Entrepreneurship

Where the free market fails: what motivates people to work

There's a video making the rounds now on some psychological experiments wich looked at using financial incentives to make people to work harder. The outcome of these experiments were unexpected; if a task was highly cognitive (as most white-collar tasks are), performance dropped as financial incentives were increased.

According to the video, we can conclude from these experiments that the human mind does not abide by the rules of the "free market", as there are a basket of things people look at when trying to determine if a piece of work motivates them.

Specifically, the video proposes those three things are:
1) Autonomy - the ability to follow one's own path
2) Challenge and Mastery - something is to be gained personally from performing the task (other than financial reward)
3) Purpose - something is to be gained by "the greater good" as a result of the completion of the task.

As an example of this, the video references open source software - software projects which many highly educated, highly paid people work on without any financial renumeration at all. Why do people work on open source software? Because they like self-directed work, the challenge of the work, or the feeling of contributing back to society as a whole with their free code contribution.

Anyways, interesting video as it flys in the face of many traditional organizational behaviour (HR) practices

Engineering a better needle and thread

"Usability" is a funny thing: in order for a large volume of people to use your product, it must meet a minimum standard of usability, as otherwise people won't be able to figure out how to use it.

The strange thing is once a significant level of market penetration has been achieved, most companies assume that the minimum standard of usability has been exceeded - as if it wasn't good, why do so many people use it? Why change a good thing?

Well - just because something solves a problem, does not mean it solves the problem well. Case in point, the need and thread.



(image from Telegraph)

Needles do work, but damn are they annoying to work with. I've got pretty good eyes, and I still have trouble threading the eye of a needle.

But why change something that works? Could 100,000,000+ customers be wrong? Well, it turns out they can:
A better needle and thread - improved!

The Spiral Eye Needle takes a centuries old product, believed by hundreds of millions to be sufficient for their needs, and significantly improves on it.

What are the chances your product or service could also be improved?

Retail Performance Art in Kashiwa, Japan

Here's a cute idea from Japan: a cafe where you can only order for the person after you. So, for example, if you order a coke, and the person before you ordered a Sprite, you would get a Sprite, and the person after you a Coke. 50% Gambling, 50% Performance Art, all fun.

"Mike went up to the cafe, slapped down a couple thousand yen (~$25), and ordered a little bit of everything: some ice cream, some snacks, some candy, some drinks, a Japanese horn-of-mysterious-plenty intentionally set up as a shocking surprise for the next lucky customer. (After his order, Mike received single iced coffee.)

As we walked away from the cafe, with just the right amount of delay, we heard an extremely excited "arigato goazimasu!! thank you so much!!" yelled in our direction, from an ecstatic mom and her equally excited young son. They truly appreciated the surprise."

(Image and Article Source: cabel.name)

The Paradox of Entrepreneurship

It is easy to take risks when you have nothing to lose; by definition, the action ceases to be risky if you only can gain from its outcome. Hence, entrepreneurship is less risky to those which have less.

Less doesn't necessarily just refer to financial wealth; those with less friends, family and other social obligations also have less to lose (in terms of relationships). Those without full time jobs are less affected by the loss of time. Simply speaking, for most people the opportunity cost of entreprenurship increases proportionally with the advancement of their lives.

This could be one of the reasons why many new immigrants become entrepreneurs. Many new immigrants have literally nothing to lose, and have a social community which understands the need for personal sacrifice in the hope of achieving something greater. Hence, entrepreneurship is a very viable opportunity to a new immigrant, especially compared to the other career options they have traditionally been offered.

Young adults have many of the same characteristics as new immigrants; both have little to lose from attempting to start a new business, especially so when compared to their alternative career choices. Both also have difficulty obtaining financing at reasonable rates, and a lack of relationships as well as experience in the local business environment.

This is the first paradox I see in entrepreneurship; although it is easier to attempt to launch a business when you have nothing to lose, the very fact that you have nothing to lose weighs negatively against your chances for success. In other words, local business knowledge and access to capital significantly increase your chances of success - but if you have both these things, then you have something to lose, which makes it more risky for you to become an entrepreneur.

