Adam Davidson understands how to tell business stories. As a writer for The New Yorker, co-founder of NPR's "Planet Money", and an award-winning economics journalist Davidson has spent the better part of his life neck-deep in the nuances of money-making.
However, his book, The Passion Economy, came as a result of what he couldn’t understand.
He kept stumbling upon businesses that were succeeding by playing the game… wrong. The teams were small, and yet they were building 7-, 8-, and even 9-figure businesses. They were providing the market with radical alternatives to traditionally "commoditized" products: pencils, candy bars, accounting services.
But what was even more impressive was how they were able to achieve these levels of success. The owners and creators weren’t stretched thin, burnt out balls of stress paying their workers the bare minimum. Instead, they were relaxed, creative, excited. They were charging more for their products than their competition (sometimes as much as 10x more), working fewer hours, and seeing more success as a result.
Davidson dove into this community and labeled what he discovered The Passion Economy – a new economy made possible by the internet, technology, and a global customer base. His book by the same name captures the stories and lessons he gathered in order to help aspiring creators and entrepreneurs build a passion-based business on their terms.
In this article, we’ll be taking a look at the 5 most impactful lessons that you can begin applying today to your creative work.
Lesson #1: Price Higher Than You Think
Value-based pricing is a common strategy for higher-end services that is slowly moving its way into the common language of creators. My favorite book on the subject, The Win Without Pitching Manifesto, is an excellent place to start if you want a strong introduction to the concept.
Davidson’s primary argument, in a similar vein to value-based pricing, is that individuals will lose if they compete like commodities (i.e., high volume and low price). Such a strategy is not sustainable. This is why creator-burnout is such a problem in the community.
During my time in the self-publishing world, I saw incredibly gifted authors pumping out excellent books every few months and selling them for $0.99. The royalty rate at that price is 35%. That means, for all their work, these writers were paid one quarter and one dime. The upside is that there is no cap on earnings; theoretically, any author could sell a million of these overnight. And yet, most don't.
Their high-volume strategy may have worked when the market was less crowded, but there are now an estimated 4,000,000 books published in the US alone every single year. This same idea can be seen at work in design (Fiverr), video creation (YouTube), and nearly every digital income that is based on high output.
Davidson points out the following foundational points about pricing for passion:
- “Price is emotional.”
- Stop charging by the hour.
- “Price is determined by the value it provides the customer, not by the raw material that is used to make it.”
- Bigger markets can support premium prices.
There is an excellent story in the book about Nike that illustrates a number of these points:
- people don’t necessarily buy Nike because they’re the best shoes but because of the social cues that result from wearing them (emotional);
- Nike’s markup, especially in the early days, was an order of magnitude higher than their competition (value-based vs cost-based pricing);
- shoes are a huge market; most people own more than one pair, which means there is room for a premium offering.
So how can you apply these pricing tips to your own creative work?
- If you still charge by the hour, move towards charging per project instead. This will give you more flexibility and the ability to charge more.
- Look at your closest competitors (who might your customer turn to as an alternative to you?) and figure out how to provide 4-10x more value so that you can charge 4x-10x as much.
- Crowded markets offer big opportunities for those who unapologetically stand out. Don’t shy away from competition.
Lesson #2: Your Customer’s Voice Should Be Loudest
Chapter 1 of The Passion Economy centers around Scott Stern. Stern is the David Sarnoff Professor of Management of Technology at MIT Sloan. He's interesting because, unlike many academics, he strives to uncover the practicality in all of his research. A good idea is only a good idea if it works in reality.
Stern provides a 4-step process for building a business in our modern creator-focused economy.
- Understand how your business adds and captures value.
- Pick your customer.
- Pick your competition.
- Get specific on value-capture.
Any of these above points deserves its own lengthy post, but the one we will focus on here for a moment is #2.
Most creatives are taught that customers are attracted. The creator creates, releases her creation to the world, and whoever responds positively becomes their audience and customer. Stern argues that this is out of order. Instead, customers should be chosen near the very beginning of the process.
If a business's purpose is to solve a specific problem for a target group of people, then of course it makes sense that those factors (the problem and the person) must be identified at the outset. Otherwise, the business has no direction, no strategy, and likely no revenue.
