I was talking to a long time friend and entrepreneur last night for hours over the change in the markets we chase. We’ve known each other for half my life, about 16 years, and we’ve both seen incredible profits and incredible losses over those times. His company is on the verge of falling apart, even though it has a strong calling in its market — business promotions.

His market has been cut up and spit out by deep discount web providers who can handle much more work in a much more efficient way — his personal attention and long term follow through don’t seem to be as valuable as they were a decade ago. Our conversation for many of those hours was mostly him telling me about what he thinks he needs to do to fix the downturn and save his business. My end of the conversation came in the last half hour, and I told him that he was wrong about his direction for saving his business.

He believed that he needed to keep innovating in order to reach new customers and grow his market, especially in the regions that his businesses exist (on the west and east coasts as well as in the midwest where be both live). He said that the reason why he wasn’t able to compete with the online service providers is because they were doing a better job of innovating, and he was focusing on the full service market rather than the up-and-coming market. He relied on a book he purchased in the last year, titled Dealing With Darwin: How Great Companies Innovate at Every Phase of Their Evolution, by Geoffrey A. Moore.

I’ve read Moore’s book, and I actually like a lot of what he has to say. The problem with Moore’s book and my friend’s business is that they’re covering two different subjects, in my opinion. Moore’s book is very successful at looking at the market of commodity goods: items that can be considered “daily use” items — computers, clothes, fast food, and the rest. My friend’s business is definitely not a commodity product, even if competition tries to offer it at commodity profit margins (slim to none).

I’m the founder of an innovation company, Deep Labs, which is a company that has to be an innovator since its market caters to other companies that require innovation. The likelihood of this market becoming a commodity-margin company is slim-to-nil: when your customers always innovate, you have to do the same. The risk taking at Deep Labs is incredibly high, but the rewards can be high as well. In the business promotion market, innovation is not as important as meeting expectation, and this is where my friend should focus his future.

When I explained to him that focusing only on innovation is too risky for the rewards he’d get, he asked me how I’d describe my solution for his market in just a few words. I told him that the most basic description is also the most in-depth one, too: downsell your solutions as time-savers and efficiency-increasers for his marketplace. Show them that what he does is not complicated or innovative in 90% of the work his firm will perform, but what differentiates his business from the online service providers is that he’s there to save his customer time while taking care of their promotional needs.

When I said those bold-faced words to him, I saw the light bulb go off in his head. Before I even had time to ask the question I was intending to ask, he answered it without a single word or prompting from me: “Is it possible that my customers are wasting time doing work they don’t have to when they deal with online service providers?” Are they cutting off their nose to spite their face? Are they wasting a few hours a week in order to save a few dollars, and how many hours a year would they save if they re-hired his firm over the online service providers?

I asked him if he ever went hours out of his way to save a few dollars on a high-end retail sale or for a coupon for a seemingly expensive item. He said he definitely did for a while, but he learned his lesson and stopped. This is a great example of a business trying to innovate (through savings promotions), but failing to focus on what their customers wanted: savings. Saving a few dollars but giving up hours to get that savings may end up costing the customers in the market more, and once they make that realization, they’ll likely not fall for the innovative promotion again. In his market, many of his customers, ex-customers and future customers are wasting hundreds of hours of year doing a job that he used to do — and they’re wasting those hours in order to save themselves a few hundred dollars.

This is one of those areas that many businesses fail to realize — and also fail to use as a selling point. My better half used to own a web design company for years that she let close up because she failed to compete properly with others in the market. Her service was top notch and her customers were always happy, but she had lost a few customers to incredibly cheap companies. Within a year of her closing up shop she started to get phone calls from her ex-clients who wanted to work with her again. I told her to take the contracts but raise her prices: the demand was back and the penalty was paid by those who tried to save a dime without realizing the long term costs to themselves. She didn’t want to get back into the market, already hurt by the few who didn’t see that businesses charge what they have to charge in order to provide the service that is expected by the customers.

My main job in all of my businesses is to be the innovator and the risk taker — but I would never do that unless I knew that I had the responsible follow-through employees or partners who could handle the other important side of any business. If you can save your customers time and money by providing your service cheaper and faster than they can do it themselves, you should never have to worry about the competition that only provides it cheaper. If you lose some customers to the cheapest competitors, always offer them that exit from your services but remind them that you’ll be available should their new service provider require that they invest more of their time in finishing the project. I’ve lost customers over the years, but very few of them have disappeared for good. I’m always surprised at the ones that come knocking on my door when they realize that cost-savings is not effective if they lose time over the deal.

