Small Bets: Large effects

Some small bets have larger effects. A retail store may add an additional checkout lane but it comes at a cost. There’s remodeling costs but also an opportunity cost. Floor space is zero sum. The best small bets are the ones with the best ROI. There are two places ‘Returns’ can be enormous; software and psychology.

When he was eBay Jeff Jordan had a problem. Growth was slowing. eBay was still great, people loved it, but not as much as they first had.

eBay gets lost in the shuffle when talking about early internet companies but they did a lot. Brian McCullough noted that eBay and PayPal settled the land called ‘internet commerce’ and normalized trust. It used to be weird to transact with people you didn’t know. Stars, ratings, and the internet enable trust to buy things through the mail from a stranger, get in a stranger’s car, or sleep in a stranger’s home. We can thank eBay for that.

To accelerate growth, Jordan and his team thought wondered if a Buy It Now button would work. They asked users what they thought and the users hated it. It would ruin the thrill, the charm, and the delight of eBay they said. The engineers tested it anyway. Those original users were right, they hated it. But all the new users loved it. It was a small bet. The code was pliable. If it bombed it was gone, instead the idea blew up.

Psychology is like this too. Rory Sutherland, Chairman of Ogilvy Consulting said, “Our mantra is, ‘Test counterintuitive things,’ because no one else ever does.” One way is to reframe something. When he was in the market for a home, Sutherland wanted something architecturally unique. He found a great place at a good price and bought it. His small regret was that it was on the second floor of a building and there was no elevator. That’s fine, now his house has a built in home gym - the stairs.

Small bets are all about the little things that can make a difference. Sometimes it’s a mental inquiry only to find something too hard. Sometimes it’s a financial cost like Sam Walton’s ice cream machine. Sometimes it’s around the ‘operating system’ and that’s where the biggest returns lurk.