Equal is not good enough

Years ago, when studying to become a stockbroker, my classmates and I were discussing the relationship between risk and reward among investors. Our instructor gave us a useful rule-of-thumb:

Between two investments of equal return, the rational investor will choose the one with a lower risk. And, between two investments of equal risk, the rational investor will choose the one with a higher return.

That’s sound advice from the early lessons (although it is shocking how often investors prove themselves to be irrational… but that’s besides the point).

I was thinking today about the concept of the “equality of the offering” and the rational consumer. Here are two of my experiences as a consumer:

Equality of hotels: Recently I was traveling to meet with a client. They had booked me into the Best Western; a decent hotel from my various traveling experiences. After my stay ended, I was asked to fill out a survey online comparing this experience with previous hotel experiences. After much thought, I told them frankly that this experience was incredibly unremarkable: There was nothing during my stay at their hotel that made me say “wow” or might induce me to return. In fact, just last year, I stayed at their competitor’s hotel across the street and the stay there was almost exactly the same. The service was mediocre. The complimentary breakfast was passable. The high speed internet connection was there when I needed it. The only difference was the room itself: last year’s hotel room was slightly larger and had a couch.

Will I go back to the Best Western? It’s doubtful. Because the experience was so unremarkable, I’m willing to stay at another hotel, and another, and another until I find one that I like.

Between two (or more) hotels that offer an equal stay, the rational guest will choose the nicer room (particularly if they’re not paying for the room, as was case).

Equality of home renovation box stores: Recently I’ve been renovating a couple rooms in my home. I outsource the projects I can’t do but I’ve been enjoying the work I can do. The part I enjoy the least, however, is the trip to the home renovation store. There are two near my house: Home Depot and Rona. And the experience is nearly equal: terrible service from typically absent staff, overwhelming selection with little guidance to make appropriate choices, and long line-ups to reach minimum-wage cashiers. And let’s not forget about product return procedures that are unwieldy at the best of times. So how do I choose? Well: Rona is closer but Home Depot has a self-serve checkout (which never has a line-up). So if I go during the day when the store is quiet, I’ll go to Rona because it’s a faster trip to and from my house. But if I go after 5pm (when more people are walking through the store), I’ll go to Home Depot because I can get in and out o the store faster.But that’s it. That’s how I decide where to go. That’s not customer loyalty!

Between two home renovation box stores, the rational consumer will choose the store that offers the least amount of pain.

If Best Western, Home Depot, and Rona asked for my advice, it would be this: Find ways to be different. Separate yourself from the pack by taking a chance on something that your competitors won’t do. It might mean alienating some customers but it may mean winning even more customers who desire that additional difference. And I believe the added cost will be swallowed up by increased customer loyalty.

If social networking sites were college students

This was my most popular article on a previous incarnation of this blog. I’ve updated it and reposted it by request.

Imagine that every social networking site were a college student. Here’s who they’d be:

In the general arts degree program:

aaronhoos_blog_socialmediaclassmatesClassmates.com: The self-absorbed senior who’s been attending college for 8 years to get a 4 year degree. He thinks he’s all that because of his long mullet and mustache. He has no idea that everyone laughs at him behind his back. Drives a Chrysler LeBaron (which he’s very proud of) with a surprisingly small amount of rust.

Where he’ll be in 10 years: Just graduating… but then lost in a world that has long since passed him by. Driving the same LeBaron, just a little more rust.

aaronhoos_blog_socialmediamyspaceMyspace.com: This was once the most popular student in school. Started out as a freshman and all the girls liked him. But he put on some weight and sold out to “the man”. Now, other more interesting social networks have come along but he thinks he still has a shot with the ladies… but mostly just the freshman music students. Drives a Pontiac Sunbird.

Where he’ll be in 10 years: Vastly overweight. Still in school. Wondering what he’s going to do with his general arts degree… but still picking up freshman music students. Driving a Pontiac Sunfire.

aaronhoos_blog_socialmediafacebookFacebook: A sophomore, the great looking guy that has it all: Looks, athletic ability, a nice car, and he’s on the dean’s list. All the girls adore him. He doesn’t need to try out for the football team — it’s just assumed that he’ll be the quarterback. His popularity is on the rise. Drives a Corvette.

