Episode 111: The Secrets of Scaling with John A. List

Description:

Episode 111: Do you have creative ideas ready for implementation? Discover how to make your good idea great, and your great idea scale. In this episode, renowned economist John List joins Tom to discuss a process you can use to determine if your idea or business is scalable.


Pre-order Tom’s new book, “The Win-Win Wealth Strategy: 7 Investments the Government Will Pay You to Make” at: https://winwinwealthstrategy.com/


Looking for more on John A. List?

Website: https://voices.uchicago.edu/jlist/

Book: “The Voltage Effect: How to make good ideas great, and great ideas scale”

Twitter: https://twitter.com/econ_4_everyone

SHOW NOTES:

00:00 – Intro

03:38 – How Is Scaling An Art?

04:35 – What Ideas Are Easily Scalable?

06:09 – What Are Real-Life Examples Of Scalable Ideas?

10:31 – What Can Elon Musk Teach Us About Scaling?

13:34 – How Can Previously Un-Scalable Ideas Be Resurrected?

15:08 – How Do Systems Allow For Scale?

21:13 – How Can You Think Marginally?

Transcript

Announcer:
This is The WealthAbility® Show with Tom Wheelwright. Way more money, way less taxes.

Tom Wheelwright:

Welcome to the WealthAbility Show where we're always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility.

                So there are a lot of good ideas out there, but why is it that some ideas go big and some ideas just linger? And it's probably not because one idea is better than the other, but rather it's this idea that Elon Musk talked about just the other day about scale. And how it's about scale and systems. And we are so fortunate to have an expert in this, John List, an economist. He's the economist for Walmart. He's got an amazing background. Recently wrote the book that we see in his video there, The Voltage Effect. Nicely done John. So John welcome to the WealthAbility Show.

John List:

Thanks so much for having me and I look forward to our chat.

Tom Wheelwright:

Thank you. So if you would, John, just give our listeners a little of your background and how you came to write this book?

John List:

No, absolutely. So I'm a professor of economics at the University of Chicago's econ department. And I started a pre-K back in 2010 for three, four and five year olds. And after I received great results, I tried to scale it. And policy makers told me I was crazy because what happened in the Petri dish, there'd be no chance I would have the same level of success when I scaled it.

                So I started to do academic work around scaling. Now, what I learned was that as I was thinking about scaling that public program, what was going on at Uber at the time, I was a chief economist at Uber. This is around 2015. We had the same questions around scaling, and we had the same questions about whether an idea would work at scale. And I then harken back to my days, I worked in the White House in 2002, 2003. I was a senior economist for Bush two, and we had the same kinds of questions.

                We were wondering, “That policy looks great in Akron. Will it scale up?” And in all of these venues, whether it was my time in the White House, whether it was my time as an academic, whether it was my time as chief economist at Uber, it was the same sort of question, “Will that idea scale?”

                And I started to look into the literature and what I learned is people viewed scaling as an art. And what I mean by art is it was move fast and break things, throw spaghetti against the wall, and whatever sticks, cook it. Fake it till you make it. Tom that's art. That's not science.

Tom Wheelwright:

I love it. I love it. So you said something right there that kind of piqued my interest. And of course we're in a business that is working on scaling right now. So I'm very, very interested in this. And a lot of our listeners, our listeners are all entrepreneurs, so they're all interested. Most of them are interested in scaling, going to a bigger result, be able to serve more people.

                But you mentioned there what ideas can scale and what ideas can't. So has your study shown that there are certain ideas that just will never scale and there other-

John List:

Absolutely.

Tom Wheelwright:

… ideas that are really easy to scale?

John List:

Yeah, absolutely. So let's be clear. First of all, the book is primarily on the features or signatures of an idea that can scale. So the back half of the book is on execution and it's on what are the ways that you can use economic thinking to make sure that you're executing? The first half of the book is primarily on what are the signatures of ideas that can scale. And I break it down into five pieces essentially.

                And it started because I started to look at ideas that made it big. And I started to look at ideas that failed. And what kept coming up was that there was essentially one of five reasons why the idea failed to scale. And that's what I call the five vital signs. It's look at my idea, and if my idea has these five vital signs, then we have a chance for it to scale. As long as I execute.

                Now, if the idea does not have these five vital signs, I'm dead. Even if I execute in a brilliant way, it's never going to scale to the level where you want it to scale.

Tom Wheelwright:

All right. So I won't make you give away all the five, but I do want to hear at least maybe one or two, so-

John List:

All right, all right.

Tom Wheelwright:

… give us one or two.

John List:

Let's talk about one or two.

Tom Wheelwright:

We want a free sample here.

John List:

We want a free sample. So let me give you one example that happens a lot in government. And one example that happens a lot in the business world. So what happens a lot in government is a false positive. And this happens in the business world too, so I'll bring it up.

