Entrepreneurs

The Loss Aversion Mental Model: A Case Study on Why People Think Spirit is a Horrible Airline

August 11, 2022 By Nagesh Belludi 1 Comment

When Spirit Airlines pivoted to competing on price in the late 2000s, it quickly gained a reputation not only for operational inefficiencies but also for its in-your-face, take-it-or-leave attitude towards customer service.

Where other airlines charged by-the-package fares for the flight experience, Spirit pared back service and introduced an a la carte pricing model. Charging for the “ancillaries”—i.e., everything optional, including water—allowed Spirit to keep ticket prices down and appeal to price-sensitive travelers willing to sacrifice the usual amenities for a lower ticket price.

In the ensuing years, the unconventionality of this business model did not go down well with customers. Much of the flying public’s frustration with Spirit had to do with Loss Aversion. That’s the notion that the emotional disappointment of a loss is more extreme than the joy of a comparable gain. If finding a cheaper fare on Spirit felt delightful, giving up some—or all—of the savings to purchase ancillaries and surrender the savings felt utterly miserable.

Passengers felt ripped off by these seemingly hidden fees, especially when the true cost of flying Spirit ended up greater than what the initial ticket price led them to believe.

Spirit became quickly convinced that there was a perception problem—its customers didn’t fully understand how its fares work. Particularly, first-time customers blindly presumed that Spirit Airlines works the same way as other airlines. In reality, there were no hidden or excessive fees, and passengers could only pay for what they need or want. In 2014, the airline introduced its “Spirit 101” campaign to educate customers and alter their perceptions. With time and the increased adaptation of the “Basic Fare” model and curtailed customer service by every other airline, passengers’ expectations have since been right-sized. Spirit Airlines has come a long way, and its customer service has improved vastly.

Further studies on loss aversion have shown that a cascade of successive fees is worse than the cumulative: i.e., three ancillary fees that add up to, say, $70, feel a lot worse than a single $70 fee. Appropriately, Spirit offers a “Bundle it Combo” package.

Evolution, Not Revolution

August 1, 2022 By Nagesh Belludi Leave a Comment

Innovation often transpires from synthesizing existing ideas in new ways, as the following case study on the iPod will illuminate.

In some sense, the iPod wasn’t a breakthrough innovation at all. It emerged from Steve Jobs’s “digital hub” approach to integrating iMac software for playing, editing, and managing photos, music, and movies. According to Walter Isaacson’s masterful biography of Steve Jobs (2011,) when Apple designers learned that Toshiba had newly prototyped a tiny 1.8-inch hard drive that could hold five gigabytes of storage (that’s about a thousand songs,) they conjured up a digital music player. Apple found that existing gadgets were “big and clunky or small and useless” with “unbelievably awful” user interfaces.

Sony’s Walkman had previously proven the market potential of portable audio players, having sold 200 million units in the two decades before Apple conceived the iPod. Napster had offered digital audio file distribution for over five years. Finger-driven touchscreens were pioneered in the 1960s, and Citibank rolled out touchscreen ATMs in the 1980s. (Apple didn’t offer touchscreens until 2007 with the iPhone.) Hence, the iPod’s innovation was in bringing all these capabilities together in a way that was easier to use and relevant to the consumer. Dartmouth’s strategy professor Ron Adner writes in The Wide Lens: What Successful Innovators See That Others Miss (2013.)

Apple was three years late [behind Creative, SanDisk, Sony, and Samsung, who had previously launched portable music players]. As we’ll see again in the case of the iPhone, Jobs tended to be late for everything because he wanted everything to be ready for him. Reflecting on catching technology waves in 2008, he said, “Things happen fairly slowly, you know. They do. These waves of technology, you can see them way before they happen, and you just have to choose wisely which ones you’re going to surf. If you choose unwisely, then you can waste a lot of energy, but if you choose wisely, it actually unfolds fairly slowly. It takes years.” Jobs’s discipline paid off.

Idea for Impact: Innovation often builds on existing technological competencies or as a synthesis of smaller innovations.

Why Investors Keep Backing Unprofitable Business Models

July 29, 2022 By Nagesh Belludi Leave a Comment

Investors have heaped billions into Q-Commerce—especially the rapid grocery startups—hoping to hook consumers on the convenience of groceries that would turn up immediately, sometimes in minutes.

