AUCTION-BASED PRICING CAPITALIZES ON OUR PSYCHOLOGY

Auctions are designed to turn selling an item into an instantaneously competitive process, pushing buyers to drive up the price in real-time rather than carefully assessing what an item is worth and paying for it accordingly. A seller can get a much better price this way than they would by negotiating with an individual buyer.

Auctions capitalize on two psychological tendencies: a habit of fixating on things we can potentially own and a hatred of losing things we possess. In effect, auctions create these two feelings several times over. A person places a bid and begins to picture themselves owning the item. Then, as soon as another bidder tops their price, they feel the sting of losing that same item and bid higher. This cycle tempts people to pay more than they normally would because losing feels intolerable at the moment.

Key Takeaways:

• The most popular marketing channels—especially Facebook, Google, and Amazon—leverage auction-based pricing that makes it easy to get caught up in a bidding war
• The auction-based pricing model benefits bigger brands with higher budgets, specialized consultants, and other financial advantages
• Partnership marketing is relationship-driven and outcome-based, avoiding real-time auctions

THE REAL COST OF OUTSOURCING

A wise man once said, " 'Tis better to distribute your eggs into several baskets than to put them all in one"--or something to that effect. And that's especially true if your only basket is 7,000 miles away in a country that could quite fairly be described as hard-line.

You'd think it would be obvious that sourcing your product, or major components of it, in China would eventually lead to trouble. Yet a lot of businesses continue to rely on contract manufac­turers in far-flung lands to churn out and ship parts for many, if not all, of their products. Well, 2021 taught anyone who counted on the so-called global supply chain a lesson. As Aretha Franklin sang so wisely in "Chain of Fools," "Every chain has got a weak link ... one of these mornings the chain is gonna break." Why are sage words so rarely heeded?

Given the media coverage, you might think that supply chain issues are the biggest hazard of manufacturing overseas. That may be true for very large companies that adhere to the risky principles of "just-in-time manufacturing." But, in fact, relying on distant factories for your precious products poses other risks that have the potential to wreak even more havoc on your business, especially if it's just getting off the ground.

Quality Assurance? Forget About It

Here's an example of what I mean: A few years after I sold Big Ass Fans, news outlets reported the recall of residential ceiling fans that had been made in China and sold through a Florida distributor at big-box stores nationwide. And not just a few fans, but nearly 200,000 of them. According to the U.S. Con­sumer Product Safety Commission, the recall stemmed from the fact that "the blades can detach from the fan while in use, posing an injury hazard to consumers"--in other words, a fan company's worst nightmare. Yes, defects can happen to products everywhere, but your ability to ride herd on quality control diminishes with distance.

Unfortunately, not everyone takes my sermon to heart. Too many founders remain convinced that manufacturing overseas is the only way to go, as central to launching a business as all the other mistakes they've been told is part of the modern business model: landing a big valuation, spending gobs on Facebook advertising, selling on Amazon, and hiring an agency to build a brand.

The main appeal of all of these moves is that they appear to be easier than the alternatives. Founders assume their product and brand will be in the hands of people much more experienced than they are and that, by ceding control, they'll have less to worry about. Meanwhile, I argue that if something's easy, it's almost certainly not the right thing to do, and that if founders are not in control, they're being controlled.

Before we started working with them, several of our partner companies at Unorthodox Ventures had experienced major--but entirely predictable--problems with their Chinese manufacturers. They turned to us to help sort those out, and because they had otherwise good ideas and good products, we were happy to do so.

One had serious quality issues from the get-go, having outsourced the product design to a contract manufacturer. As soon as the product reached the market, customers discovered serious flaws, as quality control seemed nonexistent. Until we fixed the production processes, our on-staff engineers began every day by disassembling the newly ­received gadgets, testing them, repairing if needed, and reassembling them.

You're Nobody Special

Another startup we worked with was left stranded because of a missing sensor that happened to be crucial for its consumer electronics device to work. By the time the overseas supplier came through, the contract manufacturer doing the final assembly was on a two-week break for the Lunar New Year, which led to a domino effect of additional problems. People clamored for their overdue orders, but plants were not going to operate during the holiday.

I've heard all the arguments for outsourcing, but they really boil down to three words: cheaper labor costs. There's no denying that people in the Far East put in longer hours for far less pay than American workers, and if your goal is to make something as cheaply as possible, that can be hard to resist. But, in the long term, outsourcing doesn't come cheap, and if your goal is to create a product and business you can be proud of, then long-term should be the only consideration. At Big Ass Fans, our focus was always on good, not cheap. We charged more for our product and found that our customers were always willing to pay more when they understood why.

And there's one more big problem with going overseas: If you're selling something that can be easily copied, the manufacturer will know exactly how many you're selling, how much it costs to make, and how to make it.

Keep in mind that unless you're a big business, your relationship with any manufacturer, anywhere, is bound to be lopsided: You're going to care a lot more about them than they about you and your intermittent orders. And, because you're not that important, there is less incentive for them to do a good job. Before you know it, you have fan blades flying off.