Many Governments have recognized this paradox and as a solution have created "business development" institutions to provide easier financing, mentor programs, and general new business support to entrepreneurs. While these offerings do solve some of the issues for those with less, they do not significantly help those who have already access to credit / solid business knowledge; those most likely to succeed in their new business ventures.

This is the second paradox of entrepreneurship (in Canada, at least) : those who are most likely to succeed in starting their own business are provided the fewest Government incentives to do so.

If Governments want to encourage the launch of more businesses by individuals further down their career paths (Whether Government financial support of entrepreneurs is right/wrong is a separate discussion), then Governments must ensure the incentive programs offered are in line with the pain points of the target demographic. For example, unlike with new immigrants and fresh graduates, people with developed careers normally have large financial obligations (mortgage), entered into initially under the pretense of a regular income. Governments could help alleviate this issue by introducing tax deferral options for founders of early stage companies, which would lower the short-term financial risk an entrepreneur has to take on.

There is no question entrepreneurship is a gamble - if there wasn't any risk involved, then everyone would likely be their own boss. Most governments have decided that supporting entrepreneurship is important to their economies - my question is - are they supporting the right people?

the difference between a project and a business

On average I probably come up with about two business ideas per day. Usually both of them suck – something crazy like gloves to protect your hands while eating ice cream. But every so often, maybe once every three weeks, I come up with an idea that actually could make some good money. But just making money once is not really a business – it is a project. A business continually makes money into the foreseeable future.

Most of my friends who approach me for advice on web business ideas actually have web projects in mind. Websites which, if successful, would make money for at least a short period of time, but have no real opportunity for continued expansion or growth.

Some entrepreneurs argue that you shouldn't worry about tomorrow's dinner when your starving today – growth strategy isn't important, as you'll figure it out when you get there. I disagree with those entrepreneurs; as lack of solid growth prospects provides a disincentive to follow through with a business ideas. Furthermore, you have a finite amount of resources; allocating some of those resources to a project which you know won't have a long term pay-out isn't necessarily the most efficient way to allocate your most scarce resource (time).

A quick list of ways to monetize websites

Looking for a way to monetize your website? Maybe one of these will work:

  • CPM ads ("cost per thousand views"; banner ads online and regular ads in print, TV and radio)
  • CPC ads ("cost per click"; think Google ads)
  • CPT or CPA ads ("cost per transaction"; advertiser pays only if the visitor brought from the media site becomes a customer. Think affiliate revenues, like Amazon Associates
  • Lead generation (advertiser pays for qualified names of potential customers)
  • Subscription revenues / rental of subscriber lists
  • Sale of user data (selling data about users--aggregate/statistical or individual--to third parties)
  • Licensing of brand (people pay to use a media brand as implied endorsement)
  • "Souvenirs"/"Merchandise"
  • Licensing of content (syndication)
  • Upgraded service/content (ed: aka "freemium")
  • Alternate output (pdf; print/print-on-demand; customized Shared Book style; etc.)
  • Custom services/feeds
  • Live events
  • Co-branded spinoff
  • Cost Per Install (popular with top Facebook apps who can help others get installs)
  • E-commerce (selling stuff directly on your website)
  • Sponsorships (ads of some sort that are sold based on time, not on the number of impressions)
  • Listings (paying a time based amount to list something like a job or real estate on your website)  / Paid Inclusion (a form of CPC advertising where an advertiser pays to be included in a search result)
  • API Fees (charging third parties to access your API)

Forwarded to me by my brother - Unfortunately I don't know the original source -

How to make money on the Internet, Part 2: Linkfarming

This is part 2 in a series of posts exposing some of the more common "get rich quick" schemes people use on the Internet. Check out part 1, Keyword and adsense arbitrage.

How to make money on the Internet:
Part 2: Linkfarming

Ever wonder how Google chooses which sites to put on the first page of its search results?

It's actually not that complicated. At a very basic level, Google looks at which websites get the most links from other websites, and then says to itself "Hey, if all these thousands of people are linking to this guy, he must be pretty good". Hence, those websites with the most incoming links ranks highest on Google (Ok, this is an oversimplification, but this article isn't about SEO)

So, if one could command thousands of links on different website, one could - hypothetically - place any website they want on the first page of Google search results. Hence link farming was born.

