#418 – Jason Cohen on hidden multipliers

A lot of times people do know kind of what the answer is already, but they don't want to face it. They're scared to face it. It means they have to admit something they don't want to admit, or it means they have to do work they don't want to do.

It's nice to be here with the sights and sounds of Spain. It's nice to live vicariously that way and yeah, it's nice to be here.

Yeah, I mean, I thought it was kind of dorky at first, but when I was using it as a test title, what happened is people would sort of repeat back things like, 'Oh, that's another multiplier.' Or, 'Oh, that's why it's hidden.' And so it just seemed to hook fairly well in talking, so I kept it. But the idea is that the idea of a multiplier is a little bit more than just the 80/20 rule, which of course we all know obviously some of our actions matter a lot and so on. You don't need a new book to talk about that, but what I found is there are certain things — I've been building companies for 25 years, many of my own. Some are bootstrapped. Some I've raised hundreds of millions of dollars for, two unicorns. I've also invested in 60 startups. And so in that experience I just found that there's these certain patterns — not 100%, there's no advice and no framework that always works, of course — but certain patterns which did seem to be very common that had to do with growth or retarding growth. And so because they were real, they seemed mechanistic. They seemed like they were based in how companies work or how customers buy or something like this. That's why they were so common. And it was true that if you made a small change you'd have a big result. So this is where the idea of the multiplier came from: this idea of a small change makes a big result, but also it's based on some sort of mechanism that I can describe, maybe try to quote-unquote prove with — whether it's not just anecdotes also to bring it alive and show that it's real somewhere, but also try to explain what my theory is behind it as well. Because in explaining it in detail then you're much better equipped to say, does this apply to me, number one, and if so what might I do. And of course the book gives lots of ideas of what to do also, but you know everything you have to take on board yourself, try it on yourself, decide for yourself if it's applicable. And so this attitude of not just like, here's a bunch of things that work, but rather let's explore and explain these things that I find to be mechanistic and common so that you can fully understand them, fully decide if they apply to you, and then what to do about it. That's really what I do in the book. So rather than a book where there's like one idea that is maybe a good idea but it should be 30 or 50 pages, you know, my thought is I cannot write that book. I refuse to write that kind of book. It has to be super dense so that you feel like it's constantly new and useful information. And also I had this idea in mind where if you open to any page and started reading you should say, oh, this is kind of interesting, or oh, this is useful, or oh, that's funny. It may not make complete sense because obviously a book assumes you've read the previous page when you read a page. So, but aside from that, that should be the feeling. It should be that dense. And so if it's that dense, then hopefully some of the things will apply to any given reader. And that's the idea.

Yeah. So on that front, on the hidden, what I find is there's two reasons why these things are hidden from us. One is the business is a very complex object that's hard to analyze, maybe impossible. If you could, you would do something like, well, here's a big diagram with boxes and arrows and numbers and flows and rates and things, and you would analyze — and it's all the things in the business and even outside the business, how competitors work on the market and customers and all these things, even things that are not numbers would somehow be a number anyway and it would all be in the model. And then you could use some kind of math or code or something to figure out, oh, if I twiddle this number, if I do better here, then that gets me more revenue or profit or maybe even just how fun it is to run the business, how easy it is to run. If you could, but of course you can't. So they're hidden because you can't make that thing. If you could, there it is, but you can't. The other reason it's hidden is you just can't evaluate your to-do list. So you say, 'Okay, growth has slowed. I got 10 ideas of what I could do. What I know for sure is just doing exactly the same thing isn't going to work because it already isn't working. Already my growth has slowed. Obviously something's got to be different. Maybe small, maybe big, I don't know. So I don't know how to evaluate of these 10 things I could do what should I put my energy into.' And also the best idea might not be on the list, of course, yet. And so in that sense it's hidden from us. The best idea may be on the list, but how would I know that? So it could be hidden in plain sight. And yet another way I find talking to founders — and now I have a podcast where I don't interview founders, we have a workshop where we sit down with founders and other co-hosts that I bring on that are somehow connected to the industry or the problem that the founder has, and we workshop it for like two hours. No script, not interviewing. We just workshop it. And from there too, I find a lot of times people do know kind of what the answer is already, but they don't want to face it. They're scared to face it. It means they have to admit something they don't want to admit, or it means they have to do work they don't want to do. Or maybe they aren't quite sure in fact and they need that extra little push. But that's often the case. So it's not necessarily, oh, you're too dumb to know. That's not necessarily it. It may just be that you need that extra push or that exposition so that you look at it and go, 'Okay, okay, damn it. That is what I need to do after all.'