Customers can, and should, be chosen. Davidson found that a common theme in many of the passion-based enterprises he researched was that the founders and customers were value-aligned. For example, professionals who decline to charge by the hour attract customers who are willing to pay a premium for the product or service, as opposed to bargain hunters shopping for the cheapest and quickest solution.
Another example of value-alignment is the training facility ConBody founded by Coss Marte. Marte started his exercise business based on the bodyweight movements he learned while incarcerated. Davidson’s writes on this, “He was able to take the single most negative aspect of his life – his criminal conviction – and turn it into his core value.” As a consequence of full transparency, Marte has attracted a profoundly loyal client base while pushing away those who want nothing to do with an ex-con.
Passion economy adherents have the opportunity to do things large, established, commodity-focused companies cannot. They can do things that don't scale. They can capture niche audiences. They can build a sustainable business with fewer of the right customers.
Here are a few tips to help you get the biggest rewards by giving the most to your customers.
- Schedule a phone call or face-to-face conversation with every single one of your customers.
- Ask lots of questions, watch them use your product/interact with your service, “pay rapt attention.”
- List out your 5-10 of your core values and decide which of these makes sense as an attraction point for customers.
Lesson #3: Middlemen Make Money
Instacart was recently valued at nearly $18 billion. FedEx is easily 4-5x as big. And Amazon is one of the few companies to ever pass $1 trillion dollars in value.
What do all of these have in common?
They solve one of the core problems of our economy:
The seemingly simple challenge of getting things from a seller to a buyer has defined so much of what we consider the basic architecture of American life. – Adam Davidson
The internet is so powerful because of the connection it provides. A connection that is (nearly) free, instantaneous, simultaneous, and geographically unlimited. Companies and creators are using this connection to build businesses and facilitate incomes that were impossible only a decade ago.
But regardless of the changes in technology or economics, there is always a trend that makes money: middlemen. The companies I listed above have all achieve the heights of success because they solve the problem of physical connection. They deliver food, packages, books, and more to people, making money in the process.
Today, companies like Shopify, Squarespace, and Ghost are making money by equipping individuals with the ability to deliver their goods (digital and otherwise) to their audiences. Mars won the candy battle because of its distribution network (i.e., their ability to deliver further and wider than any other candy maker). OCHO, an organic chocolate maker covered in Davidson's book, is now able to compete on a national and global scale because of the advances in technology. They can sit on the same shelves as M&Ms and Snickers, reaching the same audience of consumers for a fraction of the cost.
I found this point extremely interesting because most of the conversation around passion and creativity focus on the two opposite ends of the transaction: the seller and the buyer. But, the problem of connecting these two still exists.
Google is the most successful middleman in the history of the world because they figured out how to best connect free information with the people who were looking for it. They became not necessarily an information highway but an attention highway. That attention is then monetized through ads.
As the passion economy evolves, the need for different types of middlemen will evolve with it. Connectors. Curators. Tastemakers. Digital deliverers, packagers, and distributors.
All of the companies listed above have solved the middlemen issue in hugely scalable ways. If we’ve learned anything from the businesses of the past, this means that there are plenty of opportunities downstream for smaller connectors and middlers to stake their claim. Here are a few ideas:
- Start a paid curation service like The Browser, but severely niche-specific.
- Create a channel (i.e., YouTube, Medium publication, Anchor podcast) where a large volume of various makers can contribute and earn. Your income will be a percentage of all total earnings – like a mass manager.
- Do what the big companies can’t/won’t do: are there products Amazon FBA won’t maintain/deliver? Are there creations that aren’t allowed on Etsy? Solve the problems behemoths aren’t looking to solve.
Lesson #4 Intimately Understand the Value You Create
Value = Whatever your customer thinks, feels, says it does.
This was a confusing concept for me to get at first, but once I did it felt as though my eyes had been opened for the first time.
Davidson illustrates this story with a failed shoemaker that is well worth reading. Here, I’d like to provide my own short case in its place. Chipotle makes burritos. That is their product. In a way, they are also a service business in that they create your burrito in front of you and to your exact specifications. Nevertheless, Chipotle is not in the burrito game. They’re in the fast-casual restaurant business game.
