When Being Too Good Is Bad for Business

I'm an occasional fisherman and, while I'm far from an angling expert, I do know a few things about technique when it comes to catching certain varieties of fish. One particular type I've gotten pretty good with are striped bass. They're commonly found about five feet from the ocean floor, and the closer you get to that five-foot mark, the better your chances of hooking them. However, it's really hard to figure out your bait's depth unless you hit bottom first, so the best way to get right into that sweet spot is to go as low as possible and then reel up a few feet. Without taking the action of going too far, it's hard to get into the place where you can reap the most returns (fisherman's bragging rights included).

This technique isn't just good for bass fishing--it's a valuable lesson for your business. If you're running your own company, department or team, it's likely you're an overachiever who's constantly doing everything possible to avoid mistakes and reduce risk. Of course this is important, but there's a potentially harmful side as well. If you're achieving something too close to perfection, you're not only setting yourself up for something unsustainable and unrealistic; you're also likely to miss out on opportunities.

During my 20s, I was busting my butt trying to do everything right with a business I'd started that became the fastest growing company in America. I was suddenly being invited to events with top CEOs and determined to prove my place. Full of bravado, I tried to impress one particularly renowned CEO by bragging that my company's bad debt was less than a quarter of one percent in an industry where the average was just north of 1%. His response? "Kid, all that means is you are being too stingy with credit and losing sales." He was dismissive, he was judgmental... but he was right.

I decided to take a look at my business and see where I could test lightening up our credit standards. We did it in small steps--increasing credit lines here, approving a company or two there--and slowly watched our sales rise and our bad debt increase. We calculated profitability at each turn and it went up. We continued and then it invariably went down. It is important to find the apex of profitability to determine the optimal bad debt ratio and, in our case, it flirted with 1%. Lo and behold, that brash CEO was spot-on.

At my current company, Ultra Mobile, we are facing this situation in real time with our sales compensation. Most of our sales come through independent wireless stores that decide whether they should be pushing AT&T, Verizon or Ultra Mobile to their customers each month. Of course we always want them to be pushing us, but we can't just keep paying higher commissions. We decided to scale back a bit and watch what happened to sales relative to profitability. Voila, we were right: Sales dropped a bit and profits rose. Do we stop there? How do we determine the optimal commission? My suggestion is to keep doing it until we go too far. At some point, stores will stop advocating for Ultra, and then we'll need to "reel up" a bit and stop.

While these examples are specific to a certain kind of business, I think this problem of being "too good" exists in all industries. The most relevant and universal application I can think of relates to innovation. Innovation requires learning, which usually requires failure, so this is a perfect instance where being too good could cost you. One great tactic that is used in some media companies is the allocation of 95% of a budget towards "known" activities that have a high assurance of success and 5% towards unexplored ideas that might be great - or might fail miserably. It's a small enough portion to not jeopardize the business, but the winners get combined into the 95% over time and the overall ROI goes up. What's more, this small 5% often commands the majority of the talk time because it's interesting, drives learnings and insights and encourages dialogue. That's an important investment in and of itself.

Rather than always looking for weakest links in your business, be mindful of the strongest areas to ensure that they are not stagnating. Figure out which continuums are paramount to your company, then try reversing what you are currently doing in a very calculated way to see what happens. Are you too generous with your marketing budget? Reel it back one quarter. Do you pride yourself on how quickly your company turns its inventory? Test broader and deeper stock. You might even want to select your company's most successful metrics and reverse them for a limited time. You just may find you were too good at running your company and can be more profitable by easing up in a measured way.