Yeah. You can see it in yourself. And everyone needs a mirror. Everyone needs a mirror that is credible that they trust. It can't just be a random thing, but a true mirror you need because you can't see it for yourself because you're embedded in it. Because another thing is you're embroiled in all the details and this customer needs this today and I have this on my to-do list and you can't see the big picture. But someone else whose brain isn't addled with all those things, they can just see the thing that you yourself could see if you could just get some space, right? Like you said, you could see it too. It's just you're in the middle of it. Why does Rafael Nadal have a coach? Is the coach better than him at tennis?

No. What's the point? Because you need a mirror and you need someone who does know tennis, you know, right? Can't be ignorant of tennis but isn't embroiled in it to be a mirror. We all need it no matter how good you are at it. It's not even about that, who's better at it. It's not — that's an irrelevant question. We all need that.

And that's the mirror.

And I know people that actually use all those questions to reflect upon from the week for a Friday meeting with their co-founder. That's great. That is — if that is helping, that is exactly what it needs to be.

I do think it's foundational because it starts out by saying all customers are not the same. And not only are they not the same, but they're different by orders of magnitude. And whenever something's different by an order of magnitude, it means that a small change there might have a big impact and a big effort somewhere else might have less impact than that. So it is a nice way to begin. I think you can read the book in any order. In fact, at the end of the introduction, there's a table that says if you have the problem on the left, you might want to jump to the chapter on the right with the page number. So there actually is almost a problem index that allows you to skip around. So you certainly don't have to read it from start to finish, but it is foundational, I think, to start by saying, did you notice this? And what's neat about the profit whale is — and I'll explain what it is, of course — it's universal as far as I can tell. I just bullet point give examples because I didn't want to go on and on with other examples, but just bullet points: an insurance company, a grocery store, a consumer packaged goods thing. And then for me, my example in there is my actual data from WP Engine when we had 7,000 customers. And it's my literal data from a board deck that I had made at the time. So I use my example in more detail because of course I can explain in more detail exactly what we learned from it, what we did about it and so forth. So of course I do, but I give those other ones just to show it spans industry, business model, and time because this was first found many decades ago. So it's not a modern thing either. So the fact that it's that universal, you might say across time and space, tells me it's a core mechanistic thing that's probably true for — okay, not everybody, but how about most people — which again now it's starting to sound like a multiplier, right? So this is a good example to start with anyway. So the idea of it is this. You take all your customers and you compute each one's gross profit in dollars. Meaning how much revenue do they give you minus the expenses specific to that customer? How much do they call you in tech support and what does that cost? How much, in the case of software like me, how much server resources are they using? Even things like the cost of running their credit card, although that's pretty small, but okay, still there it is, right? So there's all these costs for that customer which you subtract out of the revenue and whatever's left, that's their gross profit after those expenses. So not your overhead, not your office space, not what you pay your software, your engineers, not even what you pay your sales team or marketing, but just how profitable each customer is. And so you compute that for every customer and then you line them up in order of how profitable they are. So most profitable first on the left, least profitable on the right. And then you make a running total of that. And that running total is the profit whale. And so what it looks like — and in fact I could probably quickly flip to the thing — but what it looks like is at first the curve starts going up very fast as all your profitable customers are added up. Here it is. I don't know if you can see that. So the curve starts going very fast as you're adding up all your profitable customers, and then it starts leveling out as they're less profitable, and then you get to this tail where they're unprofitable. You know, they give you $29 a month but they call you every day on tech support, you know, right? So they're losing you money, and so the cumulative sum falls because they're losing you money, and it finally ends at your company's entire gross profit. Of course, because it's everybody added together. That's your actual gross profit on your accounting books. Okay. So what you see when you plot that is you see these segments, and again I show what these are for WP Engine in the book, but you have this very profitable head — people giving you a lot of money and not taking up your money — and obviously you want more of them. And so I spend a lot more of the book saying, well, how would I identify who they are? How would I do that mechanically? And how would I describe them in a way that's actionable so that in the end I have something where I can do ads for them and then the homepage speaks to them and then the pricing is right for them and then the features I build are right for them and so on. So I spend multiple chapters saying, man, if we could get that right, you know, how amazing would this be, because I got to get more of them people in the head. That's where I have profitable happy customers. It's happy. It's fun for me to deliver because they're happy and not calling me all the time. This is of course exactly the same as what you say in your book, just with my language, my experience, my tools, but it's exactly the same as your point in your book, and therefore we're completely aligned on this notion of being in the right place means your business is more joyful, more profitable and so on.