                A lot of times, people have a sample of data and it looks great. And because humans tend to have confirmation bias, what that means is, if I have an idea that I think is going to work every bit of evidence that comes in that's in my favor, I put a large weight on that. And every bit of evidence that comes in that's at odds with what I think I say, “Well, that's a mistake. There's no way that's true.”

                So these are called false positives. A lot of times when we get data, it's simply a false positive. And I start off talking about Nancy Reagan in chapter one. In Nancy Reagan's DARE program, you might remember Tom, and the audience might remember the Just Say No campaign. This was a famous campaign in the '80s that we spent hundreds of millions of dollars on. It was simply a false positive. It didn't have voltage to begin with. And they were duped into thinking it had voltage.

                So that's kind of one hurdle that you have to cross, is make sure it has voltage. Now, gosh, this is like choosing my favorite child of my eight children. But let's talk about restaurants. So I looked into the restaurant business. A lot of restaurants try to scale. They kill it with one restaurant and they say, “Wow, we have a million in EBITDA here. If we had a hundred of them, we'd have a hundred million in EBITDA. We're going to scale this thing up. Not only scale it within the local community, but also let's scale it across state lines and nationally.”

                Now what's interesting is if the original success was due to the chef, it will never scale. Unique humans don't scale. If the initial success was due to the ingredients and those ingredients are available at scale, you got a shot. So what the analogy here is that it's really hard to scale around unique inputs. It's super hard to teach other people to be a unique human. So if you want to go down that dimension, you need to somehow turn it into a process. That's your only shot, is if you turn that human or that unique input into a process that's available at scale, you got a shot. If you don't or can't turn that into a process, you're dead in the water. Those are kind of like two secrets of the first five.

Tom Wheelwright:

I love that one. So I want to jump off on number two there, the second one there, because when I look at something I'm looking for a pattern. If I can find a pattern, I can develop a process. Basically, that's the way I look at it. And so talk about that process or those systems, because that's what makes Uber unique. That's what makes Walmart unique. That's what makes frankly Tesla unique. We've heard a lot about Elon Musk saying for him, Tesla is not about batteries. It's not about anything else. It's about scale. And that scale was everything to Musk.

                And when you look at what he's done to a factory, to me, I think one of his most important contributions is not his batteries. One of his most important contributions is the way he builds his plants. He's literally to me, the Henry Ford of this generation, of this century. So talk about that and what is it that makes a system successful versus what makes a system fail?

John List:

Yeah. Yeah. So Tom, everything you said there is brilliant. And let me try to unpack a few pieces of that. So let's talk first about Musk. Now what's interesting about Musk and any great business person, is they always start on the supply side. And that's vital sign number five is understand the supply side of scaling. So every one of Musk's ideas begin with … They have great economies of scale. As I grow, it becomes cheaper and cheaper to provide the good or service.

                That's the supply side of scaling. Okay. So when Musk says, “I do this, I do that.” The key behind all of his ideas is the supply side. Okay. Now let's go to the process in humans and inputs. So, one thing I want to be clear about is I am not saying that you can't scale with humans, we've done that at Uber and Lyft. I was a chief economist at Uber. I was a chief economist at Lyft. We've scaled, and the key input is a human. It's one human, one piece of capital.

                And that scaled. It scaled because those humans are not incredibly unique. They're like me. They're normal people who can drive a car. And there are lots of substitutes for people who can drive a car. So you can scale with that. Now, Uber and Lyft, would've never scaled had you needed somebody like Danica Patrick to drive, because Danica Patrick is unique. She's a unique driver. Michael Schumacher for those people who are in F1. These are unique drivers that if you had to have them, it's not going to scale unless you can make it a process like an autonomous car. So you can maybe create an autonomous car to drive like Danica Patrick. So that's the key is to understand what are your non-negotiables, what are the reasons why you are making it in the small? And can I replicate those non-negotiables in a way that I'm developing economies of scale that allow me to grow bigger and bigger?

                So the key is if I can't replicate those, non-negotiables in a cost effective way at scale, I need to go back to the drawing board and figure out what is the idea that can use inputs that are available at scale? And now let's be clear, technology is coming along so very quickly, that it's possible that yesterday's idea that didn't scale … Like if I need a great computer programmer at a good price, that's becoming more available now.

Tom Wheelwright:

Yeah. It is.

John List:

And there were a lot of ideas that were scraped.

Tom Wheelwright:

Yeah, you have no code software. Now that- [crosstalk 00:12:50]

John List:

Absolutely, right. There are a lot of these ideas- [crosstalk 00:12:52]

Tom Wheelwright:

… basically allows anybody to program.

