Really ARIA? You expect me to pay $2.19 for a single song? You’ve got to be joking. Don’t expect $2.19 songs to ever reach the number 1 spot in the top 100.
Update: And confirmation that sales have been impacted. I bet the slide is even worse in Australia! Great job recording industry!
When it comes to making a new product, and I’m going to use the Mac Indie shareware market as my example, there are only a few steps that you need to follow: define your niche, execute to your definition, and market your new product.
Define your niche
“Life is like a snowball. The important thing is finding wet snow and a really long hill” - Warren Buffett
New products either fulfil a need that a customer already has or introduce a need that the customer didn’t realise they had. This step is the hardest and most crucial as, without a well defined target in mind, you will produce a product that will require extensive reworking to achieve your financial aims. As an example, iPodRip fulfils a very simple need: people want to copy their songs off their iPod. As long as the application meets that goal then there’s no reason to make it flashy or overly feature laden.
On the flip-side, it is very easy to make a mistake and have your focus on the wrong thing. Acorn, Iris, and Pixelmator all started out with the wrong objective: they wanted to dethrone Photoshop. While an amiable goal, it didn’t define a consumer’s need and therefore, none of them have made a ripple on Adobe’s market-share. †
Execute to your definition
Now that you have planned out exactly which niche you are targeting, it is time for the fun part - building the product! Go nuts in designing your product by brainstorming every imaginable feature for several weeks. You’ll discover that you won’t be able to push the idea out of your mind and I find myself thinking of ideas at all hours, day and night. Make sure everything is physically recorded, no matter how foolish you may think it is.
Once you have exhausted all your feature ideas stop and cull. Adhere to the principle of KISS while taking a look back at your product goal, and remove everything that doesn’t fulfil the desired requirements as written by you. Once you have a small list then you can start planning and building. Fail to plan at your own risk.
Market your product
For me, marketing is the most enjoyable part as it allows me to use my imagination and experiment with ideas. While I wont go in-depth, I’ll outline a few things that must be played with.
Building an excellent website that quickly explains your product is vital. You need an elevator pitch, that is the ability to sell your product in the 10 seconds you have with someone as you descend in an elevator together. If you can’t explain your product succinctly then you are going to have an issue selling it.
Focus on the quality and reliability of your product alongside excellent customer support. If people are happy with your product, then they’ll tell friends and nothing beats free advertising. The flip-side is very much the case as well: a faulty product will leave an almost insurmountable obstacle in a customer’s mind. As for support, some people aren’t great at it or would rather focus on other things, so consider paying someone to take care of that burden as it is well worth it.
Experiment with Google Adwords while using Google Trends as a guide. Find the most searched for terms and use your elevator pitch to advertise. Make sure that the entry page to your website is navigable and that everything flows nicely towards a customer buying your product. Use the “Mom” test to assure this.
Where are the opportunities?
Very few people come up with unique ideas that will be successful and therefore it is recommended that most don’t pursue this option. However, there are plenty of niches in Mac shareware, where no product is currently the leader. It is these areas where opportunity abounds. As an example, the iPod was not the first but Apple clearly looked at the state of the mp3 player market, picked the best features from each and added their own unique touch to produce a market beating product. This approach both guarantees that there is a niche to tap and has the lowest risk of complete failure.
The final word
When you’ve completed all the steps satisfactorily you may not see immediate results but don’t fret, while the snowball may be small it has started rolling. Not every product will sell 40 copies in its first day like iPodRip did back in 2003 due to its fantastic niche or $54k in a day like Delicious Library due to their superb product and great word of mouth. However, with patience, you will see results.
† I don’t feel having the goal of making a simpler or cheaper image editor will do either as that still doesn’t fulfil a customers need. If they wanted it cheaper, and I hate to say it, they’d simply steal Photoshop.
In light of recent events, it would benefit all CEOs to be aware of who they are in fact working for: their shareholders. Management are, after all, only meant to divert the companies capital in such a way as to provide a maximum return for their shareholders for as long as they remain shareholders. Therefore, when any decision is made the management should consider whether the most dire of consequences will cause a loss of capital. If there is a possibility for such a crippling loss, then the decision should automatically be rejected with no further consideration required.
There is an old maxim that states “with greater risk there is a greater reward” but I no longer feel that is fundamentally sound. In cricket the safest shots are the ones where the bowler has strayed the most and with that safety comes the ability to collect oversized rewards. Similarly with companies the greatest rewards are gained when others have strayed the most; when the failures of the over-leveraged and unintelligent decision makers leads to their destruction and the ultimate rewards for the safe and strong competitors who are left standing in a now less competitive market.
Management should therefore focus on growing at a rate that never puts the company in a position where their shareholders may end up with worthless paper the next day. Ultimately the rewards, while not as thrilling as the quick growing over-leveraged companies will be bountiful, while at the same time allowing shareholders and management to sleep soundly at night.
3436.6 is the magic number whereby the All Ordinaries will have fallen 50% from its high on the 1st of November 2007. My prediction: we hit it this week.
“I have discovered that all human evil comes from this, man’s being unable to sit still in a room” - Blaise Pascal
Throughout the history of business, great companies have been run into the ground by management that has tried to move away from their domain of expertise. Whether it was due to their want to climb the ranks of the Fortune 500 by increasing revenue, a misguided sense that diversification makes a company better, or even to relieve boredom, they have committed this sin time and time again. Not only does it make management look like fools but it is to the detriment of the shareholders; the only people management should ever care about.