If Chipotle is closed, or too far, or lacking one of my favorite ingredients, my instinct isn't to look for another burrito restaurant. Rather, my instinct is to find the next closest food location that sounds delicious. They could serve sandwiches or burgers or chicken wings – it doesn't matter. Why? Because the value I was searching for was a solution to my hunger problem.
Yes, a burrito does that. But so does a sandwich or a burger or a box of chicken wings. If Chipotle focused on becoming the best burrito provider, they would have lost because they fundamentally misunderstood the value they were providing: good food at a reasonable price, quickly.
So many businesses fail because of this exact problem. They confuse their product and/or service with their value. Real value comes from understanding one’s customers intimately. That’s another reason why companies and creators that solve their own problem, or scratch their own itch, tend to grow exponentially faster than their competition; since they too are the customers, they’re much less likely to confuse the value they seek with the solution they provide.
Change your value capture constantly. Change your value creation slowly. – Adam Davidson
I’ve pulled together a few notes to help you think through your own value creation and capture stages.
- Never assume what something’s value is. Ask as many customers as possible to describe it in their own words and then use their exact words to sell it to new customers.
- Simplicity is a competitive advantage. How easy do you make it for someone to buy your product, engage your service, benefit from what you offer?
- “Tactics matter only if strategy is right.” – Everything is a distraction until product-market fit.
Lesson #5: Don't Fall Into Tech Tunnel Vision
This new creator economy is a byproduct of the amazing technology that has infiltrated our world over the last few decades. The internet is paving the way for a million new professions for billions of people. And yet, technology isn’t the point.
It’s the great enabler, making possible what was previously deemed impossible for so many. But Davidson is careful to point out the following:
Technology without solutions is always going to lose out to solutions without technology. – Adam Davidson
We must be careful not to champion tech for its sake alone. The point has always been:
- It should remove jobs we shouldn’t have to do (e.g., dangerous, dirty, repetitive).
- It should help us do important jobs better (e.g., medicine, law, education).
- It should create new jobs that didn’t exist before (e.g., programmers, content managers, influencers).
One of the best examples of this idea comes from the last chapter of Davidson's book, where he examines Humu, a company that largely created the field of people analytics. Humu uses the power of artificial intelligence to "nudge" employees towards measurable improvement. Whether it's helping supervisors with people management skills, upskilling entry-level employees, or equipping executives with improved financial literacy, Humu integrates the power of scalable technology with unscalable human uniqueness.
Computer technology, artificial intelligence, and automation don’t have to mean the soulless destruction of our individuality. They can achieve the precise opposite: passion-based organizations that promote individual happiness. – Adam Davidson
The future of the passion economy will bring deeper integrations between humans and machines. Rather than becoming the enemy of creativity, technology will become the engine of it. Subsequent advancements in AI and automation will also make the jobs of creators easier, less output dependent, and more easily differentiated (since the rote tasks of, for example, editing or posting will be largely handled by tech).
But many of these positive predictions can be experienced today.
- Bloggers, writers, and video content creators can use tools like AnswerThePublic to map out their content calendars for months in advance in just a few minutes.
- Tools like Stir make it easier for creators to collaborate by simplifying the split payment of their creative work.
- IFTTT provides millions of combinations for individuals to automate their processes and stop wasting time on repetitive tasks.
Suffering Is a Sign
Davidson closes his book with an excerpt from the essay "Economic Possibilities for Our Grandchildren" by John Maynard Keynes. Keynes was an economist credited with helping the world recover after World War II. The post-war period was a tumultuous time where many fell into "economic pessimism." But Keynes saw all of these changes as the foundation for a whole new world, a whole new age of prosperity.
"We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another." – John Maynard Keynes
Davidson makes the analogy that we are in such a transition once again. The economic suffering we see is not a sign that our grand experiment has failed. Instead, they are the growing pains of new abundance.
A new economy that champions the creator, cooperates with the consumer, and evolves our financial landscape from a winner-take-all to an all-can-win.
Welcome to the passion economy.