The “Flaw of Averages” Causes Havoc for Businesses

The “Flaw of Averages” Causes Havoc for Businesses

Introduction: The Importance of Accurate Data Analysis

The “Flaw of Averages” is a term popularized by Sam Savage, referring to the misleading nature of averages in business decision-making. Averages often misstate the true situation within a company, leading to misallocation of resources and, ultimately, reduced profitability. In this blog post, we will discuss how the flaw of averages can impact businesses, using hypothetical examples to illustrate the consequences and offer suggestions for more accurate data analysis.

  1. The Flaw of Averages in Product Analysis

Consider a hypothetical business, ABC Inc., which sells a variety of products with different units sold, unit prices, and gross profits per unit.

Product

Units Sold

Price/Unit

Gross Profit/Unit

A

         30,000

 $          100.00

 $       12.50

B

           7,500

 $            90.00

 $       75.00

C

         20,000

 $            80.00

 $       37.50

D

         15,000

 $            70.00

 $       45.00

E

         10,000

 $            60.00

 $       25.00

F

         25,000

 $            50.00

 $       12.50

G

         20,000

 $            40.00

 $       20.00

H

         20,000

 $            30.00

 $       25.00

When examining the product portfolio, looking beyond the total revenue and gross profit margin is essential. Focusing solely on averages can lead to misconceptions about the importance of certain products to the company’s profitability.

a. Rethinking Product Prioritization

For example, if ABC Inc. were to stop selling its largest revenue-generating product, its gross profit margin would increase substantially. By looking at average margins, the full impact of this product on the business is not apparent. A more detailed analysis may reveal additional costs associated with the production of this product, such as factory space, warehouse storage, staff, and shipping costs.

b. Bundling and Pricing Strategies

With a better understanding of the true profitability of each product, ABC Inc. can explore more effective pricing strategies, such as increasing the price of lower-margin products or bundling them with more profitable ones.

  1. The Flaw of Averages in Customer Analysis

Examining customers’ revenue and gross profit contributions can also reveal valuable insights. By ranking customers according to their gross margin contributions, businesses can identify the most profitable clients and those that may be dragging down overall profitability.

Now, if we examine the purchase and gross profits of each customer, we get:

Customer

Revenue

Gross Profit

S

1,899,890

        869,085

T

       1,725,700

          700,983

U

       1,598,430

          414,600

V

          951,540

          491,173

W

       1,273,760

          459,958

X

          563,430

          259,640

Y

          458,530

          176,880

Z

       1,103,720

          452,683

Total

9,575,000

     3,825,000

Sorting that into the order of gross margin, we can see the following:

a. Identifying High-Value Customers

For example, if ABC Inc. were to lose its most profitable customer, its gross margin would decrease significantly. By contrast, losing a less profitable customer would lead to an increase in the overall gross margin. Understanding the value of each customer allows the company to focus its resources on retaining and attracting high-value clients.

b. Analyzing Customer Purchase Patterns

In addition to evaluating each customer’s profitability, examining their purchase patterns is essential. Businesses can better target their marketing and sales efforts by identifying clients with higher-margin purchase combinations.

  1. Improving Business Performance Through Better Data Analysis

To overcome the flaw of averages and make more informed decisions, businesses should:

a. Regularly analyze product and customer data. Examine each product’s and customer’s profitability to identify improvement areas and make better resource allocation decisions.

b. Focus on profitability, not just revenue. While revenue is essential, focusing solely on it can lead to misconceptions about the true value of products and customers. Prioritize profitability to drive sustainable growth.

c. Use data to inform pricing and bundling strategies. Identify opportunities to increase the price of lower-margin products or bundle them with more profitable ones to improve overall profitability.

d. Monitor and adapt to changes in the market. Regularly review product and customer data to stay up-to-date with market trends and adjust strategies accordingly.

Conclusion: The Power of Proper Data Analysis

The flaw of averages can lead businesses to make misguided decisions based on misleading data. By delving deeper into product and customer data, businesses can better understand their true profitability, allocate resources more effectively, and ultimately drive sustainable growth. Don’t let the flaw of averages hold your business back – embrace the power of accurate data analysis to improve your decision-making and achieve success.

Recommended Reading:

  1. The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty, by Sam Savage This book provides an in-depth look at the limitations of averages and how they can lead to misguided decisions in various fields, including business, finance, and engineering. It also offers practical techniques for better understanding and managing risk through probabilistic thinking.