I’ve never really fathomed how the small-basket orders of low-margin groceries can endlessly compensate for the labor costs and overheads, even after discontinuing the generous referral bonuses, discount codes, and freebies enticing customers. The prospects may evolve if these startups subsist on ever more funding and develop massive businesses with efficiencies from scale. But then they’re right in Amazon’s wheelhouse.

Idea for Impact: Some business models are never created to be profitable, and investors should be wary of encouraging—and funding—loss-making propositions. The lure of backing an initial entrant, capturing market share, and then selling out to a more determined fool isn’t viable! Who needs goods delivered in such a rush for such charges, anyway?

Book Summary: No Filter & The Inside Story of Instagram

July 18, 2022 By Nagesh Belludi Leave a Comment

No Filter: The Inside Story of Instagram (2020) narrates the civil networking service’s ascendance from a Silicon Valley startup to a cultural phenomenon with an ever-present feature of everyday life and an advertising juggernaut.

The book’s author, Bloomberg journalist Sarah Frier, says, “On social media, the average user is scrolling passively, wanting to be entertained and updated on the latest. They are therefore even more susceptible to suggestions by the companies, and by the professional users on a platform who tailor their behavior to what works well on the site.”

Instagram evolved from Burbn, a mobile check-in app. The founders Kevin Systrom and Mike Krieger refocused their app on photo-sharing, which had become a well-liked feature among Burbn’s users. Most cellphone cameras were pretty shoddy then, so Systrom and Krieger implemented filters to make the pictures prettier.

The founders didn’t, however, consider the downside of their innovation—reality-adjusting filters made not only users’ pictures but their lives, by extension, look more appealing. “Instagram’s early popularity was less about the technology and more about the psychology—about how it made people feel. The filters made reality look like art. And then, in cataloging that art, people would start to think about their lives differently, and themselves differently.”

No Filter author Frier shines in analyzing how Instagram rewired society and ushered far-reaching consequences for society, especially on young people’s mental health. Instagram and its ilk have stolen self-esteem and our attention span, leaving us with a needy dependency on strangers’ affirmation for a scripted-reality form of our lives. “The more you give up who you are to be liked by other people, it’s a formula for chipping away at your soul. You become a product of what everyone else wants, and not who you’re supposed to be.” The ability to rework photos to perfection has spread insecurity—even leading to a surge in filter-inspired plastic surgery.

No Filter also fixates on the battle for Instagram’s soul, following its purchase by Facebook for a then-absurd $1 billion, but seemingly a bargain today. There’s considerable corporate drama and cultural clash, but nothing like the co-founder infighting retold in Nick Bilton’s Hatching Twitter (2013; my summary.) Facebook founder Mark Zuckerberg emerges controlling and rather callous. In seeking incessant growth, he continually thwarts the Instagram team. Paranoid that Instagram’s advance could “cannibalize” and replace Facebook in cultural relevance someday, Zuckerberg held them back. As Instagram grew bigger and cooler, Facebook acted “like the big sister that wants to dress you up for the party but does not want you to be prettier than she is.” In 2018, Systrom and Krieger left Facebook.

Recommendation: Quick read No Filter: The Inside Story of Instagram (2020) for a compelling founding story and a relevant primer on the sweeping socio-cultural impacts ushered by the heavy use of social media.

Nuts! The Story of Southwest Airlines’ Maverick Culture // Book Summary

May 30, 2022 By Nagesh Belludi Leave a Comment

Kevin & Jackie Freiberg’s Nuts! Southwest Airlines’ Crazy Recipe for Business and Personal Success (1996) is a popular tome about the history and culture of Southwest Airlines and the fun-loving antics of its colorful co-founder and CEO Herb Kelleher (see my tribute.)

Despite its Pollyannaish tone and repetitive narratives, Nuts| is a very enjoyable cheerleaders’ account of how an underdog overcame roadblocks and thrived in a competitive industry.

Nuts| focuses on the people-oriented culture that Herb and his secretary Colleen Barrett established based on Herb’s well-known dictum, “The business of business is not business. The business of business is people.” To Herb, Southwest was a cause—never just a company. The Freibergs write,

If there is an overarching reason for Southwest Airlines’ success, it is that the company has spent far more time since 1971 focused on loving people than on the development of new management techniques. The tragedy of our time is that we’ve got it backwards. We’ve learned to love techniques and use people. This is one of the reasons more and more people feel alienated, empty, and dehumanized at work. Many organizations today would be surprised at how much more people would be willing to give of themselves if only they felt loved.