Maybe you'll be advised to pick a partner that is as concerned about quality as you are before you sign a contract. But, seriously, how in the hell are you supposed to do that? Do you really think a foreign manufacturer who barely knows you are going to care about your product? I'm not saying there aren't some good contract manufacturers out there. But, even with a good one, there's always going to be a barrier when you interact: Not only is there a chance that you will not speak the same language, but there will also be cultural differences that may be impossible to fully overcome.

Kiss that IP Good-bye

And there's one more big problem with going overseas: If you're selling something that can be easily copied, a manufacturer will know exactly how many you're selling, how much it costs to make, and how to make it. Its employees have access to your intellectual property--they know your product even better than you--and there's no way to guarantee it won't launch a competing product at a lower price because it doesn't have the other expenses you do.

One of our own partner companies woke up one morning to discover its electronic gadget for sale on Alibaba, with the same name and packaging. Yes, there's a long history of American retailers knocking off a supplier's product and undercutting that supplier. But at least you have access to U.S. courts, as Sonos did when it prevailed over Google for infringing on its IP for wireless speakers.

And let's not forget the geopolitical issues. Relations between the U.S. and China could hardly be called warm these days, which has led to tariffs and heightened concerns about tech security.

I'll admit it: I manufactured Big Ass Fans in Kentucky because I was, and am a control freak. If a product was going to be sold with my company's name on it, I wanted the production lines close enough that I could be a constant presence and that there would be no delay in fixing a problem once it had been identified. Proximity to our production lines and our suppliers was essential to maintaining quality control. The vast majority of our suppliers were within a six-hour drive, which meant we could jump in the car and look at their operations at a moment's notice. Being nearby allowed us to build the kind of relationships that are so crucial with vendors, one of the most rewarding aspects of doing business. You lose out on all that when you hire manufacturers overseas.

There's a well-known saying that cheap things aren't good, but good things aren't cheap. Again, why is it that we can recite proverbs out of the wazoo but refuse to heed them? The A-Team star Mr. T famously said, "I pity the fool," but maybe he should pity the wise man--and woman--even more. No one seems to pay them any mind.

Ultimately, every entrepreneur will need to decide which road they're on: the cheap or the good. But I can almost guarantee that if you squeeze those pennies too tightly, eventually you'll come up empty-handed.

If that's not a proverb, it should be.

BY CAREY SMITH, FOUNDER, BIG ASS FANS AND UNORTHODOX VENTURES

IN OUR AI FUTURE, PEOPLE WILL BE THE REASON MOST COMPANIES SUCCEED

Imagine trying to find a particular image within the National Football League’s historical archive of hundreds of thousands of videos. A single season produces more than 16,320 minutes (some 680 hours) of game footage. If you include coverage of every pregame, halftime, and postgame show, every practice, and every media interview, you have a seemingly endless amount of footage. And that’s just for one season.

To make it easier for staffers to create highlight reels and other media from all this material, the NFL partnered with Amazon Web Services in December 2019 to use artificial intelligence to search and tag its video content. The first step of the process required the NFL’s content creation team to teach the AI what to find. The team created metadata tags for every player, team, jersey, stadium, and other visually recognizable content it wanted to identify within its video collection. It then combined those tags with Amazon’s existing image-recognition AI system, which Amazon had already trained on tens of millions of images. The AI was able to use both sets of data to flag relevant imagery within the video library, and the content creation team was able to approve each tag in just a few clicks. Whereas employees once had to manually search, find, and clip each video, store it in a repository, and then tag the video with metadata, Amazon’s AI automated most of the process.

In a previous HBR article (“Collaborative Intelligence: Humans and AI Are Joining Forces,” July–August 2018), we described how some leading organizations are defying the conventional expectation that technology will render people obsolete—they are instead using the power of human-machine collaboration to transform their businesses and improve their bottom lines. Now several companies are not merely out-innovating their competitors with this approach; they’re turning even more decisively toward human-centered AI technology and upending the very nature of innovation as it was practiced over the previous decade.

In the NFL’s case, for example, AI accelerated the image-recognition process, but the system would have failed without employees determining which data needed to be uploaded and then approved. And the NFL didn’t simply hand the job of making highlight reels over to AI; content creation experts performed that work, but they did it faster and more easily thanks to AI’s unique ability to quickly sort through massive volumes of information.

The new human-focused approach to AI is changing assumptions about the basic building blocks of innovation. Companies such as Etsy, L.L.Bean, McDonald’s, and Ocado are redefining how AI and automation can knit together a wide range of cutting-edge information technologies and systems that enable agile adaptability and seamless human-machine integration. (Disclosure: Several companies named in this article are Accenture clients.) These path-breaking firms have invested in digital technologies at unprecedented rates to respond to new operational challenges and rapidly shifting customer demands. They’ve dramatically increased investments in cloud services, AI, and the like, and they’re generating revenue at twice the speed of laggards, according to a 2019 Accenture survey of more than 8,300 companies. A second study, of more than 4,000 companies in 2021, shows that the 10% making the biggest commitment to digital technologies are rocketing even further ahead, growing revenue five times as fast as laggards.

