Merchant Sensibility

The more complicated a business gets, the more of a math problem it becomes.

Running a lemonade stand, you don’t need to analyze gross margins or survey customers because you squeeze the lemonade yourself, and hand it to every customer. But once you have employees and customers you’ve barely met, numbers become more important.

For example, Redfin folks just finished reviewing a multi-million dollar business that wasn’t as profitable as it should be. We decided to get numeric on the problem, asking one of our number-crunchers to analyze tour costs and abandon rates in that market.

This was a necessary and good action to take, typical of an approach that we believe creates enormous economies of scale for Redfin and other online businesses: we store data on a wide range of customer interactions, so we can be more analytical than most brokerages. But running the numbers has two shortcomings:

  • It isn’t actually an action. It’s a study, which will take weeks to complete, which may or may not result in a decision. Especially as a business grows, you need a bias for action.
  • It encourages learned helplessness: the person running that business isn’t the number-cruncher. So now you have two people screwing in a light-bulb instead of one, and less accountability.

There’s an alternative, often championed by one of the best consumer investors I’ve ever met, Marc Singer. Marc doesn’t look for math wizards to run a business. He looks for lemonade-standers, people who even in large organizations find a way to make every problem small.

Marc is always talking to me about somebody who ran a restaurant, a chain of movie theaters, a lawn-spraying service, a maker of gizmos that deafen the deer who wander onto your yard. Rather than analyzing all the data from an under-performing business, Marc often digs into the customer experience. Why is the food cold or the popcorn-line too long?

Marc has a word for this way of thinking. He calls it a “merchant sensibility.” In its classic sense, merchant sensibility is the ability for someone to guess which of two similar products a small store should stock. “You still measure whether the product the guy chose actually sells better,” Marc once explained to me, “But someone with merchant sensibility gets it right more often than other people.”

People aren’t born with this ability, and the ones who think they are just don’t recognize their own mistakes. People learn it, leaning back against the men’s magazines with eyes narrowed while customers walk into the store, watching carefully where customers pause and where they move on.

If Marc were in that review of our multi-million-dollar business, he might have recommended a similar approach: get in a car and go tour houses with customers, to find out first-hand what’s broken in the business.

At my last startup, Plumtree, we had number-crunchers and lemonade-standers. At one extreme there was a guy known as Master Blaster, who hired a number-cruncher to sit on his shoulder all the time and tell him what to do. And at the other was my friend Ken Lowe, who ran our East Coast business.

Like almost everyone from New Jersey, Ken was a lot smarter than he pretended to be; he founded his college’s Chaucer club because each new club got a stipend for beer. A large man, Ken often greeted me by asking “How much you benching these days?” In a meeting where a dozen bigshots reeled off their titles, Ken would wrap up the intros by saying, “Ken Lowe, Emperor of Japan.” A colleague once penetrated the inner sanctum of his home-office and reported back that it consisted of an absolutely bare desk, and a shrine of Yankees’ insufferabilia.

When the time came for Ken to present to the executive team, I didn’t think he’d do well. For seven years at Plumtree, I sat petrified in these meetings as our CEO, John Kunze, tried to figure out if the presenter really knew her stuff.

People started over-preparing, learning a script or memorizing formulae to describe a business that they lived and breathed 12 hours a day, six days a week. This prompted John to ask, “OK, but what’s really going on in your business?”

This was exactly the question that Ken Lowe hit out of the park, because he spent most of his time meeting customers and prospects, saying little, listening a lot. He could tell you when a deal that hadn’t closed was going to close, and when a customer who’d bought our software was going to fail. He probably had lots of numbers but the only one he talked about was his “blood number,” a bottom-line the business would hit or else, as Ken would say, “there will be blood… MINE. HA HA HA!”

Now as Ken realized, you need data and first-hand experience. Without a broad data set, you can lurch from problem to problem, and anecdote to anecdote, based on whatever you just saw in the field, so that every week a new problem is the most important problem in the world to solve.

But as a business grows, you tend to get more number-crunchers and fewer lemonade-standers; in looking at the numbers you can forget the lemonade even exists. You need to work the spreadsheets and squeeze the lemons too.

Discussion

  • http://twitter.com/alex_lod Alex Loddengaard

    Somewhat unrelated: I think a lot of people get caught up in the product and what its vision is, without taking a step back and looking at the user experience, what it's lacking, and how it can be better than its competitors'. So in addition to spending too much time on numbers, people ought to also avoid that OCD impulse to build out a product for the sake of the product.

    • http://blog.redfin.com GlennKelman

      That's worthy of a separate post Alex!

  • Barbara Bailey

    In number-crushing, you can miss your best lemonade stand.

  • http://www.HomeSellingStrategist.com Clare

    Ahhh, an accountant with heart and soul. The key question is what do these numbers mean to peoples' lives and how are they different because the numbers are this way or that?

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  • http://sworddance.com/blog Pat Moore

    Hi Glenn,

    Another example of the lemonade-stander approach:

    I remember one company meeting at Plumtree, where John reported the results of a little test he ran on the sales force. He asked each sales person to cold-call a voice mailbox. As John relayed at the meeting, the results were “disappointing”. If I recall the VP of Sales left shortly thereafter.

    In football, after a disappointing season, the (usually replacement) coach talks about “the blocking and tackling” basics, “the fundamentals”, etc.

    Too many web companies get all wrapped up in the complexity and they ignore the fundamentals of any business: cash flow, customer satisfaction, repeat business, and being able to ….. sell.

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