The Gym

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Last August, after a few months into living my optimized nutrition lifestyle (I need to come up with a better name) I wanted to start exercising more frequently. I needed accountability and a plan so I went to Thumbtack and found a personal trainer.

For the next four months, he and I met starting three days a week, then four and later five. A few weeks in I started a 30 day no drinking experiment to test alcohol’s influence on my blood markers. At the end of the experience I felt so good I didn’t start drinking again.

My five-day routine included times I was traveling. I carried my routine and my diet to Boston, Raleigh, Ireland and Miami among other places. No matter where I was or what I had to do, early every morning I was at the gym. My gym sessions were hard and focused. And they energized my mind while challenging my body.

Since I started the journey I’ve lost 32 pounds, shaved my bodyfat to 12.5% and become a new person mentally and emotionally. In November, after a second mild back injury, I fired my trainer and designed my own routine, increasing my workout days to six.

But I was getting bored. So a few weeks ago I decided to try Crossfit. I chose Crossfit after extensive research on functional movement training. I was developing strength and my body was transformed, but I wanted more.

The two-week experiment was interesting. Crossfit workouts were among the hardest things I’ve ever done. They decimated my body early in my day, generally wiping me out for an entire morning. I expected that. I also injured my wrist, not directly because of Crossfit, just randomly in the midst of a workout. The workouts were great.

But the most important thing I learned was that I was very happy with my old routine. The rare day I missed my gym session in the past felt off. I wouldn’t be as mentally sharp.

Missing it for two weeks had unexpected mental consequences. I make a point every day to do something that scares me and journal about it. I journaled about Crossfit a lot. I assumed my shakiness came from fighting the naturally obsessive tendencies of my personality. I crave routine and change is hard.

My entire constitution was shaken over those two weeks and I only realized why at the end of the second week. Like a daily meditator who suddenly stops, I missed the hard mental focus of my gym sessions. I missed feeling pumped but incredibly energized after my strength and cardio (Jacob’s Ladder) workouts. I missed the challenge of beating my stats. I missed finishing an audiobook every ten days.

My gym time was my time. It was a time when I was completely and totally focused on myself with zero distractions. Losing that time and ceding access to my mind to a coach and a workout group carried consequences. I didn’t realize how much my solo sessions impacted my mental and emotional well-being until I didn’t have them.

If you struggle for motivation or routine, Crossfit, especially an entry level fitness-focused class, is great. Most of the people I’ve worked out with over the past two weeks do not look like people you would expect to be Crossfitters. They are motivated and working hard to increase their general fitness. For them and maybe for you, Crossfit is great.

After two weeks away and an additional two weeks at 50% to give my wrist a rest, I’m back to my old routine…if you can call something you did for six months old. Just thinking about getting back to it gives me calm.

You can follow my health data here.

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Standby for all-call

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I notice patterns and cadences. It’s something I’ve always had a thing for.

Travel is full of patterns. The only thing keeping the ballet of chaos that is the American air travel system alive is systems. Systems that involve moving a lot of people in an orderly fashion require routines.

Americans can’t be expected to follow signs or to figure things out on our own so we resort to announcements, often loud ones. Comparatively European and (most) Asian airports are places of calm, almost zen-like. The strategy of inserting the chaos of yelling over any existing chaos is a purely American creation.

At one point in my life, I was in an airport at least twice a week. Today it’s a few times a month. I’ve grown accustomed to the patterns and announcements. I know the words. I don’t need to listen to them, I just know them. Like the familiar sounds of a home, they remind me where I am and subconsciously calm me. The routines of travel have the opposite effect on me than they do on the majority of travelers.

There’s the repeat announcements a Chicago O’Hare, many from a male voice I have painted a picture of in my head. “The TSA has limited the items that may be carried through the security checkpoint. Passengers should check with their air carrier for further information.”

Years ago when the TSA raised the threat level a notch to orange, one of his announcements changed and his accentuation of the word ORANGE made me chuckle. I could hear it 100 times in a day and still giggle.