  2. Why Can’t You Just Give Me The Number?: An Executive’s Guide to Using Probabilistic Thinking to Manage Risk and to Make Better Decisions, by Patrick Leach. This guide is designed for executives and decision-makers who want to improve their understanding of risk and uncertainty. It introduces the concept of probabilistic thinking, demonstrating how it can lead to better decision-making and risk management in a variety of business scenarios.

Copyright (c) 2021, Marc A Borrelli

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Working on an event with a not for profit that I recently joined, I posed two questions, “Who is our audience?” and “What do they want?” I figured that these were easy questions and should quickly have responses; however, I was shocked, because they couldn’t be answered. How can you put on a successful event when you don’t know who you are marketing it to and what they really want. It made me think about how COVID is dramatically changing who our customers are, what they buy, and where.

We all know that a large amount of business has moved online, but many companies have yet to fully pivot to the point they can provide both information and delivery of their products and services in an online format that meets or exceeds their customers’ expectations. During a recent conversation with an executive of a training company, he was discussing how they working to move all their training online, but dealing with the challenges of how to deliver it in a way that the attendees got its full and would enjoy the experience. In my own business, I know many clients are getting tired of Zoom calls and want to return to in-person meetings, but only when it is safe. The challenge is how to make it interesting and keep people engaged?

If we look across the economy, many industries are finding the delivery of, and demand for, their products are changing. We all experienced the toilet paper shortage when the lockdown started. Why? From my understanding, the toilet manufacturers had most of their production set up to service commercial clients, the biggest users. However, with the lockdown all that commercial demand transferred to residential demand, which the manufacturers were not set up to produce or deliver.  Likewise, with the liquor business were sales were transferred from restaurants to retail, again disrupting supply chains.

A recent article in Bloomberg noted that:

  • SK-II beauty brand produced by Procter & Gamble Co. has seen sales decline by double digits. The reason, most sales were done at airport duty-free shops. With travel effectively on hold, the airports are empty and no one is buying. Thus the delivery needs to change.
  • Mondelez International Inc. said that sales at its gum and candy division plunged 33% primarily due to falling sales of gum. Why? Gum consumption is very dependent on people being away from their homes. It is used to freshen breath for meetings or first dates – activities have been effectively halted for the moment. Thus, demand has evaporated.
  • Starbucks announced that U.S. traffic slumped 52% from a year earlier; however, the average total bill, rose 25% over the same period. The reason was that shops were closed and people are not out, but when they are they are bundling orders for everyone at home. While bundling of orders makes the economics of delivery orders more attractive, it requires skill to allocate labor and tailor operations to ensure big-batch orders are fresh and hot.
  • Molson Coors Beverage Co. reported revenue down 23% over last year. During the COVID period, party-friendly kegs sales disappeared; however, sales of 12-ounce cans exploded. The issue for Molson was getting enough aluminum for the cans to meet demand, which causes the fall in revenue. The company is working with suppliers to ensure the availability of the packaging materials needed to accommodate the stay-at-home lifestyle.
  • As we all know U.S. tourism has been hit badly with COVID, but this is taking a toll on many retailers that have tourist-centric locations, e.g. Tiffanies and Macys on Fifth Avenue. However, it is also affecting stores like Carter’s Inc., the baby, and kids’ clothing chain that has seen tourist-centric locations revenue fall by 20% while non-tourist centric locations saw a rise in revenue of 15%. The issue for Carter’s is that tourist-centric locations account for about 20% of revenue. Thus the company is facing issues with delivery and is working closely with retailers like Wal-Mart, Target, and Amazon.com to help offset the decline.

Therefore, if you are experiencing either an increase or fall in revenue, spend time to understand why? Is it that customer tastes/requirements or channel delivery has changed and plan accordingly. As I have said before, I expect us to be living with COVID for at least a year, so be prepared for the long haul and recognize that many customers’ behavior changes may not revert when it is all over.

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An old colleague of mine recently posted on Facebook, “Life/business will not return to normal until we can get stuff done face to face.” While there is some truth to that, if we are going to live in our COVID world for another year, companies cannot wait for getting stuff done face to face, they need to sell now!