Coca-Cola in the 70s was a prime example. The company had blanketed the globe with its ubiquitous brand of cola but sales had stagnated due to the failed marketing of international bottlers. J. Paul Austin, the chief executive officer, decided to spend some of the companies surplus cash on some totally left-field ideas: wine, plastics, whey-based drinks, water purification and even shrimp farming. The result? A 1% average annual return throughout that decade. When Roberto Goizueta took over in 1981 he decided to continue diversifying by acquiring Columbia Pictures and the annual report took on the form of a magazine advertisement for the latest movies coming out of the studio!
Fortunately for the company they didn’t let the cola business completely stagnate and rolled out the highly successful Diet Coke which shifted Goizueta’s attention back to the core of the company. With his competitive spirit awakened he took the fight to Pepsi and made another stupendous error: he unveiled “New Coke”. When the American public discovered what happened they totally boycott the new cola and proceeded to demand the old formula back adversely affecting sales and the share price. However, no matter what management did they couldn’t permanently tarnish the name of Coca-Cola and the company continued making a profit until management finally awoke from their slumber, albeit 15 years later, divested of the diversified distractions and focused on the marketing of the brand. Today the success is quite apparent as they blanket the globe with colas, juices and other liquid refreshments to the great fortune of their shareholders.
Any company that passes the first 5 years of existence and continues to grow profits without undue leverage already has a good thing going. The key for management is to continue to milk the gold mine while only branching into areas that they are experts in and continuing to provide high levels of return. Software companies should remain software companies, Cola companies should remain cola companies and energy companies should remain energy companies. It is a very good thing indeed when management sit quietly in a room.
11,405 - Dow Jones, 24th Dec, 1999
11,433 - Dow Jones, 11th Sept, 2008
1,279 - S&P 500, 24th Jan, 1999
1,249 - S&P 500, 11th Sept, 2008
Warren Buffett, in a speech he gave back in 1999, discussed the ebbs and flows of the market during the previous 34 years. The most interesting part of the speech was his analysis of the two distinct phases that he was witness too; where from 1964 to 1981 the Dow Jones didn’t move 1 point and from 1982 to 1999 it increased tenfold. This 17 year pattern was only unique in one regard: it’s length. The pendulum of investor opinion has swung back and forth many times since the turn of the 20th century and the only guarantee for the 21st century is that it will continue doing so.
Fast forward to today as we near the end of 2008 and the figures at the beginning of this post tell a familiar story. Here we are 9 years later and nothing has moved even though the US economy has grown throughout that time period. How long will this negative pendulum swing last? Who knows. The one thing I can say with certainty though is that when it does go positive again the ride up will be much smaller and shorter than the epic bull market that ended in 1999.
The product that I made my nest-egg off has been re-released by Happy Hour Code under the guidance of John Devor. I think he has done a fantastic job on the application and the new icon is simply stunning. Grab yourself a copy if you value your Mac and iPod.
The last thing I was expecting this morning was Australia’s best bank in merger talks with Westpac but I guess Gail Kelly didn’t want to stop managing her old bank! My initial thoughts indicate that this is a pretty good deal as St George is trading well below historical highs and while also being a very well run bank with a low cost base. I’ll have further assessment on that aspect once more details become available.
What’s truly interesting about this deal is that Mrs. Kelly’s intimate knowledge of St George should allow unprecedented levels of cost savings to appear very rapidly. In fact this may end up being a case of the tail wagging the dog but I hope the combined bank doesn’t lose their focus on the customers as they become a bigger entity.
Warren Buffett: the richest man ever and one of a select group who didn’t build their fortune by creating a single fantastic business. If you were fortunate enough to be around when he took over Berkshire Hathaway and bought $10,000 of its stock at $7.60 then those 1300 shares on Friday were worth a cool $164 million. He achieved those returns via hard work and a steadfast determination to always stick to his core values and I can’t see his feats every being bettered.
While he has exemplary intellectual prowess in his field, and undoubtedly would have succeeded in any era, he was extremely fortuitous in his timing of birth. Not only was the stock market immature when he first started investing but the vast majority of the globes worth wasn’t in play as it is today. Literally every living American has money in the stock market, via direct investments or retirement plans, and the global nature of business has allowed foreign countries to invest unprecedented sums. Warren was lucky enough to ride the wave that the mountain of cash created from the early 60s to today giving him dramatic compounding on top of his excellent purchasing. Simply put he was the right mind in the right country at the right time.
While I don’t foresee his success ever being repeated I should outline one scenario where it could happen. If in the next 5-10 years, before the economies of China and India really hit their stride, the world credit market would totally collapse then the potential for another great accumulator to write their name in history would present itself. However, the general nature of business these days makes it highly unlikely to occur.
All journey’s must have a start and so here we are.
A little about me: I’m a full time securities investor working with my own capital with the aim of creating enough wealth to be able to help change the world in a tangible way. My investing style is similar to Warren Buffett’s, albeit without the history, and therefore I’m definitely in this for the ultra-long term.
Via this blog I will never give investing advice or my economic thoughts but I will outline my mistakes in order to help me retain lessons that I’ve learned. I will also dabble into the amusing companies that I run into and discuss any excellent resources that I find.
But as with any true Graham/Buffett/Fisher investor you will require patience if you want to follow this blog as things won’t move all that fast but I hope you enjoy sharing the journey.