Well, here's why it's hard, and we can get back to the tail because there's also the unprofitable end and what to do about that and other things, but just sticking on that for a second. Why is it that we don't do it when it's so quote-unquote obvious? And one thing is it's not necessarily obvious until you analyze. So the profit whale helps you analyze. It doesn't have to be the profit whale though, forget that. It could be anything. There's lots of ways to figure out, oh, some of these customers are good ones. And so maybe we haven't analyzed, but I think in the end it's this: every customer you just feel like, I got to keep them. This is revenue and this is my target market and I've got to just grow. And so I want to — and also you just want people to be happy. Someone signs up and they're unhappy. You don't want them to be unhappy. And that's good. That's coming from a good place that you don't want them to be unhappy. You just haven't fully internalized that making the right customers happy is indeed what you should be obsessed with. But if a customer isn't the right fit for your tool or your service, and that's why it's not working out because this is not actually what they need, it's not fitting what they need, that's why they're having problems. So you trying to do it anyway is not helping them or you. It's dragging you away from your actual strategy — the customers that actually love you that you could be doing more for or getting more of. It's just distracting you from that because you're not fully acknowledging that this is not right for you. And part of that is you want everyone to be happy. Part of it is you don't want them to leave. Part of that is you want the personal validation. Part of that is you haven't defined what perfect looks like. So you don't know. You don't realize that they're not perfect because you haven't encoded that clearly enough to realize, oh wait, you just shouldn't be a customer. That's the answer here. And if you don't have that encoded, you can't realize that. It's too hard to realize that. And then you're worried that if you laser focus on just your perfect customer, that means you're just going to give up 99% of your target market and so you won't grow enough. You won't be big enough. And I don't mean you have to grow to be billions of dollars. That could be your goal. But I mean a solo entrepreneur just trying to make it happen for themselves, where of course growing to be billions of dollars is not the goal. I mean even for them you're still worried that by being focused there won't be enough target customer, you'll be alienating enough of your target market that it won't work. And that is a reasonable fear. It's reasonable to think if I'm laser focused to exactly then someone who's not exactly in the center will go ew and leave. It's a legitimate fear, but you're wrong. And the reason you're wrong is this. And it's in the book too, but I don't care, I'll tell you right now. The reason you're wrong is the way we actually make decisions, normal people in real life, is we look at products and we make a trade-off. It's very unlikely that a product is absolutely perfect in every way with no weaknesses, no everything according to us. So we're always making a trade-off. Well, it has this and that that I like, but it does this and I don't like that, or it's missing this thing I really want. Okay, but in the end, which one am I picking anyhow? That's what we do. Or we say things like, this one thing is so great, I'll just put up with the other crap. I have, for example, I have certain things like — completely — within reach. Here's a glasses case. It's oddly shaped. It's got this weird thing. And it's got this weird metal button on it. But I love the way it's shaped. It fits perfectly into certain pockets and things that I have. But this metal button could scratch, which means I can't put other things next to it. And what I like to do in my backpack is put my sunglasses in there and then this next to it so I can swap my sunglasses for my glasses. That's my practical desire. But this button, this little metal thing, means it might scratch my glasses, and I don't want to put them in another bag. So sometimes I'll pick a glasses container, which I don't like as much as this, but I can put it together with my sunglasses. But on my desk, I don't care about this metal button, so this is perfect for me. So here's a whole bunch of weird-ass trade-offs out of nowhere, I guess. And so that's what customers are always doing in their minds. They're trading off this stuff. So is that metal button a weakness? Is it a strength? Well, it depends on what I'm doing. It depends on my use cases and I might get that case anyway, which I did because I love it so much for other reasons. So that's what people are doing. So when you're very specific in your target, which I call Carol — I've named her, this was decades ago, I named this ICP as we now call it, ideal customer profile — I named her Carol. And when you're clear about Carol, then every Carol that comes to the homepage goes, 'Oh, this is definitely for me,' and is very likely to buy. Isn't that great? But then people that are adjacent to Carol and not exactly right, they'll see what you are and be able to make this trade-off decision. And because they're able to make it, because you're so clear, they're comfortable in their decision and they'll buy. Whereas if you try to hide it and say, 'I'm good for everything and you're not specific,' they're like, 'I don't know if this is for me.' It's hard for them to make the decision and fewer of them will buy. Now, this is a big thing for me to claim. That this is what happens. It's like, how do you know that? That sounds okay. How do you know that though? And so I'll give you some actual data which is not in the book. So this is only here, not in the book, that I'll show you this proof. I have another fun example in the book but this is data. There's a company here in Austin, Texas where I live called Bazaarvoice. And a couple decades ago what they did is they helped large brands add customer reviews to their website. So this is like Walmart and Best Buy and these big brands with thousands or tens of thousands of products, maybe hundreds of thousands of products and millions of people leaving reviews. And so they had data about customers leaving reviews on products and they had millions of data points. So this is real data about what happens when you show things like positives and negatives or negative reviews on products. So here's what they found. When a product showed not only the five-star reviews, which are like the Carols that you know, but also the one-star reviews and why people didn't like the product and showed it side by side equal, then sales would go up and returns went down. Now sales going up is because when you can see the weaknesses as well as the strengths then you can make the trade-off decision and because it's clear the trade-off you are now comfortable making that decision and so you do. That proves what I just said. And then returns went down, which for a physical good company is crazy, crazy profitable because you know maybe margins are 10%. And so one return, especially if the return fails and it's broken or it's lost, you know, it takes 10 sales to make up the profit loss of that one thing because you only make 10%, right? So every return might take 10 sales just to get back to zero. It's so unprofitable to have a return. So the fact that returns go down even by 10 or 20% is dramatically profitable for that kind of company. But why did returns go down? Because the person who bought it already knew what the weaknesses were and so when they got it they're like, I know, I know that, not oh this is a surprise I'm returning it, right? So double win. So I can prove with data that if you talk about your strengths and weaknesses because you're talking to your perfect customer, then you will get more sales out of your entire target market.