But selling during COVID is different, as a client recently said, “I am not sure our sales force have the skills or know-how to sell online.” Sales teams face two challenges selling during COVID, reduced budgets in an uncertain market, and selling when business is virtual. Already half of the B2B companies have reduced their budgets by over 40%. Overall, IT spend is predicted to drop 8% in 2020 – as enterprises spend roughly $300B less than they did in 2019.

A further complication for B2B companies selling internationally. How do U.S. companies sell in Europe where they are barred from traveling, while their European competitors can move around freely? This will pose problems and could result in a loss of market share unless companies develop new tactics to counter the lack of face to face interaction.

Andreesen Horwitz recently said that from their discussions with several CROs and founders they were seeing:

  • Cash is critical. Total Contract Values are lower, and there is a 30% drop in upfront cash, as actual payments are delayed or deferred.
  • Significant drops in the sales pipeline. Hardest hit are those with companies have sales-led prospecting and have direct multi-stage sales + implementation.
  • Increased involvement of execs, e.g., CFOs, in deals and procurement process
  • Channel is more critical. The proportion of deals coming from channel and renewal rates relative to bookings are both up.

Andreesen Horwitz provided six strategies for selling during COVID.

  1. Build pipeline through targeted virtual events. With everyone WFH and easier to schedule, including executives, figure out how to leverage your C-suite effectively. Don’t just rely on webinars with large numbers of attendees featuring execs, but use smaller events focused on specific topics of interest where you can get your CEO or CTO in front of essential buyers. The loss in quantity will be exceeded by what you gain in quality and higher intent. However, as much of this new, the pipeline from virtual events may progress differently from a traditional pipeline. Thus it is critical to understand and monitor the conversion rates of your virtual event funnel. 
  2. Get creative with your Business Development Representatives (“BDR”). If customers can self-serve initially, that will provide marketing qualified leads for BDRs to follow up on. However, to enable customers to self serve, you need to ensure that your website correctly explains and sells your product. If you have insufficient warm leads for your BDRs, consider switching BDRs to customer success managers (CSMs) focusing on adoption, retention, and renewal, since the two talent pools often overlap. Especially in a SaaS business, where the CSM is essential because customer success drives adoption, and adoption reduces churn and drives up renewal rates. Many SaaS companies used this tactic during the 2008-9 recession, and it often helps BDRs better understand customers.
  3. To renew customers, be flexible on all levers, except the price. It’s always easier to retain a customer and renew, or even expand, an existing account than to acquire a new customer, especially during a downturn. Extending flexibility to customers, when you can, will win customer loyalty and referrals in the long-term, assuming you can deliver successfully. Your current prices will determine your future prices, determining your total addressable market (TAM), so any reduction now has long term effects. Further, once you start negotiating on price, you have become a commodity. When renegotiating or changing contract terms, if possible, look to levers beyond price, such as flexible payment terms or additional professional services. 
  4. Implement a deal desk. If a salesperson gives something away to close a deal, that incentive can quickly become the new standard for all sales. Implement a deal desk, usually in the form of a mailing list or a chain of sign-off for deals over a certain threshold, to maintain deal structure around incentives and discounts. A deal desk will prevent reps from giving away too much.
  5. Manage the psychology of your salespeople, as well as your quotas. Set expectations that are achievable and realistic, not only because people need to get paid, but because great salespeople need to win. For great salespeople, much like for a top athlete or prizefighter, confidence is a big part of their game. The way they get confidence is they win and have the attitude, “I never miss a number. I usually blow it out. I never lose to a competitor.” Sales numbers feed that psychology, so what if you maintain your sales numbers based on life before COVID, and now, your top salespeople are not getting paid and are losing confidence. Eventually, their psychology will get to the point where they start making silly mistakes. “They don’t listen carefully.” “They’re not patient.” “They press too hard.” You need to support your sales team in keeping their confidence high, and that starts with a reasonable plan and then having an understanding of what’s going on in these cycles.
  6. Look for channel partners with strong customer relationships and pull from the field. Partners who don’t have to do prospecting but can pull you into existing relationships are the better partners right now. You have to shift your channel strategy from scrappier, more boutique channel partners to more established players who have the relationship and account control. Behavior follows business, so look for the pull from the field sales team to evaluate a partnership and know that it is strategic. Once you see that pull from the field, you can match up your sellers with their sellers, identify the accounts they’re in that want your functionality, and then do the integration that the salespeople want.

Of course, this is just the start. Other questions:

  • What metrics should you watch right now?
  • How do you qualify leads?
  • How do you evaluate the risk v. opportunity of channel partners?