John List:

A hundred percent. So a lot of ideas that we've scrapped in the past that we can go back and revisit, and those ideas might now be scalable because of technological improvements. In ways that we do things. I can turn a human now into a process, that's a good computer programmer. And now that's no longer a unique element. So that's what I'm talking about here, Tom.

Tom Wheelwright:

That's really interesting in my business, especially, because I actually think you can have a computer do tax planning. So I noticed your smile when I did our introduction, way more money and way less taxes. Which, by the way, is actually how it works. We always say that the more money you make, the more tax you pay, but the more assets you have, the less tax you pay. And really for us, it's been a matter of, again, looking at those patterns. We look at patterns in the law.

                Identify the patterns. And then once you identify the patterns, you can put that into a computer process. That's what Uber, I think, was really brilliant at, was identify the patterns of driving and what are people looking for? And how do I make that simple? How do I even follow? How can I follow the car? So I know where my Uber driver is. I can see. I can see them coming along. I mean, we all do that. When we order an Uber, we're sitting there watching, where is this Uber driver right now? And it's that pattern that Uber followed to be able to make that possible.

John List:

No, that's right. That's right. And I think the other bit of magic that Uber and Lyft and rides share in general has, is that before they came along, it was really wait time was what's called the rationing device. And what I mean by that is you'd fly into Logan airport in Boston, or you'd fly into LAX, or you'd fly into Vegas, McCarram, and you would wait in line for 45 minutes or an hour. So it was, whoever would wait in line would get the car. So they had wait time as a rationing device and what Uber and Lyft did, which was brilliant, is they made price the rationing device. They made it a market. And now if cars get in short supply, we pay more, but we're able to get a car quickly because price is a rationing device and it's the market then that can scale. That's the beauty behind the idea.

Tom Wheelwright:

But that's a rationing device on the supply side, not the demand side. Because-

John List:

Well, I demand it though because I can pay it and I like a low wait time. So the reason why I demand it is because they're using price to ration cars rather than wait time. If they used wait time to ration cars, it wouldn't be an innovation at all. Nobody would care about it.

Tom Wheelwright:

Interesting. Interesting.

John List:

Does that make sense, Tom?

Tom Wheelwright:

Absolutely. Absolutely. So I'll get back to this in a second. Hey, if you like financial education, the way I do, you're going to love Buck Joffrey's podcast. Buck's a friend of mine. He's a client of mine. He's a former board certified surgeon and he's turned into a real estate professional.

                So he has this podcast that is geared towards high paid professionals. That's who he's geared towards. So if you're high paid professional, you're going, “Look, I'd like to do something different with my money than what I'm doing. I'd like to get financially educated. I'd like to take control of my money and my life and my taxes.”

                I would love to recommend Buck Joffrey's podcast, which is called Wealth Formula Podcast with Buck Joffrey. I hope you joined Buck on this adventure of a lifetime.

                All right. So you've got your five things you've got to look at, at the idea. Got that. Okay. Now we've got to create the system. How do you create a system? How do you make sure that system's going to succeed versus fail? Are there certain points that you look at as an economist? For example, when you look at scale of, okay, this system's likely to succeed versus this system that's likely to fail.

John List:

Yeah. Great question. So the way I think about it is, and this is getting in now to the back half of the book, which is on, after I launch an idea, or after an idea's been launched, how should I be thinking through my decision making? So the one thing that can give you the best chance to succeed is if you think like an economist.

                So when I say, think like an economist, chapter six talks about using incentives. And now an economist thinks about incentives, both in terms of prices, or money, but also in terms of non-financial incentives. And I talk about what happened at Uber with tipping. You know, a lot of people don't realize, but only 1% of people tip on every Uber trip.

                And three out of five people never, ever tip. So this is like a crazy fact, but then it gets more interesting if you look at those three out of five people who never, ever tip, if you put them in a yellow cab, the old yellow cab. You get in, at the end, you pay with cash or a credit card and you pay face to face and then you make the tip decision. Guess what? Now? 90 or 95% of people tip, even though they weren't before.

                Social norms, social pressure, social image, these are all features that play very importantly when we're trying to scale and make decisions in our org. So chapter six kind of unpacks that. Chapter seven talks about thinking on the margin. Now what I saw in the White House, what I see in the boardroom, I'm the chief economist now of Walmart. I've already seen it at Walmart. People tend to think in averages, not in margins. So what I mean by that is they get a bunch of data and they look at the averages of the data and then they make a decision. Where you're in the tax side you know this. Marginal tax rates are very different than averages.

Tom Wheelwright:

That's exactly what came my mind.

John List:

You're doing this all the time. You're trying to get people think on the margin, think on the margin.