Don’t innovate if you market is about saving people time and money. If someone else can save your customers as much time and money as you can, only then do you have to focus on innovating as the key element of your research and development in your market.

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For those families with my political sites, I’m a fairly extreme capitalist of the anarchist variety — I believe in unrestricted markets because I feel that people won’t make transactions unless they see value in what they’re getting for what they’re giving. Sure, there are suckers in the world, maybe many, but I believe that all the laws and regulations that supposedly protect consumers do nothing of the sort — they just make it harder for the average Joe to start a business or grow one.

Lately I’ve been getting a lot of advice from what I call gentlefolk — I used to call them lefty treehuggers but it wasn’t the kindest label. These gentlefolk are all about living in what I consider a dreamworld — trying to make big corporations care more about the consumer than about their own bottomline, trying to force everyone to live 100% post-consumer-recycled, trying to only buy organic or fairtrade or the rest. It is very annoying to me that these “gentle” people want to do all of this by way of force — let’s create laws to force people to be “good” rather than be personally involved. For me, my own “greed” has helped more people around me (employees, customers, suppliers, family, friends and those I don’t even know) because I know that treating someone well means a better relationship in the future. Those who run cut-throat businesses that harm more than help their customers or their market are quickly destroyed — bankruptcy comes very quickly if you don’t know what your customers want and how they want it. The market corrects itself for bad companies and individuals!

The advice I’m getting from the gentlefolk in my life is often wrong to the extreme — they just don’t understand that running a business is all about watching your own bottomline today and in the future. If you can’t keep the cash flowing, you won’t be around. That is pretty simple. For most businesses, keeping the cash flowing means keeping your customers happy so that they return for more and so that they’ll tell their friends so your market grows. It is such a “duh” statement that I always get frustrated when the gentlefolk can’t seem to graps the basics.

With the explosion of blogs and OpEd sites, I’m seeing the gentlefolk advice market grow every day. Entrepreneurs and people with absolutely no understanding of the business cycle are starting to be read — in huge amounts. Their opinions are starting to be regarded as fact, and I’m amazed at how often a pro-business attitude is shut down by the masses who think that wanting a profit is a bad thing. Here’s a little secret: profits are the only way to gauge if a company is successful because it means that others are willing to give up their cash for a product or service that saves them more time and money than just sitting on that money. Profits are also the only way for a company to work hard to develop new and better technologies and ways to save themselves more money, which then allows prices to fall as these new efficiencies and market competition butt heads to drive prices lower.

One such site that seems to offer gentlefolk advice for a business failure is Next Generation. They had an article that was linked to on slashdot yesterday titled Five That Fell.¹ The article is about 5 gaming companies that are now gone, no longer in business. While the article has a great topic and the coverage is spot-on in terms of which 5 gaming companies are missed the most (in my opinion), they’re completely wrong in how they’re covering the failures. Instead of realizing why the companies are gone, they use business terms that seem to portray the market itself as evil and wrong.

Here’s one line from their first part of the multipage article:

As it happens, in 1989 – the year of Tetris – Time-Life bought out Warner, forming the first of our modern way-too-big media conglomerates.

Way-too-big media conglomerate? This sentence reads as a negative, but we have to look at the reality in the market. The company that was bought out was Atari, a company that repeatedly made horrible business choices. They didn’t adapt, they didn’t modernize, and they didn’t give the market what it wanted. In the beginning days of the video game market, Atari was the Microsoft of its day — the gentlefolk would have been crying about how Atari was a big-bad-monopoly if they had a forum to complain back then. The way-too-big media conglomerate that bought Atari did those employees a favor; no one else really wanted to take a financial risk on a company that had no real hope of rewarding them. If it wasn’t for Time-Warner, the company would have been gone. Why didn’t the gentlefolk who wrote the article just offer their normally favorite solution for a failing business — the employee buyout? Maybe it is because Atari was owned by their employees since 1986 and the employees had no business sense for 8 years — leading to the buyout and saving of the business why “big-media-conglomerate” Time-Warner.

Their next article segment also slaughters any hope that a business-savvy writer was speaking:

The first game was such a success that Origin nearly went bankrupt acquiring enough floppy discs to meet demand.

If a company has a product that is under huge demand, there is absolutely zero chance of bankruptcy in the proper business cycle. Why? Because the only way demand can be considered a successful demand is if the product is being supplied at a profit! If you’re selling items below cost and people are buying the item only at the discount price, you’re really not seeing a demand for the product at its true market price. Low prices can create a real demand for a cheap product, but in no way can you consider this a feasible demand — it would never hold up over time. There are companies that use loss leaders in order to drive traffic to their business in hopes of selling a profitable product in addition to the loss leader, but again we can’t look at the product by iteself as a financial success. If you’re selling your item at a loss but you’re gaining profitable traffic from it, you can look at the demand for that item as a success in terms of marketing, but the item itself is definitely not a success on your bottomline. If you go bankrupt because of a high demand for a loss leader, you’re not looking at the big picture.