See this Andreesen Horwitz article for a discussion on many of these questions.

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Customers are People Too

Customers are People Too

In discussions with some of my clients, I have asked if they are reaching out to their customers directly, CEO to CEO. Some are, but some respond that everyone is so busy at the moment, they are just leaving them alone. I think this is a mistake.

Yes, we are all busy, and stressed. However, if you accept that how you act over this period will define you for the next ten years, then I think reaching out is a great investment. But don’t get me wrong, this is not about call up asking for an order. Rather, operate empathy-first. Ask how they are doing, is everyone in their family safe and well. Tell them what you are doing to get through this and what can you do to make their life easier. Prioritize in-depth relationships with customers and focus on quality over quantity, as we all know we should do when it comes to relationships.

You may find they are stress and have no one to talk to because they are the CEO. Talking, sharing ideas, being empathetic, and just listening may be the greatest thing you can do for them now. I remember a story my father told me when he had just started his industrial catering business. One day he at his largest and most important client, he stopped and asked a young junior executive how his meal was and was there anything he could get him as the young man seemed unhappy. The young man thanked my father and shared that he was anxious as his child had been taken seriously ill My father sat with him for an hour during my father’s busiest time of the day just listening to the young man talk. About twenty years later, that young man was promoted to CFO of this organization. My father sent him a bottle of champagne to congratulate him. The executive sent back a note which said, “I have never forgotten the lunch you spent with me when I was a nobody and was anxious about my son. The contract is yours for as long as you want it and I am here.”

Customers will remember how you treat them now and may do for ten plus years. A few calls is a small investment.

 

Copyright (c) 2020, Marc A. Borrelli

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TikTok, Why and Should You? Yes

TikTok, Why and Should You? Yes

Even if you are not on TikTok, you have probably seen the videos. In the world of social media, you’ve got to move with the times and if you’re not fast, you’re last. TikTok is the fastest growing social media platform with more members than Snapchat, and as a marketer, you shouldn’t ignore its rapid growth and rise in popularity. Currently, TikTok is taking share from all the other social media channels and growing like crazy. If your business is B2C you need to understand it. If you are B2B, you should so that you understand the under 30s coming your way!

What is TikTok?

  • TikTok is a mobile app that allows users to create a short, 15-second video of themselves, often featuring music in the background, which can be sped up, slowed down, or edited with a filter.

  • Users can film their reaction to a specific video, and with the app’s “react” feature, place it in a small window that is movable around the screen.

  • The “duet” feature allows users to film a video alongside another video. The “duet” feature was another trademark of musical.ly which TikTok acquired

  • Users to set their accounts as “private” and can choose whether any other user, or only their “friends,” may interact with them through the app via comments, messages, or “react” or “duet” videos.

  • Users also can set specific videos to either “public,” “friends only,” or “private” regardless if the account is private or not.

  • TikTok’s “for you” page is a feed of recommended videos to you based on your previous actions on the app, consisting of what kind of content you’ve liked.

  • TikTok has over 1 billion all-time downloads, and its popularity and influence have only continued to spread.

  • TikTok enables everyone to be a creator and encourages users to share their passion and creative expression through their videos.” Music is the gold in TikTok, and the platform works with musicians whose videos are going viral to help them improve the use of the platform.

While TikTok is a social network, it has nothing to do with one’s social network. It doesn’t ask you to tell it who you know. The app has a “Discover” page, with an index of trending hashtags, and a “For You” feed, which is driven by an AI system that analyzes and tracks user behavior to provide a continually refined, never-ending stream of TikToks optimized for your attention. Essentially, the platform is an enormous meme factory, and giving small pieces until you yell enough!

 

How did it get here?

ByteDance, a Chinese tech company, founded in 2012, owns TikTok. In 2016 ByteDance launched a short video app in China called Douyin, and Douyin took off. Within a year, Douyin had 100 million users and 1 billion video views a day. A year later, Douyin decided to expand outside of China to select international markets under a new name – TikTok. As TikTok shot up the charts in other Asian markets, in the US, a short video app was taking off, Musical.ly, which focused on 15-second lip-syncing music videos. When Vine closed in October 2016, many of its influencers moved to Musical.ly to continue their work. In November 2017, ByteDance acquired Muscial.ly for $1 billion. In August 2018, ByteDance announced it was shutting down Musical.ly and merging it with TikTok. In December 2018, TikTok peaked in the US with 6 million installs that month. ByteDance received a three-billion-dollar investment from SoftBank, and last fall, it was valued at more than $75 billion, the highest valuation for any startup in the world.

