9 takeaways from the Passion Economy

During the epidemic, I read up on how to start and succeed as a small business owner. I came across Adam Davidson’s book, the Passion Economy, on a list of best non-fiction books. Even though it was over 300 pages long I devoured it in one evening. Here are 9 takeaways.

1. Figure out why you are interested in the Passion Economy

Passion Economy is a term that Adam used to describe profitable niche companies that big companies rarely compete with. Examples included OCHO Candy Inc, a candy with organic materials selling across the US, and Humu, a data-centric business founded by ex-Googlers to incentivize employees to stay longer. Both companies occupy a niche. Ie. OCHO competes against the Mars candy company, and Huhu goes deeper than anonymous data and offers “nudges” curated per employee.

I’m interested in the Passion Economy because I’m a content creator. I’m curious about how the future of content will be delivered and digested, give the ever shorter content lifecycles and the growing demand for quality entertainment. While there are the big content creators ie. the various streaming platforms, I wonder if there’s a way to bring together writers and moviemakers into a company that produces quality content, year-round.

2. There are two kinds of geniuses

The first kind are the Albert Einsteins: they make great discoveries, and their discoveries are difficult to understand for the average person.

The second kind are those who make the incomprehensible comprehensible.

I aspire to achieve the later kind of genius, by creating content to clarify the complex. An example of what I’ve seen is the Patriot Act, a Netflix show starring Hasan Minhaj. Each episode is funny, informative, and goes into political topics such as Elections and how Corononavirus broke America. I strive to be informative and funny, just like Hasan.

3. Separate value creation from value capture

Nike creates value by creating products with a large premium through celebrity sponsorships. Then it captures the value by sharing the premium via large advertising spend. This is a high cost, high margin example. The product is not the only deliverable; the consumer also desires the association with sports legends such as Serena Williams.

4. Pick your customer and pick your competition

To pick your customer, talk to 20 potential customers. See what their reaction to your product is.

To pick your competition find a niche that is poorly served by large companies. For example a garment manufacturer went after workers who needed fire-tolerant clothing, but whose clothes from DuPont were not breathable. When their workers took off the clothes during summer the companies were fined. Another example is a brush company that sold brushes to a nuclear power plant because its requirements were unfulfilled by cheaper brushes.

5. Let the price drive the costs

In the Passion economy, much of the cost is in the knowledge, creativity, and time to think. Charge a lot, then earn it. The price should feel good to you. Determine the value by having conversations with customers to see where they can most improve. If they refuse the service, you can ask what they went with instead. This also applies to employees; while the salary is the price, you can pinpoint special projects that only you can execute. The key is to avoid being a commodity because commodities compete on price, and price battles are a losing proposition.

6. Change value capture constantly, change value creation slowly

Going back to the Nike example. Nike creates sportswear, which is the value creation. It has multiple value capture methods, including creating custom shoes.

7. Revenue matters less than profit

It is refreshing to read a book about non-tech companies. Many tech companies follow a revenue growth policy while ignoring the bottom line. This book follows advice from Jason Blumer, an accountant turned consultant who advises companies to charge high and earn it. This means pursuing a more targeted customer base, forsaking the top line for high margins.

8. Add nudges to increase long-term happiness

Nudges is a behavioral concept: make the desired behavior easier to do than undesirable behavior. For example, automated contributions to retirement accounts led to more people saving for retirement.

At Humu, an HR data-centric business, the software nudges the manager at the time of the scheduling to pick from a list of available people, instead of asking whoever comes to mind. The managers are also nudged to have career conversations, increasing the likelihood of the frontline staff to stay at the fast-food restaurant longer. Each six-month stay contributes to a 1% bump in the bottom line; given most fast-food chains have a profit margin of 6%, a 1% gain is significant.

9. Manager as coach

The ideal manager is a coach that understands each team member and helps them achieve their goals. This is easier said than done since each manager is a link in a chain with someone else to answer to. Still, it’s a theory that I agree with and something to aspire to.

Summary

Overall I enjoyed Adam Davidson’s book, the Passion Economy. It gave plenty of examples of how to succeed as a profitable niche company in the twenty-first century. The basic framework asks these four questions:

1. What are the things I know how to do
2. Who would most benefit from these things?
3. How much would they benefit? Quantify the benefit in dollars.
4. How can I frame what I do so people can see the benefit and agree to price based on value?

I recommend the book to anyone who wants to study small businesses. It is a fast and informative read.