The same article continues:

Until money came into the picture, Origin was almost a dream come true – for Garriott, for his employees, and for the game industry as a whole.

What are they talking about, a dream come true before money was involved? How is it a dream come true as a business if there is no money? The open source “work for nothing” market is pretty amazing, but it is no different than shareware was 20 years ago — these are hobbyists, not business people. You have yet to see any “work for cheap” companies succeed over the long run, and Origin was definitely not a success before money came into the picture. On very rare occasions you’ll see a shareware product explode in popularity, but almost always you’ll find that the hobbyist can’t maintain good service and support unless they focus on the bottomline — making sure that people are willing to compensate you for your time.

I’ll make a big forecast here — open source and free software won’t make a dent in the proprietary and costly software market. I use Wordpress, which is free, but none of my customers that hire me to support their blogs use it. They don’t want free software with zero on-time support. I wouldn’t want it for my company if my income relied on it. Companies that want to succeed pay for what they use because they want support if things go wrong. You can hope and think that the business world would change, but it won’t. I’ve watched for 20 years how businesses repeatedly will “over” pay for an item that they could get free or cheaper from another supplier, but the choice ends up making sense when there is a crisis. Origin would never have made the games they made, in the long run, if they were a hobbyist co-op that made games. How would the hobbyists spend the 60-100 hours a week each perfecting the games if they couldn’t eat? Money is not the cause of Origin’s failure — it was the lack of money from people who were sick of waiting for a game that continuously promised but never released on time. EA attempted to set deadlines on the programmers, but this ended up causing EA to release games that were buggy and imperfect. Guess what? That means that the games were never meant to be — the programmers were not able to create a product that the market demanded, so the programmers were out of a job. Simple supply and demand here, nothing more.

The article portion on Origin finishes with this:

Our industry has switched leaders from a man who dresses up in a cape and crown to men with shiny shoes who “do lunch”. If videogames today seem like they’re lacking something, perhaps there’s good reason.

I really can’t even comment on this ridiculous statement. When a market of customers wants something, they want a product that works, in the right time frame and at the right price. Origin under the “man in a cape and crown” could not meet the market’s needs. Origin under men who “do lunch” could not meet the market’s needs. There is no conspiracy here, there were just a bunch of programmers who had no business sense — they tried to create a market that would never exist no matter what they did. Markets are created ONLY when the 3 demands are met TOGETHER — timeframe, price and quality. If any are missing, the market may never exist.

The next part of the article focuses on Sierra, a company that made games that occupied much of your early teens:

They started the fads, they grew fenced in by them, then they got blinded by their own self-importance and snookered by the hype of the mid-’90s. Even so, it’s a real shame they never found salvation.

This is actually very good business sense for once. Many companies believe that the market caters to them, not the other way around (which is the reality). There are no monopolies (not Microsoft, not Comcast, no one) that exist for long in any business market — except when they’re mandated by law (like your electric company or your water company). If a market is not mandated by law to only be one company, other companies will constantly bite and tear at the biggest company’s market. Eventually there is a shift. Sierra failed because they kept doing what they were good at during one small period of the gaming market’s existence. This is proof that you should always be developing for the future markets — no company can stay the same and continue to exist. Not even Microsoft or Google. You either grow or you shrink, even if your income seems to stay the same over a long period of time.

I’ll wrap things up with one last line in the article:

Everyone fired; years of hard work up to the highest bidder.

It happens. The reason that everyone gets fired is because a business had no market to sell their items to. We usually call it “junk” when a company can’t release something that anyone wants. In this case, the market corrects by making sure that no one gets paid, and then people get fired. Years of hard work are meaningless if you aren’t making something productive and profitable. Why don’t we all just move bricks around a yard for 5 years and complain about it? These programmers were the equivalent of people moving bricks around for no reason - they wasted their time, and the market gave them exactly what they were worth: nothing.