 

How does it make money?

TikTok generates a million dollars annually, according to Crunchbase. However, TikTok is aggressively investing in growth right now and is grabbing market shares away from other popular social media channels.
A few potential monetization strategies might be:

  • Advertising revenues generated via targeted ads (similar to YouTube)

  • Allowing content creators to monetize their content as a user-generated platform is critical to the platform long-term success

  • A subscription model for original, more extended form content from the platform that assembles the best short-form content

TikTok has grown so fast that Facebook has taken notice and is building an app, Lasso, to compete against TikTok. However, given TikTok’s position, that may not be easy. TikTok is following its users of a specific demographic around the web via paid ads, and it appears to be ubiquitous. It is blitzscaling to gains as much growth and share as fast as possible.

 

Some TikTok Stats

  1. TikTok was downloaded more than 660M times in 2018.
  2. TikTok is more popular on Android than iOS with 80% of users on Andriod
  3. More than 500 million people globally use TikTok monthly, and 26.5 million are in the US
  4. TikTok’s user base is primarily based in India at 43% of all users.
  5. 66% of users are younger than 30-years-old.
  6. Users typically spend around 52 minutes per day on the app.
  7. In-app purchases increased by 275% year-over-year.
  8. 29% of monthly users open TikTok every day.
  9. The #RaindropChallenge has over 685.7 million views on TikTok.
  10. Jimmy Fallon’s #TumbleweedChallenge created 8,000 videos with over 9 million views in seven days.
  11. There are more than 5 million #InMyFeelings challenge videos on TikTok compared to 1.7 million on Instagram.

 

The Content

TikTok is available in 150 markets. Typically built around music, language doesn’t pose a significant barrier for its videos. As few of the videos have anything to do with the news, they don’t quickly become dated. Kids do TikTok better than adults. According to Jack Wagner, a “popular Instagram memer, “I haven’t seen one piece of content on there made by an adult that’s normal and good.” However, adults are also using the platform, including:

  • Arnold Schwarzenegger, riding a minibike and chasing a miniature pony

  • Drag queens

  • Opera singers

  • the Washington Post

  • dogs on Instagram; and

  • The self-made celebrities of Generation Z.

 

 

Why it is appealing

The platform doesn’t pretend to require a good reason to visit; the only reason is it serves videos that retain your attention. Through its AI system, half an hour has passed before you realize it. What makes it unique is that unlike Instagram and Facebook, it doesn’t make us feel irritated, looking at friends having a better life. The whole family can watch together if the content is appropriate, making it more fun and engaging rather than falling into our closed silo with our device.

Further, TikTok focuses on whatever will retain our eyeballs, and it provides the incentives and the tools for users to copy that content with ease. The platform then adjusts its predilections based on the closed-loop of data that it has created. The scary thing is that the algorithm provides what we want, and we deliver what it wants. When do we know what the difference is between the algorithms and us?

In addition, TikTok has a couple of differentiators. First, as a Chinese company, it has huge market penetration in China, unlike many of the other large social media companies. But TikTok has local market adoption more than other social media companies, helping get more user attraction. Finally, TIkTok is focused on developing local creators in each market and limiting influencers.

 

US Government’s Concern

In January 2019, the Peterson Institute for International Economics, an American think tank, claimed that TikTok poses a national security threat to the West. It noted the app’s popularity with Western users, including armed forces personnel, and its ability to convey location, image, and biometric data to its Chinese parent company, which is legally unable to refuse to share data to the Chinese government. There is discussion in Congress about legislating or banning it, but for now, it is still up and running.

 

So Why Should You Care?

Brands are slowly appearing on the platform. From fashion brands like River Island and Guess to restaurants like Chipolte, to massive sports teams like NFL’s New York Giants, an array of favorites taking up space on the channel now. If your demographic includes Generation Z then you should definitely be considering TikTok as a brand channel. Also, remember that as teens are often ahead of the curve on most things, so even if Gen Z isn’t your thing, your actual target audience may be moving to this platform in the near future so it’s worth reserving your handle and get experimenting!

 

© 2019 Marc Borrelli All Rights Reserved

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