I notice when they change as I have in the past few months flying American Airlines, the airline I most often fly and with whom I was once a super top tier frequent flyer.

After landing as your plane approached the gate, a voice from the flight deck would say “Ladies and gentlemen please remain seated until the captain turns off the fasten seat belt sign. Flight attendants please prepare for arrival and cross check.”

It seemed benign but the announcement was purposeful. It was an indication to the flight attendants that we were, in fact, pulling up to the gate with no further delays. That announcement wasn’t for the passengers, it was an official indication that exit doors could be disarmed and we were no longer on an active taxiway. We were safe.

It was always delivered in a subtle, pleasant way. The majority of the statement seemed to be about passenger safety. It reminded us to be careful.

Similarly, the chime you hear while taxing is the signal from the flight deck that the tower cleared us for takeoff. The sign that we’re not stopping again. Sometimes you hear it long before the plane approaches the runway.

These are the patterns.

Since the US Airways/American merger, some things have changed. The combined airline clearly chose to keep the practices that work the best between the two and jettisoned the rest.

Now, as the plane approaches the gate, nothing is said. Once the plane stops, one of the flight attendants gets on the intercom and says “Flight attendants prepare for arrival, disarm doors and standby for all call.”

It’s an employee-focused message. It’s abrupt. It serves the purpose. It gets the job done.

It sums up the differences between the culture of the two airlines. US Airways was a classic legacy carrier. It filed for bankruptcy twice in two years. It changed its ticker symbol to LCC to reflect its desire to be a low-cost carrier. It put ads on tray tables. Every flight, even super short ones, included a harassing announcement from flight attendants about its credit card offer.

American didn’t file for bankruptcy until 2011 and to most analysts it was a surprise. American was the most predictable carrier. For frequent flyers it was a dream, not because of extreme perks but because if you were a top tier flyer, the people thanked you. They didn’t follow procedure they just smiled. The company had a culture of trying to show gratitude. Sure, sometimes they failed. But my point is about the culture.

American and US Airways merged in 2013. US Airways’ management took the helm. It’s the world’s largest airline.

The change in the gate approach announcement is small. But for all the changes it is the one that speaks to me the most about the new company’s philosophy. It’s not good or bad. It just is.

And on Thursday, I’ll be unbuckling my seat belt on a couple of American Airlines flights while the flight attendants standby for all-call.

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Align your pricing with your customer’s goals

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I recently did office hours with 500 Startups. Their most recent SF batch is astoundingly awesome. I met with a few SaaS companies and we talked about pricing.

I’ve given this advice to a number of founders in our portfolio, SaaS and otherwise. They’ve found it useful.

Your company’s products should be priced in a way that align’s your success with your customer’s. That is to say that your customers don’t buy your product for its features, they buy it because of what the features do for their goals. This is a subtle but important difference.

In many SaaS businesses the price increases as features and/or users increase. A SaaS business selling to businesses often charges by the number of users that use the platform. That may come in the form of employees using a tool or a business’s total number customers or orders. You get the point.

Most pricing grows along with that scale. More users = higher costs. The logical thought is that a higher number of users puts more load on the SaaS business and should pay a higher cost. This thinking is flawed.

Businesses buy your product for what it does for them. A marketing tool will hopefully increase your business’s revenue per customer, making you more money. An infrastructure management tool increases your computational efficiency per machine increasing your profit per machine and/or your overhead per machine, saving you money.

If your product’s cost scales linearly as your customer’s size grows, you are penalizing your customers for their success.

Instead, make your business about helping your customers achieve their goals. Charge more when your customers achieve them and less when they don’t. Slack does this well. As did a upsell recommendation tool I used in a past life managing a large ecommerce business.

If your business is selling tools that increase average order value in ecommerce, then get paid when you do that. Setup a constant control group in your tools to show what customer behavior is without you and then show what it is with you. Get paid a percentage of that performance when you perform. Adapt this thinking to your business’s fundamentals.

When you don’t perform you’ll get paid less.