Link farming is the process of creating a large quantity of websites (sometimes in the tens of thousands). Because it would be prohibitively expensive to actually create tens of thousands of websites, link farms are usually created with an automated process, which copies ("scrapes") content from other websites (Such as Wikipedia or Yahoo Answers). Advertisements are also place throughout the content as well, so the website can be monetized.

But an advertisement is useless if no one sees it / clicks it. Aye, here's the rub:

Once these thousands of websites built with copied content are created, they are then interlinked to each other to increase their "authority" in the eyes of the search engines.

So to review, thousands of websites are created using copied content embedded with advertisements. The "authority" of those websites is artificially stimulated via interlinking, thereby allowing them to appear fairly high up in search engine results page. Hence, they get visitors (as people may search for the content which was copied), the visitors see the ads, and the link farmer gets paid.

Another method of link farming is to use the farm to increase the positioning of a legitimate website. In these cases, advertisements are not necessary put on the link farm sites. Instead, each site has a link to the one external website which the linkerfarmer wants to increase the search rankings for.

How much money do people make from link farming?
Link farming used to be significantly more profitable than it is today. The major search engines have all adjusted their algorithms to make it more difficult to maintain a profitable link farm. That being said, due to the rising popular of text link advertising, many link farms are getting a revival, generating thousands of dollars per day.

Are link farms bad?
Like adsense arbitrage, link farming makes the Internet a worse place for everybody. It's also fairly easy to catch, as most link farmers do not have the resources to spread their websites over a large number of unique IP addresses, making it easy to identify them as "part of the same network".

Another issue with link farming is the "value" of a site's link is determined by that sites popularity: one link from the Internet's most popular site is more valuable than 1000 links from the least popular. Therefore, a giant link farm alone may not be enough to get to the top of the search engine result pages.

Finally, link farming is plainly against the rules of all the search engines. If you're caught, your website will get banned. With many alternative link building methods available, link farming is not the most effective way to increase the popularity of your website.

How to make money on the Internet, Part 1: Keyword and Adsense Arbitrage

I am regularly asked questions about online get-rich-quick schemes: how they work, why they work, and naturally, why don't I use them and then go retire in a Costa Rica villa. As this topic is a pretty sexy, I thought I'd dedicate my next few blog posts to some of the more common online money making schemes.

So, without further delay,

How to make money on the Internet
Part 1: Keyword Arbitrage

Let's start with the basics: what does "arbitrage" mean?
Arbitrage is a term used when someone exploits inequalities between markets to make profit. For example, let's say I am in the Canada, and want to go shopping in the USA. I go to my local bank, and discover the exchange rate is $00.98 CDN = $1.00 USD. So I take $98.00 CDN to the bank, and in return get $100.00 USD back.

I then take a flight into the US to go shopping, and notice that the currency trader at the Airport is paying $1 CDN for every $1 USD. So I give the currency trade my $100 USD, and get $100.00 CDN back.

I just made $2 CDN via arbitrage!

Now, Bring it online: Let's say I am advertising on Google, and they charge me $00.50 every time someone clicks my advertisement for web design services.
In order to try to find a better deal on advertising, I visit Yahoo to see their prices, and notice Yahoo charges $1.00 every time someone clicks an advertisement for web design services.

See the money making opportunity? If I buy clicks on Google for $00.50, and then send people directly to a page where I sell advertising on behalf of Yahoo for $1.00 / click, I could make $00.50! If I do this on 100,000 keywords, I could make $50,000!

That's the very basic concept between google adsense arbitrage / keyword arbitrage.

Now for a few quick question/answers:

Is it really that simple?
Nope, its not. There are a number of issues which have to be considered - for example, when you show ads on your website, you only receive a % of the click cost. Furthermore, the price you pay to buy click is not fixed, and can fluctuate based on a number of factors such as the content of your website. Therefore, if your website just contains advertisements, you may have to pay more money per click, which in return shrinks your spread. And these issues are just the beginning...

