How to build better products by betting small and keeping an eye on the race


The Grand National is a National Hunt horse race held annually at Aintree Racecourse in Liverpool, England. First run in 1839, it is a handicap steeplechase over 4 miles 514 yards with horses jumping 30 fences over two laps. It is the most valuable jump race in Europe, with a prize fund of £1 million in 2017 [1].

In the UK and Ireland, the Grand National is the most watched race of the year. It is an amazing spectacle to watch for the excitement, the fierce competition, the danger that comes with the massive fences and obviously to see if the horse we backed wins.

Every year, I put a small bet on one of the horses, but I don’t remember ever winning in my last 20 attempts. Predicting the winner on a field of 40 horses is not a simple matter, it is indeed very complex.

So many things can happen during the race that can throw even the most experienced and knowledgeable horserace expert. Among the things that happen during the race, changing weather and track conditions, the form in which the horse woke up in the morning, the training or lack thereof he had the week preceding, the horse in front of yours falling at the fence and bringing you down with him, the amount of drinks that the jockey had the night before, how distracted he might be from other thoughts in his head, after all his wife is divorcing him, the effect that the noise from the crowd has on your horse, and just about another million random events that could happen in those 5 minutes of racing.

Predicting a winner among the 40 participants is hard

But what if we could bet while the race has already started? Would that help us with our prediction?Well, yes. We could discard the horses that have fallen at the first fence, the unseated ones and the ones that have fallen too much behind.

That’s interesting, does that mean that now our chance of backing the right horse has increased?

Yes indeed and this does not only work for horse racing, it works for product development and innovation too.

Let’s imagine an organisation with €1M budget. Based on their understanding of the market they decide to invest the full budget into delivering “my shiny project” that again according to their understanding of the market will give them a return on investment when finished of €10M.

In gambling terms they are making a $1M bet on the “my shiny project” horse at 9/1 odds.

So what do they do? They use the €1M for assembling a team getting them the necessary resources to get the work done and do the work to deliver the project. While they are delivering, the race is on, but they are not watching it, they are busy building the project. Once they are done, only then they will know if their bet was a winning one.

If things go well, they might even get better odds as return, they might make $100M instead of 10, but history has thought us that this happens only in statistically negligible cases, while most of the time the result is that we have lost most of our money if not all of it. There are more fallers than winners at the Grand National year after year; and indeed there are more losers than winners, in fact on a field of 40, 39 lose, and one wins.

What can we do to help our organisation win the bet? Is there a possible approach that gives us the edge over other companies?

Oh yes, there are ways to help you win the race, let’s look at one example.

We take our €1M budget and allocate 9% of it to bet on the product we believe will win based on our understanding of the market and we pay an extra 1% to watch the race.

How do we watch the race? We invest 1% of our budget in tracking how our customers use our product with the intent of understanding what our customer really needs.

This would equate to spending €90k on betting on one horse and €10k on a live stream of the race we are betting on.

bets
Don’t bet all your money when you have the least amount of information

 

While we are watching we find out that our original horse has fallen at the first fence, and we also observe that another horse, we never thought could be the winner, is jumping very well and is at the centre of the leading group, a very good strategic position.

Then obviously we decide to invest another €90k betting on that horse and another €10k to keep on watching the race.

risk
Gain an unfair advantage against your competitors by watching how your customers behave and limit the risk of your bets

You can clearly see where I am going with this analogy. By limiting the risk of the initial bet and investing in observability I am gaining a clear advantage on the people that made their big bet before the start of the race.

 

In product development we can do this by making sure we create customer observability in our product to have a live stream view of the customer behaviours that informs our future bets.

Sources:

[1] https://en.wikipedia.org/wiki/Grand_National

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4 thoughts on “How to build better products by betting small and keeping an eye on the race

  1. Love the betting analogy, the problem I see is that many teams & organisation don’t even understand the cost, odds or the prize for the race. If you have a team of 5 developers it’s probably costing your company say 10-15K(probably conservative) a week in terms of pay etc. so every week you’re betting 15K that your the work your team will do will produce a return > 15K. The next time your team is having a discussion about what they are going to build talk about the opportunity in terms of revenue(prize) and the probability of winning all the prize(odds). Now ask the team what bet they would be willing to lay based on the cost of development(15K*number of weeks to build), ask them is there a way they could lay a smaller bet that would give us confidence that we were on the right track. Might be a fun game to play with teams to actually track their bets with fake money etc. over 3-6 months and see who makes the most money.

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