Costs that rise linearly are the first thing businesses look to cut when times get tough or they start to reach scale. A great example of pricing gone bad is Zendesk. Your costs to use Zendesk rise linearly as your staff size increases. Nothing about Zendesk’s pricing is tied to your business’s success. As you grow in people you pay more. I don’t know what Zendesk’s goals are for my business except to charge me more if I grow.

Be in the business of helping your customers be more successful, no matter if you are a SaaS business or a widget maker. Show them that you are only successful if you can deliver on the promise to make their business better. Don’t just get paid to show up.

Do this and your customer relationships will be more defensible than the lower linear pricing that your competitors will offer then.

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Thoughtful Weekend Reads – February 21

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Hi everyone – I hope you had a great week.

This week I nerded out a bit more than usual, spending more time on topics that will make dinner guests think I’m incredibly weird.

As always I’d love to hear from you with your feedback or just a simple, hi!

If I am not for myself, who is? And when I am for myself, what am I? And if not now, when?
-Hillel

On The World

How a Basket on Wheels Revolutionized Grocery Shopping

This goes in the “things we use all the time but have no idea how they came to be” category. You guessed it, it’s the history of the shopping cart.I’m especially excited because the shopping cart’s creator and I are from the same small Oklahoma town.

New study finds clear differences between organic and non-organic milk and meat — ScienceDaily

As you might know I spend a lot of time focused on the science of nutrition. My overall opinion on organic foods is yes, it is better but it is expensive. If you have to decide, focus on organic “watery” fruits and underground vegetables and just keep your meats free of antibiotics.

This study is compelling because it’s a collection of 196 papers on milk and 67 papers on meat instead of the usual one-sided study.

It’s not that non-organics are BAD for you, but this is one of the first studies that finds material differences between the two in an area not related to pesticides. 

Renting is Throwing Money Away … Right?

The “American Dream” is a marketing construct of primarily Fannie Mae from a 1950s ad campaign to increase mortgage originations. In my view owning a home is choice between the freedom to move and the freedom to nest. It is not, however, simply a better financial decision than renting. This article is quite illustrative to that point. 

Sort of Business-y

The Secret to Moonshots? Killing Our Projects — Backchannel

Make sure to read this. Google X is Google’s (now Alphabet’s) long-term R&D lab. This article is an adaptation a TED talk delivered this week by Google’s leader, Astro Teller (yes, that’s his name). The stories and pictures are cool. They are the stuff of science fiction…but real. 

But what really blew my mind is their bias towards action. They just do things. They fail. In fact failure is the point. They ask daily “How are we going to try to kill our project today?” 

The lesson is push hard. Never let yourself sink into protecting and idea. Try as hard as you can to prove yourself wrong. That’s when the great discoveries are made.

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Tables with stuff

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Every Valentine’s Day there are random people in front of a gas station selling last minute gifts.

Last weekend it was a couple with a table in the parking lot of a 7-11 with piles of Valentine’s baskets and big stuff bears wrapped in heart tape and such.

The killer app in the retail world of past decades was a box with stuff in in it. Like the Barnes and Noble I visited today.

Their core competencies were compiling large quantities of stuff, leasing tons of real estate and putting the stuff on shelves. The building was convenient to a lot of people so they went there to get the stuff. That was the simplest way to get things.

That’s what most retailers still are, especially the large ones. Real estate companies that buy stuff, put it on shelves and take your money.

To earn business today retailers have to do more than be close to their customers. The value of the proximity of the box is minimal. The only value the boxes provided before was proximity in a pinch. That’s their last remaining value. The couple selling Valentine’s gifts in front of 7-11 are hot on their trails.

We’re in the first inning of the one hour delivery game. It’s messy. But there is no doubt same day deliveries will replace the last valuable feature of big box retail in the next ten years.

If fast and close are no longer valuable to consumers, what do retailers do to earn customers’ business? More importantly which ones will realize this and change course before it’s too late?