Tom Wheelwright:

What's interesting is how little people understand that when I teach classes all the time on this to entrepreneurs, and I'll ask them, I'll give them an example of, let's say Susie gets a $5,000 bonus and it pushes her into the next bracket. How much additional tax does she have to pay? And sometimes they'll get back $8,000. I'm going, “Oh, so I got a $5,000 bonus, but an $8,000 increase in tax.” I'm going, “Yeah, well we're obviously looking at … Are we average tax rate going up or just our marginal tax rate?”

John List:

No, you're right. And this happens a lot in … I do a lot of work in charitable giving and I'm sure you get this a lot too. A lot of people think in charitable giving that, oh yeah if you give a hundred dollars, they don't understand that with the current tax rate giving a hundred dollars means it's really like giving 67. Or 63, whatever it is, they sort of feel that you get the whole hundred dollars back in tax. I get the whole hundred dollars- [crosstalk 00:20:24]

Tom Wheelwright:

It's a credit, not in a deduction.

John List:

Exactly. It's like, no, no, no. That's not how it works. You got to think about the marginal tax rate.

Tom Wheelwright:

Yeah. Yeah.

John List:

I've taught economics for a long time and I always teach average versus marginal thinking. But in theory it sounds right to students, but when they leave the classroom, it's really hard for humans to take learnings from one environment to another. And that's kind of what I try to do in this chapter is I try to say, “Look, here's a general way to think about marginal thinking. And if you just follow this kind of reasoning, which is really take thinner cuts of the data and those thinner cuts will lead you to marginal thinking. I think we can all be a lot better off if we do things like that.” So that's another way to think about, kind of where I'm going here to answer your question is, to me, ensuring success is about being a good, critical thinker. And being able to think about your decision making.

                And a lot of times that comes down to economics 101 thinking. For example, there's a chapter in the back half of the book that says winners quit. And we're always taught that we shouldn't quit. Tom, you were probably raised in this way. I was raised in the Midwest and I was taught that quitters never win and winners never quit. So society has taught us that quitting is repugnant and we don't quit because of that. Another reason why we don't quit is because we neglect our opportunity cost of time.

                So here's what I mean by that. I read a big survey of recent people who have quit their jobs here. Here are reasons why they quit. Reason number one, my boss no longer appreciated me. Reason number two, I didn't get the promotion I thought I deserved. Reason number three, I didn't get that pay raise. Reason number four, I got cross with a coworker. Dot, dot, dot, dot, dot, all the way down to reason number 10, I didn't like my cubicle.

                So the point here is every reason was my current job got soiled. That's the wrong way to think about life. That's part of the problem. The other part is my opportunity set got better. The job market got better and all these jobs came out and I was pulled, not pushed. We don't think that way because we neglect our opportunity set. We don't periodically look around what does the job market look like? Or what's that new apartment I could move to? Or is there a better city I could move to?

                We don't do that until we're pushed because we ignore our opportunity cost. And that's another reason why we don't quit enough. So I bring science to that question. And now you're kind of feeling the back half of the book is about decision making, but it's decision making not only for entrepreneurs, but it's decision making for everyone. It's like a self-help type of setting here in the back half of the book.

Tom Wheelwright:

I like that. So final question for you as we wrap up, one thing that our listeners could do right now in order to get ready to scale?

John List:

Yeah, I would say read the book is number one. Figure out does your idea have the five vital signs? If it doesn't, you still might want to scale it. It's just recognize that the tent isn't going to be as big is what you thought it could be. Or secondly, go back to the drawing board and kick the tires to see if you can satisfy the five vital signs. And then after you satisfy those five vital signs, go to the second half of the book and figure out here's how I'm going to execute. I'm going to be a good, critical thinker. And I'm going to think through how I'm making decisions and how I'm generating data. And that's how to lift off that rocket ship and make sure the rocket ship stays in flight for as long as it can.

Tom Wheelwright:

Awesome. Thank you very much. So John List, the book is, as we can see, The Voltage Effect. Great to have you, John, thank you so much. If we want more information about you or what you do, where do we go?

John List:

Gosh, if you Google John List, there will be a mass murderer who comes up. So I apologize for that. I'm not related to that person go down to about the third one. You can also find me on Twitter. I'm called econ for everyone. I'm also on LinkedIn and I have a bunch of connections on LinkedIn and I put a bunch of content there. And if you want to talk about Walmart, go ahead and give me any advice you have on how we can make Walmart better and how we can scale it. And from there you can just check me out on Google, I would say once you get past that nasty mass murder.

Tom Wheelwright:

Got it. Got it. Thank you. I love that we, first of all, have to figure out can we scale? Is our idea something that can scale? And then we can go into the looking at the patterns in the systems and in doing that so that we can scale. That's why I love the way you've broken your book down, here's the first half, and then here's the second half. Because when we do that, what I find as people scale is they actually make way more money and pay way less tax. We'll see you all next time.

Announcer:

You've been listening to the WealthAbility Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.