In the end, the article lists 5 companies that all made big mistakes of trying to chase a market that didn’t exist. I could sit here and start charging $500 for every article I publish, but no one would pay it. That means the market doesn’t exist. We see business failures every day, but if we let gentlefolk tell us why the businesses failed, we’ll never learn the realities of the business cycle. The business cycle is met only if the following items magically cross paths:

1. An item is made at the time it is needed
2. An item is priced in such way that a buyer of the item sees a money or time savings from the item’s use
3. An item is made to last as long as the buyer needs it, and the item works as the buyer expects it to

In the gaming market or any entertainment market, we buy products in order to save ourselves the time and money we’d have to spend in order to create our own entertainment. I’ve been called a funny guy, but telling jokes to myself is a huge waste of time. I would rather pay US$50 for a game that is available when I want it if the game can entertain me and not aggravate me. None of these companies met that magical cycle that we call success. All were failures because they wasted their time without offering value for it to others. Don’t let the gentlefolk fool you into believing anything else.

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NewsFactor Magazine had an interesting article over the 4 day weekend titled Does Anyone Get Rich on eBay?¹ The article goes into great depth on the money that has been made on eBay, the mega-auction site, and also gives some examples on who is actually making the millions that seem to be sold by every “make it rich” guide on the Internet. I believe that the best money made online seems to be to sell make-it-rich guides to suckers (which is why I never charge for my published information and only charge on a face-to-face basis).

I’ve played the eBay game for years — sometimes making very good money, and other times losing my shirt. In my experience, the best money made is in unique and custom items sold to a hungry clique or fanbase of buyers. For about a year I helped one of my employees sell a few thousand sets of custom “punk pins” — those unbiquitous pins that alternative music fans seem to stick everywhere on their clothes. My young employee made about 1000 pins a week that he was selling at various local music shows and at school. At 20 cents profit each he was bringing in about US$200 per week in profit, but he was spending almost 50 hours a week making pins — not a very good income at US$4 per hour. Once he took it to the web, though, he made big strides in selling at a bigger margin, and was seeing US$30 or so an hour average. Then the competition came in and his market collapsed, but he covered his end for over a year before it fell apart. His market was small initially, but the suppliers were smaller. Once it became a big buying market, the suppliers grew in number and everyone lost out except the few companies that specialized in making the trinkets.

My favorite way to make money on eBay was always to help retailers and wholesalers sell their overstock. For years this was an hourly gig for me — I’d send cold-call letters to hundreds of local retailers and wholesalers offering to help move their overstock for a flat hourly fee. For almost 2 years I could count on getting at least 5 calls a week from people holding too much inventory and wanting to move things. These customers would see a net loss on the goods they sold, but they sold them in order to recoup from old stock so that they could sell new stock to their retail customers. Paying me hourly meant they didn’t have to navigate the market. My secret was finding which items in the same market sold the best and taking those item profiles and making them better. It isn’t always how well written your description is, but I found that more pictures and a cheaper starting price always brought a better selling price in the end. Starting a US$500 lawnmower at US$0.99 often times sold better than starting it at US$100. Yet even this market has quickly been swallowed up by full-time retail stores that focus on helping others liquidate their overstock and even clutter at home. Their commissions are high — 30% of the selling price — and they generally don’t even allow any sort of reserve to be made (meaning your US$500 lawnmower might sell for US$30), but people are more willing to trust a retail reseller than a consulting one, it seems. I left that market over 18 months ago and won’t look back.

When my friends and relatives ask me about eBay today, I tell them to forget about using it to make a consistent profit. There are too many people out there working way too hard for very little money — the wonder of competition in a free market. This is good for buyers and terrible for sellers — I don’t think the average reader will want to invest the thousands of hours of labor in order to make a few dollars an hour during that time period. The outlook for eBay is more and more foreign and local competition driving profits down — again a great thing for the consumer. The eBay market isn’t saturated, but it is much more work to try to find a profitable direction, and the only winner is he that is the hardest working with the most luck — not the greatest market to be in.

Another thing that many eBay experts fail to realize is the reality behind much of where eBay is heading — the insider game. I know of a few warehouse employees and managers from large distribution networks that have started their own eBay business — they get to buy well below wholesale cost, and get to ship right from their office. One of my own retail businesses a few years ago was shut down by someone selling at 30% below our cost on eBay, and some meticulous spying on my part made the discovery that my supplier’s warehouse manager was doing it. Over time, expect distributors and manufacturers to go to eBay directly and avoid the mall, the retailers and the small online sellers. Why do they even need the old system when the new system gives them more power and more profits?

I don’t believe eBay is a lost cause, but I think it is one area that the new entrepreneur should avoid. You need quite a bit of cash, you need a ton of time and you need a very good supply of inventory just to build your base foundation. I’d skip it and focus locally on making ends meet before dreaming of untold quick millions that only a lucky and hard working few will ever see.

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