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Unicorns and the economy

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Jeremy Phillips missed a very important point in his Friday NYTimes piece The Rise and Fall of the Unicorn. It’s a point most overlook when considering the impact of a number INFLATES MARKET.

He pinned most of the valuation frothiness on a winner-take-all mentality. That if you back a single power-horse, the market return potential is exponential. This is true with one caveat.

A great number of the “unicorns” in focus are businesses with complex supply chain unit economics. These are businesses where the company does not control huge components of the fully loaded costs to deliver its services, the only control what they pay for it before selling it to a user, theoretically at a markup.

A black and white illustration is Uber. It controls price and what it pays drivers per mile, per pickup and as a minimum guaranteed hourly rate, for example. It does not control the cost of the car, gas, insurance, etc..

The theory in scaling is, as proven historically by businesses like Walmart, scale applies pressure on components in the supply chain all the way to the raw good (e.g. the metal in the car). And thus any imbalance between the cost the company wants to pay and the true cost of the product it is buying (e.g. Uber: buying the ride from the driver, Walmart: buying the toy from the manufacturer) will be short-lived. Market forces will solve the imbalance.

This approach works in markets where the company (e.g. Walmart) is by far the largest buyer of the good. What Walmart does will ripple through the supply chain and drive production costs down.

The flaw in Phillips’ piece and in most analysis like it is that it ignores the true supply chain costs of higher profile companies like Uber, HomeJoy, DoorDash and Instacart. It costs more for a human to deliver the service than the service is paying them. And the human cannot reach into his/her supply chain and push down costs. It takes X minutes to get from A to B with $X in gas in an asset that costs $X/day.

None of these companies will, for a very, very long time, have the scale to impact global oil prices or the macro cost to produce cars.

Why does this matter? Because when these companies operate at scale delivering a unique and mostly new product at an artificially low cost, they train consumers to believe that the product is only worth X. So even if competition is squashed, if the supply chain isn’t cheaper, then the subsidies must continue. Otherwise, consumers will balk at paying the true cost of the product and flock to alternatives.

When you invent a product and deliver at scale, you create the market perception of what that product *should* cost. And if you do that you must be sure your scale can drive down cost or your subsidies can continue in perpetuity. Otherwise, you’re toast.

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Memberships

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When you sell memberships that guarantee a physical service, you are mostly in the business of financial engineering.

The price you charge has to cover your costs and generate a profit but has to be low enough to make signing up seem like a good deal.

It is in your best interests that customers use your product as little as possible so that you can sell more memberships. The higher the member utililization, the higher your costs. Your business is a promise to provide a service, on-demand, X times per month (or in some cases unlimited).

If you don’t provide the service reliably or if its availability is constrained, your members will be unhappy and stop paying you.

Memberships are very popular in capital intensive categories. Gyms, vehicle use, aviation and now homes.

Don’t be fooled by marketing, the primary goal of any company that sells membership to a physical place or experience is minimizing the amount you use the product. In these capital intensive businesses, costs do not scale in a linear way. If demand outpaces supply, the cost of more supply is generally large and jolting (e.g. buying a new plane, building a new gym, building another house).

Consumers react well to memberships for additional access or a higher level of service. The irrational fear of diminishing returns pushes them to use the product more. This works well for products otherwise available with no membership but more accessible with a premium membership. The most successful example, perhaps in history, is Amazon Prime.

But memberships for access alone are risky. There are few companies in history that have done it well. For reference see the history of the gym industry.

Be wary.

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What business is a VC in?

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I stumbled onto this question on Quora:

My startup has traction, revenue ($600k/year), and profit!

It is a scalable model in a multibillion dollar industry.

We are based in the US, with 2 co-founders (CEO/CTO), mid-30s.

We approached 87 potential investors. Even with a soft introduction, we don’t even get an answer.

What’s missing?

This was my answer. I want to print it on a t-shirt.

There’s a common misperception about the business VCs are actually in. This doesn’t apply to angel investors and people who invest because they want things to exist.

VCs are as much in business as you are. They find investors to give them capital to invest. Their business is finding companies that will have outsized returns as a result of venture capital investment.