Nuts| is dreadfully out-of-date. Southwest and the airline industry have changed a lot since the mid-90s. Southwest even stopped handing out peanuts to protect passengers from peanut-related allergies.

The miracle at Southwest Airlines could keep on only so long. As long as Herb was the CEO, employees would go the extra mile for the sake of Herb. Until his retirement in 2001, Herb preserved Southwest’s unique cost structure and work rules. Kelleher’s successor, Jim Parker, presided over mounting labor tensions and quit after just three years. CFO Gary Kelly replaced Parker in 2004. Bob Jordan became CEO in 2022.

The going has not been smooth for Kelly. Southwest has become more like the other carriers regarding employee relationships and cost structure. The rehabilitated legacy airlines and a new breed of ultralow cost carriers have chipped away gradually at many of Southwest’s apparent competitive advantages. Yes, customers still rave about Southwest’s friendly staff, unpretentious service, and flexibility in travel planning. However, Southwest hardly ever has the lowest fares on most routes. In fact, Southwest’s average fares have outpaced the industry by 12% since 2009.

Recommendation: Speed-read Nuts! … it’s full of original insights, upbeat stories, and concrete suggestions for principle-centered leadership and how to inspire people to achieve incredible results. Here are the key takeaway lessons:

Even a little respect goes a long way. Give employees responsibility and entrust them to take that responsibility.
Set the ground rules—and let employees be creative. “Culture is one of the most precious things a company has, so you must work harder at it than at anything else.”
Give your employees some skin in the game, and they’ll go the distance. Southwest claims, “We have credibility because we tell people what we’re going to do and then we do it.”
Empower workers to make decisions at the customer level. Employees who feel they have leeway in their jobs to make the “right decision” depending on circumstances are happier, more confident, and more productive. They’ll even give extra—because they believe their work has special meaning and is not just a job.
Make sure people feel they can be themselves and have opportunities to express individuality.
See yourself as a motivator and a positive force. When things go wrong, accentuate the positive and focus on a path to a solution. It’s an approach that employees will admire and want to emulate.
Build a sense of community. Foster the feeling of a “family” in which employees can count on each other professionally and personally.
Recognize that employees have lives outside of work. Celebrate every milestone to establish and strengthen relationships. The walls of Southwest’s headquarters are covered with pictures and commemorative plaques of picnics, community service awards, customers’ commendation letters, service employee milestones, and tributes to important cultural events.

Fall in Love with the Problem, Not the Solution

March 25, 2022 By Nagesh Belludi Leave a Comment

Entrepreneurs, don’t get so excited talking about your solution that you forget to emphasize how it solves a problem at all.

Which problem are you solving for the user? What pain-point are you alleviating? Why is your solution relevant to your customers? How will it make their life easier, faster, and cheaper?

After all, every great company starts by solving a painful problem. Focus more on that problem when you’re selling. Not only will this persuade your investors and customers, but it also rallies your team around a shared understanding of the problem and prepares you to ask for the level of resources it should receive.

Idea for Impact: Sell the problem first, not your idea. Often, jumping too quickly to a solution makes you lose sight of the nuances of the problem.

Many Creative People Think They Can Invent Best Working Solo

January 19, 2022 By Nagesh Belludi Leave a Comment

Apple co-founder Steve “Woz” Wozniak writes in his memoir, iWoz: Computer Geek to Cult Icon: How I Invented the Personal Computer, Co-Founded Apple, and Had Fun Doing It (2006):

Most inventors and engineers I’ve met are like me—they’re shy and they live in their heads. They’re almost like artists. In fact, the very best of them are artists. And artists work best alone—best outside of corporate environments, best where they can control an invention’s design without a lot of other people designing it for marketing or some other committee. I don’t believe anything really revolutionary has ever been invented by committee… I’m going to give you some advice that might be hard to take. That advice is: Work alone.

Teams aren’t automatically better at creativity. In what’s termed “collaborative inhibition,” everyone needs to be happy, so team members talk and talk until they’ve reached a consensus on a decision which is usually the lowest common denominator—something tepid that everyone, worn out from the prolonged discussion, can endorse.

Idea for Impact: The best creative decisions often reflect a unique, opinionated perspective. Look for ways to increase organizational creativity by building better environments in which individual creativity can thrive.

Don’t Be A Founder Who Won’t Let Go

January 17, 2022 By Nagesh Belludi Leave a Comment

You’ll never get a potential successor to take your job if you’re going to be peering over her shoulder constantly and talking to employees directly about what they’re doing.