How is it possible such significant pricing discrepancies exist?
At the end of the day, even online markets aren't perfect. Some of the big issues are differences in pricing algorithms between PPC advertising providers and ignorance/laziness on the side of the advertiser.

For example, when advertising using Yahoo's Search marketing program, US & Canada traffic are lumped together as "North America". Many American online advertisers have therefore been advertising to Canada users by mistake, as they were too lazy to set their Yahoo accounts to do otherwise/unaware that they were doing so. Having US advertisers on Yahoo Canada artificially drives up the demand for advertising, and therefore the price as well.

In Google, US and Canada traffic is separate by default. Because of this, US advertisers don't generally show their ads to Canadians. Less advertisers in Canada mean less demand and therefore lower cost-per-click rates. Therefore Google Canada clicks were cheaper than Yahoo Canada clicks. Hence, you could buy a click on Google and resell it to Yahoo and make a profit.

How much money can people make from arbitrage?
I've heard stories of "friends of friends" making in the millions in profit per month, but haven't personally verified them. I have seen examples of individuals pulling in $10K + / month

Why don't the search engines / PPC ad networks stop keyword arbitrage?
Some of the big boys (i.e. Google) are now beginning to official discourage arbitrage. As to why they didn't sooner, its likely because keyword arbitrage makes them money. At the end of the day, their business is collecting a % of every ad transaction - Arbitrage artists not only increase the number of transactions, but also the price per transaction. Long term, too much arbitrage seriously harms user experience, which in return would lower revenue - hence why I believe they have recently begun to crackdown.

Why didn't/don't you do it?
Because money isn't everything. PPC arbitrage makes the Internet a worse place for everyone involved. It artificially drives up the cost of advertising for businesses (a cost which ultimately is passed onto consumers), as well as makes it harder for internet users to find what they are looking for.

I like to compare PPC arbitrage to that old scam where you remove a sign from the highway, and instead re-route everyone 2 minutes out of their way to your little gas station which sells maps. Sure, you're going to make a killing, and you're only going to be inconveniencing the drivers a little, but how are you adding any value to society? And if everyone did what you did, the highways would become useless, as no one would be able to get where they want to go on them.

Stupid TTC, cash is for money markets

And now, for a short off-topic rant:
I bike to work everyday, but not when it rains, as the area of Toronto where I work (Spadina and Wellington) smells like a combination of cat piss and dead fish whenever it rains.

So, as it was raining today, I took the TTC - Toronto's Public Transit System. It's gosh-darn expensive these days, clocking in at $2.75 for a ride that takes me - oh, maybe 20 minutes by bike to make otherwise. On weekends, its cheaper for me to drive and park (on city streets) in the downtown core than it is to take public transit.

As I normally ride, I didn't have any TTC tokens today. So, I went to a machine to buy tokens.

Red light flashing, machine not functioning.

I move to the next machine, same problem, but this time, there is a note taped to it! What's this? Ticket prices are going up again, so the TTC is limiting the number of tokens I can buy to prevent me from stockpiling?

Not only is this incredibly frustrating from an operational perspective (shut down machines = longer lineups at counters = longer wait time = more frustrated customers, like me), but what business in its right mind tries to PREVENT its customers from paying them in advance? I would love it if you would pay me cash for consulting services months before you use them. There are even some hugely successful businesses based purelyon that model. Time value of money people!

Now I know what all you economics/finance guys are thinking: maybe they don't have enough tokens in the system to allow for stockpiling? Maybe the fair hike is greater than the opportunity cost of not being able to put the money from stockpiled tokens in short term investments. Frankly, I don't have the spare time to try and calculate that out - but I encourage you to.

Also, please reply with anything else that peeves you / you admire about our otherwise beautiful city's public transit system.

Why venture capitalists aren't interested in ad supported businesses

Great article over at the Lightspeed Ventures blog about what it takes to generate $50 million in revenue from an ad-supported website (Fifty million was chosen as it is unlikely Lightspeed would be interested in investing in a company whose revenues top out before it)
O'Reilly sums up the goal as follows:

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