We’ve turned what we’ve learned from this research into guidance that business leaders can use to compete in a world where most companies will owe their success to humans rather than machines. Our IDEAS framework calls for attention to five elements of the emerging technology landscape: intelligence, data, expertise, architecture, and strategy. It can help both technical and nontechnical executives to better understand those elements and conceive of ways they might be woven together into powerful engines of innovation.

In this article, we use the IDEAS framework to examine examples of businesses that have implemented human-driven AI processes and applications to solve problems in e-commerce, online grocery delivery, robotics, and more. You can do likewise, marshaling the skills and experience of your own people to manage technological innovation in everything from R&D and operations to talent management and business-model development.

Intelligence: Make AI More Human and Less Artificial

Human intelligence and artificial intelligence are complementary. No machine powered by AI can match the ease and efficiency with which even the youngest humans learn, comprehend, and contextualize. Accidentally drop an object and a one-year-old who sees you reaching for it will retrieve it for you. Throw it down on purpose and the child will ignore it. In other words, even very small children understand that people have intentions—an extraordinary cognitive ability that seems to come almost prewired in the human brain.

That’s not all. Beginning at a very young age, children develop an intuitive sense of physics: They expect objects to move along smooth paths, remain in existence, and fall when unsupported. Before they’ve acquired language, they distinguish animate agents from inanimate objects. As they learn language, they exhibit a remarkable ability to generalize from very few examples, picking up new words after hearing them only once or twice. And they learn to walk on their own, through trial and error.

Conversely, AI can do many things that people, despite being endowed with natural intelligence, find impossible or difficult to do well: recognize patterns in vast amounts of data; defeat the greatest champions at chess; run complex manufacturing processes; simultaneously answer many calls to customer service centers; analyze weather, soil conditions, and satellite imagery to help farmers maximize crop yields; scan millions of internet images in the fight against child exploitation; detect financial fraud; predict consumer preferences; personalize advertising; and much else. Most important, AI has enabled humans and machines to work together efficiently. And contrary to automation doomsayers, such collaboration is creating an array of new, high-value jobs.

At Obeta, a German electronics wholesaler whose warehouse is run by the Austrian warehouse logistics company Knapp, human workers are teaching a new generation of robot pickers how to handle differently sized and textured items. The robots employ an off-the-shelf industrial arm, a suction gripper, and a vision system. Crucially, they are also equipped with AI software from Covariant, a start-up based in California.

To train a robot, Knapp workers put unfamiliar objects in front of it and see if it can successfully adapt to them. When it fails, it can update its understanding of what it’s seeing and try different approaches. When it succeeds, it gets a reward signal, programmed by humans, to reinforce the learning. When a set of SKUs differs totally from other sets, the team reverts to supervised learning—collecting and labeling a lot of new training data, as happens with deep-learning systems.

Thanks to the Covariant Brain software, Knapp’s robot pickers are acquiring general-purpose abilities, including 3D perception, an understanding of how objects can be moved and manipulated, the capacity for real-time motion planning, and the capacity to master a task after only a few training examples (few-shot learning). These abilities enable them to perform their job—to pick items from bulk storage bins and add them to individual orders for shipping—without being told what to do. In many cases, the items have not been precategorized, which is unusual for industrial packaging systems; it means the robots are learning how to handle them in real-time. This is a critical skill to have when dealing with electronics, especially when you consider the different care required to handle a light bulb and a stove.

To succeed in a commercial environment, robots must perform to a very high standard. Previously, Knapp’s robot pickers reliably handled only about 15% of objects; the Covariant-powered robots now reliably handle about 95% of objects. And they’re faster than humans, picking about 600 objects an hour versus 450 for humans. Nevertheless, they have not caused any staff layoffs off at the Obeta facility. Human workers, instead of losing their jobs, have been retrained to understand more about robotics and computers.

HOW DIRECT-TO-CONSUMER BRANDS CHANGED HOW WE BUY

In 2011, a pair of entrepreneurs challenged an industry ruled by a few giant companies. They did this by asking a question that changed business: Is Gillette really the best a man can get?

The pair were frustrated by the process of buying razors in a store where blades from giants like Gillette were priced so high that stores kept them in locked display cases. Betting that others were looking for a cheap, convenient alternative, the duo launched Dollar Shave Club and began selling razors and blades for as cheap as $3 a month and shipping them directly to customers.

Within a year of launching, they raised over a million dollars in seed money; within a decade, they had a $1 Billion valuation—disrupting the established norms of how we buy.

Key takeaways:

• The rise of DTC brands has made direct customer acquisition more valuable than ever
• Subscription brands can get a high lifetime value from a single customer
• The best publishers have figured out how to enhance their content and marketing placements to optimize the user experience and drive better results for brands