In evaluating whether to invest, the questions VCs ponder aren’t limited to whether they think a business is fundamentally strong (a bootstrapped, profitable business absolutely is). VCs have to assess, as best they can, how quickly the business can grow to critical mass where the marketshare and/or product is attractive at a high valuation to a potential acquirer.

There are investors who love businesses like yours. On a personal level I am one of them.
You wouldn’t feel slighted by an airline gate agent if he/she didn’t invest. That’s because it’s not their job. And VCs have a job.

Look for investors investing their own capital who have a track record of investing for the long-term in businesses they think *should* exist. And be prepared to show how 1 dollar in leads to X dollars in return for the business.

A great story to google is from the founder of grasshopper (who just started a fund to focus on these types of businesses, btw). Look it up.

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The Role of Regulators

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The role of government regulators grew in the early part of the 20th century. Regulators serve two purposes, sometimes but not always concurrently: Protect workers and protect consumers.

Their rise made sense at the time. Companies like Standard Oil were dominating markets and using their dominance to artificially create inflate profits, harming consumers. The Sherman Antitrust Act specifically targeted such companies and gave the FTC the power to intervene to protect consumers on a macro level.

The story of taxis in Las Vegas took a different path. The barrier to entry into the Las Vegas taxi market in the 1950s was so low that anyone could get into the business. Because there were so many taxis drivers competed on price. As always happens in price-sensitive markets, eventually pricing pressure pushes down the quality of the product. In this case that meant that cars got less safe, drivers were more careless and as the market evolved, riders were very much in danger. The regulators established and enforced safety standards by requiring licenses to operate. And safety improved.

In the case of every regulated market the regulation morphs over time from safety-oriented to market protection oriented. I don’t think this happens intentionally but it always happens.

What at one point was a regulator focused solely on consumer safety turns into one that regulates pricing and decide who can enter the business. The regulator thinks those things keep consumers safe. But the process always get skewered.

Regulators use licensing and application requirements to slow market growth thus protecting pricing from huge swings. Rarely do they accomplish this without unduly blocking access to markets from nearly anyone.1

In Nevada, for example, new applicants for a transportation license must prove market demand and disclose pricing in their applications. Any existing provider may object and if they do, procedures essentially block the new participant from the market. A potential competitor may simply object to your desire to enter the market and, poof, they win.

Economics relies on competition to push companies to innovate. The role of the regulator should be to set and enforce safety standards. The concept of a regulator protecting drivers, for example, from low pay is no different than a regulator setting the price for real estate. If the price for a safe product gets too low to provide that product, people will stop selling it. The market will correct itself.

It is not the role of the regulator to stop that process. The regular’s job in a competitive market is only to ensure that as prices drop, safety does not.

—-
1The history of the trucking industry is such a fun example to read about. “a frozen dinner with a hamburger patty instead of a chicken leg requires trucking rates that are 20 to 25 percent higher”

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Great Companies

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To be a great company a company must first be a company. Companies that redefine industries were first good at one simple thing.

Southwest changed how people view airlines and set an entire industry on a destructive course correction. Before it did that, it flew a few cheap flights, on-time, between medium-sized Texas cities.

Patagonia challenged what it meant for a business to do good. It elevated the importance of supply chain transparency resulting in a wholesale change in how companies source their products. Before it did that it made a few very good products that customers couldn’t live without.

Before either company made their mark on the global economy, they were strong businesses.

Consider the greatest human business and industrial advancements of the past century. The overwhelming majority of them were made by companies who first built scale in a focused market.

Only with their scale and demonstrated success could they turn to the rest of the world and encourage them to follow their lead.

They were able to say, “look at us, we’re successful, we’re doing it differently, why aren’t you?” The argument would have been very different if they had said, “look at us, we’re going to do it differently” and never built a business.

If they weren’t strong companies first, none of us would know who Southwest Airlines and Patagonia are.

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This post originally appeared at Zach Ware's Notebook.