Yeah, exactly. Point well made. Well, I mean, I'm looking at my list. There's a number of things that are about price and what people are prepared to pay and the willingness to pay in this case. But also, I mean, one of the things that you said at the end, I think chapter 11, is that it's about, you know, build a company in the shape of you. But you give an example that intrigued me, that in WP Engine you built that, and one of the things that you particularly like, at least what I can recall from what I read, is that you enjoy setting a high price and then being forced to live up to that, which is a very interesting way of setting prices. And a lot of companies don't do it that way, but I love it. Possibly I'm wired the same way here. Can you explain? Yeah. So I think there's so many ways to talk about pricing strategy and many of them are valid. So I think you should pick the one that speaks to you, right? Whatever you can take on board and you feel like this is something I can use. So here's another one that I like to use. I call it more or less. And I have an article online about this. So you don't even have to get the book to read this. But the idea is that in this particular way of thinking there's three primary pricing strategies when it comes to price and value. And one of them is more for more, as in you get more and you pay more. So this is like premium, the best. It could be luxury, especially in personal items. It could be luxury where the idea is like, yeah, this is expensive because the materials are the best, the manufacturing is the best, the attention to detail, the joy of using it, the design, maybe the support, maybe the service is a boutique, you know, very high quality, very responsive. So it could be in that. But basically like, okay, for that I'm going to have to pay a lot. I get it. So this is what like you say, I like that, and I kind of summed it up my own little personal philosophy as you just said. Another way to say this is, okay, I'm setting a high price, but man, I'm going to have to deliver on that. So you say I'm still getting a great deal. It actually, right? Delivering even more value than that.