When you have a case of the founder’s syndrome, you’re addicted to running the show, and you’ll have a hard time separating yourself from the company you’ve built. When there are conflicts, you’re often at the center of it and hold your vision and experience over the leadership’s heads.

In the long run, your compulsion to have a say in all the nitty-gritty of your company will undermine the future of the very company that you’ve devoted your life to. The best thing you can do for its future is to back off and give your successor real control.

Establish a timetable to disengage yourself from the operating decisions and set some firm rules about this transition. Spend increasingly more time away from the business and pursue other interests. Start to envision a world in which your next ventures or leisure activities will become the principal focus of your life.

Idea for Impact: Know when your work is over and when it’s time for you to move on to other things. Grooming exceptional talent to take over the business you’ve built and gradually letting go of control is one of the most challenging things a founder will ever do. If done well, it’s the most transformative you can do for your business.

Why Amazon Banned PowerPoint

December 23, 2021 By Nagesh Belludi Leave a Comment

One of the distinctive features of the Amazon management system is its use of the long-form to facilitate decision-making. Jeff Bezos has claimed that banning PowerPoint presentations—more specifically disallowing bullet points for sharing ideas—as Amazon’s “probably the smartest thing we ever did.”

Since June 2004, Bezos has forbidden bullet points and PowerPoint at a senior leadership level. Instead of presentations, teams are expected to iterate an approach to sharing information that involves writing memos of running copy, usually a “six-page, narratively-structured memo.” Meetings typically begin in silence as all participants sit and read the memo for up to half an hour before discussing the subject matter.

Ram Charan and Julia Yang’s The Amazon Management System (2019) reproduces the original email from Bezos explaining this dictum:

Well-structured, narrative text is what we’re after, rather than just text. If someone builds a list of bullet points in Word, that would be just as bad as PowerPoint.

The reason writing a good four-page memo is harder than ‘writing’ a 20-page PowerPoint is because the narrative structure of a good memo forces better thought and better understanding of what’s more important than what, and how things are related.

PowerPoint-style presentations somehow give permission to gloss over ideas, flatten out any sense of relative importance, and ignore the interconnectedness of ideas.

Using memos may seem counterintuitive in an age when communication is increasingly visual. However, long-form has a way of forcing rigor to think through ideas properly, reconcile viewpoints pro and con, iron out logical inconsistencies, and consider second-order consequences.

Bezos’s approach is brilliant not just because sentences and paragraphs enable a certain clarity in thought and exchange of ideas. It also inhibits some of the usual shortcomings of brainstorming meetings, viz., interruptions, biases that initiate groupthink, and the tendency to reward rhetorical ability over substance. Forcing all meeting attendees to read the memo in real-time prevents them from pretending to have read it before a meeting and then bluffing their way through the meeting.

Idea for Impact: Think complex, speak simple, decide better.

Bullet points and “decks” are often the least effective way of sharing ideas. Having a narrative structure allows you to clarify your thinking and provide a logical, sequenced argument to support your ideas.

Let’s Hope She Gets Thrown in the Pokey

November 16, 2021 By Nagesh Belludi 1 Comment

The Elizabeth Holmes-Theranos criminal trial hasn’t been without its share of theatrics.

Yes, Holmes’s massive fraud is obvious. She entranced (read WSJ reporter John Carreyrou’s excellent chronicle, Bad Blood (2018; my summary)) journalists, investors, politicians, and business partners into believing her fantasy science. She may even be responsible for negligent homicide if people died because of her company’s fake test results.

Then again, these sorts of cases generally hang on subtle distinctions between hyperbole and outright dishonesty and whether such deceit was deliberate.

Holmes’s lawyers will argue that she was merely an ambitious entrepreneur who failed to realize her vision but wasn’t a fraudster. Her lawyers will make a case that she is not to be blamed because people took her puffery and exaggeration as factually accurate. At what point do her wishfulness and enthusiasm go from optimism to intentional fraud? That’ll be the critical question.

At any rate, the Theranos verdict is unlikely to deter others from the swagger, self-assurance, hustle, and the “fake it till you make it” ethos that is so endemic to start-up culture. Investors will never cease looking at people and ideas rather than the viability of their work.

Idea for Impact: Don’t be so swayed by story-telling that has a way of making people less objectively observant. Assemble the facts, and ask yourself what truth the facts bear out. Never let yourself be sidetracked by what you wish to believe.

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Idea for Impact: Think complex, speak simple, decide better.

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