for a rare inside view of the arduous five-month process. Companies hardly ever allow such a close look at an offering because they fear that the Securities and Exchange Commission might charge them with touting their stock.

Answers emerged to a host of fascinating questions, from how a company picks investment bankers to how the offering price is set. One surprising fact stands out from Microsoft’s revelations: Instead of deferring to the priesthood of Wall Street underwriters, it took charge of the process from the start.

Gates asked Martin to leave while he conferred with Shirley and Gaudette. This was a different Gates from the one who two months before thought $20 too high. ”These guys who happen to be in good with Goldman and get some stock will make an instant profit of $4,” he said. ”Why are we handing millions of the company’s money to Goldman’s favorite clients?” Gaudette stressed that unless Microsoft left some money on the table the institutional investors would stay away. The three decided on a range of $21 to $22 a share, and Gaudette put in a conference call to Goldman and Alex. Brown.

Eric Dobkin, 43, the partner in charge of common stock offerings at Goldman Sachs, felt queasy about Microsoft’s counterproposal. For an hour he tussled with Gaudette, using every argument he could muster. Coming out $1 too high would drive off some high-quality investors. Just a few significant defections could lead other investors to think the offering was losing its luster. Dobkin raised the specter of Sun Microsystems, a maker of high-powered microcomputers for engineers that had gone public three days earlier in a deal co-managed by Alex. Brown. Because of overpricing and bad luck — competitors had recently announced new products — Sun’s shares had dropped from $16 at the offering to $14.50 on the market. Dobkin warned that the market for software stocks was turning iffy.

Gaudette loved it. ”They’re in pain!” he crowed to Shirley. ”They’re used to dictating, but they’re not running the show now and they can’t stand it.” Getting back on the phone, Gaudette crooned: ”Eric, I don’t mean to upset you, but I can’t deny what’s in my head. I keep thinking of all that pent-up demand from individual investors, which you haven’t factored in. And I keep thinking we may never see you again, but you go back to the institutional investors all the time. They’re your customers. I don’t know whose interests you’re trying to serve, but if you’re playing both sides of the street, then we’ve just become adversaries.”

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