What's important if you select this, though, every decision and every action you do has to be commensurate with it. And this is where often we fall down. Okay, we set a high price, but then is your service good? Or do you say we don't have tech support, or it's AI? Because then it doesn't match. Or is the quality good? Or does it, you know, if it's software, does it have low uptime, or does it fail a lot, or does it not integrate with stuff, or you put too much text in the field and it crashes or something like that — that's all not the same thing as having this high quality, where it's contradictory to that. That won't work because you get people saying, 'All right, look, I agree to pay a lot and now I'm expecting something good and it isn't.' And so then they cancel, right? Or they tell their friends, or they buy something and it's, you know, a physical good and it doesn't live up to it and they tell everyone this is just, you know, just too expensive. It's just overpriced. Don't buy it.

Right? True. And so people will not want to buy it because they're like, 'I don't — this doesn't look like a company that would charge that much,' you know. So it either blocks the buying decision or it gives you an unhappy customer if things aren't consistent with that. So that's the point of selecting one of these: is that then everything else has to match, which is why I call it a strategy. Because to me, strategy means the couple of key important decisions and constraints that everything else that you do has to fall under so that it's a consistent, aligned thing, whatever that thing is. That's what I mean by strategy anyway.

So it could be more for more. A second one is called more for less. So this is, hey, you get a lot for your money. It's a high ROI. It doesn't do everything. It's a trade-off, but man, you sure get a lot for your money. And so, this is where most products are actually. Like, if you analyze markets, I give some examples in the book, but it doesn't matter. Most of the money and profit in any market is typically in this space because people are paying enough that you can generate profits, but it's not super luxury, which of course, as a percentage, luxury goods often generate the biggest percentage profits, but there's few people that can afford it. So while that is a great model, this middle ground is where a lot of the profits are. And so, this is like, if you buy a sweater, unless it's a luxury sweater or a really shitty Temu sweater, you're probably in the middle here where it's like, this is pretty good, pretty comfortable, pretty good quality, the price is right. So here the language is stuff like, 'You're smart to buy this because it's a good trade.' Also, the actual trade-offs are important. It does do this and that, but it doesn't do this and that. It has to be a trade-off because it's not super expensive luxury. There must be some kind of, who is this for? When is this the best trade-off? Because if the product does A, B and C but not X, Y and Z, as a buyer, if I say, 'Oh, I love A, B and C and I don't even care about X, Y and Z,' then for you, this is the perfect product, and yet it's not a luxury price. That's why you buy it. That's the whole mindset of this stage. So that's where your ads have to go, your positioning is, and so forth. It's like, wait, how is this different from other things? What are those trade-offs so that I know if this is the right ROI, the right buy for me? That's more for less.

And then the third one is less for less. It's shitty and it's cheap.

And there's a ton of stuff in this category. And actually, in terms of the number of things sold, the quantity of things sold, this is the most because most of the world doesn't have much money. And it's better to have something than nothing. So this is where I do go to Temu and I buy like a sweater for $3. And that's insane that I can have any piece of clothing at all for $3. Now, it won't survive 10 washes in the washing machine. And, you know, it's kind of weird looking. It doesn't fit quite right, but it's better than having no sweater. And at $3, it's okay if it disintegrates by the end of the season. I'll just buy another one next year. It's actually okay, right? And maybe there's things I just don't care that much about, so it's okay if it's shitty. Or it's something like IKEA where, yeah, the furniture isn't the best quality or anything, but oh my god, like, it's so inexpensive, I can put together a dorm room or I can put together my first apartment for so cheap you can't believe it. Some of that stuff might last if I treat it well. A lot of it won't, especially if I move it a couple of times, it'll probably crack and fall apart. But oh my god, I can have all this furniture and otherwise I would just not have this furniture at all.