Where he’ll be in ten years: Trophy wife. Model kids. Owns a medical AND legal practice. $1 million in the bank. A yacht at the club. But feels empty inside. Driving a Mercedes (but has a BMW for the weekends).

aaronhoos_blog_socialmediaorkutOrkut: Orkut wants so badly to hang out with Facebook and MySpace. Unfortunately, he doesn’t speak English at all but he’s not good looking enough to play the exotic angle to get dates. He’s got a few friends among the international students but just keeps a low profile and hopes to graduate soon so he can return to his village to own a coffee plantation so his father doesn’t have to herd burros forever. Doesn’t drive anything right now, but aspires to drive an All-American car.

Where he’ll be in 10 years: Will own a taco restaurant in a strip mall in Ohio. Father will still herd burros. Driving a used Ford Escort (but he keeps it nice and shiny).

aaronhoos_blog_socialmediabeboBebo: Bebo is the off-campus student no one has heard of (even though he shows up now and then and wishes desperately that people would remember who he is). He asks girls out on dates but he tries way too hard. Drives a 4 door Chevy Cavalier that he’s modified a little with new rims, tinted windows, and a stereo.

Where he’ll be in 10 years: If he doesn’t tragically take his own life, he’ll find a low-paying job selling used cars. Driving whatever’s on the lot at the end of the day.

In the business degree program:

aaronhoos_socialmedia_linkedinLinkedin: A junior. He’s got his own group of friends in the business department and puts on a brave face about not being like those in the general arts program (although he secretly wishes he were like Facebook). He’s mostly talk and optimistic dreams but he has to work twice as hard to get the same marks as everyone else. Drives a Honda Accord — the perfect mix of business and fun.

Where he’ll be in 10 years: Upper management at a midsize company in the US. Thinking that he’s achieved the American dream (but still suffering from road rage during every commute). Will have 2 kids from his first marriage. Driving a small SUV but contemplating the purchase of a motorcycle to satisfy his midlife crisis.

aaronhoos_blog_socialmediaxingXing: A sophomore in the business degree program, aspires to be like LinkedIn but just lacks the panache. The only thing going for him is that he’s popular among some of the international students. He’s a little awkward around the girls and he sometimes forgets to wear matching socks. Drives a Honda Civic (“because it’s just like LinkedIn’s Honda!”).

Where he’ll be in 10 years: Lower-to-mid management at LinkedIn’s company with the sad realization that he’ll never achieve much more than that. Driving a Honda SUV with squeaky brakes and a crack in the windshield.

aaronhoos_blog_socialmediaplaxoPlaxo: A freshman in the business degree program. This guy shows up to school in a nice car (but it’s his parents’). He tried out for the football team (in borrowed gear). He spends a long time on his hair (but it’s thinning prematurely). He’s not on the dean’s list (but blames it on an administrative oversight). He talks a big, big game and he may have been a big fish in a little pond in highschool but now he’s a freshman in a long list of business students. Drives his parent’s Toyota Supra (but there’s a dent in the back and the alignment is off).

Where he’ll be in 10 years: Working for Xing (who works for LinkedIn). Paying for everything with his credit cards. Driving a Hyundai Sonata.

UPDATE


aaronhoos_blog_socialmediatwitter

Twitter: Twitter is like the second semester student who shows up from out of town. He doesn’t declare a major and thus is able to win over everyone. He’s a simple guy and drives a simple Volkswagen and doesn’t seem like much. But can he dance! He teaches the girls how to dance and upsets the local minister. At first, people are wary of him but once they see his moves and unique style, he frees them from their misconceptions and bias and everyone loves him and they can’t stop talking about him. (Click here if this paragraph doesn’t make any sense to you).

Where he’ll be in ten years: At first people will think he’ll go far, and he will indeed go on to a higher education. But he’ll move back home and open a local hardware store. Some people will see him every day and find him helpful. Others will forget that he’s there when the next dancer comes to town.

Angel investor article: How GAAP and IFRS impact your investing

aaronhoos_businesswriter_venturehype

Venture Hype is a blog focused on helping angel investors. Recently, they published an article of mine that highlighted what angel investors need to know about Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Read my June 3rd article: “Reader’s Question Answered: What The @$#! is GAAP and IFRS?