Yeah. So then the point is, how cheap is it? Because okay, if it's going to be crappy, it better be cheap. And so like now we are fighting over price. Notice we weren't before. This is the first time we've said I might in fact compete on price because we always say don't compete on price. But with this pricing strategy, yes, you are and that's okay. IKEA competes on price and it's okay. Vanguard funds is a financial instrument that competes on price. That's okay. Costco grocery stores in America competes on price. That's okay. It's okay as long as that's part of your entire strategy. Now, you have to know other people: if they have a lower price, you might lose because that's the pricing strategy you're in. So you have to be careful, like, are you sure you can be the lowest price? Are you sure? And of course, it's hard to make much profit, even if your profit margins as a percentage are okay, which they're generally not, but even if they were, there's so few dollars that it's still very hard to turn any profit.

So what does that mean in terms of the rest of your business model, your cost model, and so on? Well, again, everything has to be consistent with it. So anyway, all three of these are very smart. It's easy for me to find tons of examples, both huge multinational corporations and mid-size companies and little bootstrapping founding companies that use any one of these strategies. So they're all smart. They're all reasonable. The question is, which one's right for you? And by that I mean your personal proclivity, what you like to do, what would be fun for you, and what you can build, and what you see as some kind of niche in the market that you think you can get to, and so forth. Like, there's a lot of things that have to be right for any company strategy to be smart. But all three can work in those ways. And so all I say is, I believe you must pick one. What you cannot do is do a little from all three because that's confusing, or not pick one because again then you're not going to make aligned decisions and so that again will be confusing and ineffective. So I just believe you should pick one and you should then align everything to it as part of your strategy.

Yeah. If it's best, if it's more for more, then it seems like you would have to have a guarantee, and that's actually part of what the 'more' is, right? That you're standing behind your work. Now, of course, as I said at the top, everything has exceptions, so you have to apply it to yourself. A very funny exception to that is, in America, it is common to have warranties or guarantees. You know, if there's any manufactured defect, they'll fix it in the first year, 7 years, whatever. So, an American company that makes bulldozers and other like heavy machinery called Caterpillar went to Germany. They're like, 'We're going to sell this stuff in Germany because we have high quality and we have great guarantees. They'll like that.' So they go to Germany and their sales are not happening. Germans won't buy it. And in interviewing, they figured out why. And the German said, 'Well, this all sounded good and we inspected the goods. It seemed like it was good quality until you said that there was a 5-year warranty. If any of these things wear out in the first 5 years, we'll replace it.' Well, why would something wear out in 5 years? In just 5 years, something will break. That must be bad, then. It must be that the product is poor quality because you have to do this warranty to get me through the first five years. And they're like, 'No, no, no. What we do is we buy equipment and we already have mechanics on staff to fix stuff. Of course, something's going to wear out. It's heavy machinery. Stuff wears out. We expect it to wear out at a reasonable rate and everything because it should be reasonably high quality and other than that, we fix it.' The fact that you need a warranty tells me it's low quality.

So obviously this is cultural and communication. It's not about whether it's good quality. So all that does is just show these things always have — you always have to take all these ideas on board and in context and decide what is actually right for me and my market and my customers and all that. But I would say all these are good considerations. In other words, if you're not thinking about the more or less — if you're not thinking about that concept at all — I think that's an error. If you haven't decided which of these you intend to do, that's an error. If you're not at least trying to align all your things to that, that's an error. Now, all the details of that, who knows? Like I just said, I could come up with lots of examples, but if you're not making a decision at all, then you're not setting your strategy. If you're not trying to align to that decision, then you're not honoring your own strategy. That I believe is an error. But not an error because of any external reason or because anyone else said so. But just because you're not setting your own strategy or you're not honoring your own strategy, that's got to be an error.

Mhm.