SELLING OPTIONS AND CATCHING CATFISH: THE LOGIC OF SELLING OPTIONS
How two guys found $55 million
Hurwitz was one of the first Lubavitchers Chanin hired for his new cash-advance brokerage, which he named Second Source Funding. The business took off. At the group home, Hurwitz bragged to Zeines that he’d made more than $15,000 in his first month selling loans. With no competition, Second Source could charge whatever it wanted. The standard deal it offered small businesses was to borrow $9,000 and pay back $120 a day for six months, or a total of $14,500, equivalent to an interest rate of 250 percent a year. That’s 10 times the legal limit in New York state, which made it a crime in the 1960s to charge more than 25 percent. To get around that, merchant cash-advance companies argue they aren’t actually charging interest—they’re buying the money businesses will make in the future, at a discount. As long as nobody uses the word “loan,” it usually holds up in court, says Robert Cook, a lawyer who advises the industry. Another no-no is chasing down an individual to collect if the business fails. Merchant cash advance is a supercharged version of “factoring,” the age-old practice of trading the right to collect unpaid bills in exchange for cash upfront.
Harvard Business School Confidential: Secrets of Success by Emily Chan
REFRAME
A young man asked a priest, “May I smoke while I pray? The priest answered angrily, “Certainly not.” Another young man asked the same priest: “May I pray while I smoke?” The priest answered, “Good child.”
Another story—as Professor Deepak Malhotra of HBS tells it— when President Theodore Roosevelt of the United States was campaigning for reelection in 1912, his campaign office made a brochure. The brochure included a picture of the president, together with information on his campaign. Three million copies were made, but only days before the brochures were supposed to be distributed, the campaign office realized they did not have the rights to use the picture. The rights belonged to a privately owned studio (call it Studio X). There was not enough time for a reprint.
The first reaction to solving the problem would be to send a representative to negotiate with Studio X as soon as possible. But this approach could have cost millions as copyright law allowed the copyright owner to demand up to a dollar a copy. What did the campaign office do? They sent a telegram to Studio X with the following content: PLANNING TO PRINT 3 MILLION COPIES OF CAMPAIGN SPEECH WITH YOUR PHOTOGRAPH. HOW MUCH ARE YOU WILLING TO PAY FOR OPPORTUNITY? Studio X quickly responded: APPRECIATE OPPORTUNITY, BUT CAN ONLY AFFORD $250. The campaign team accepted graciously.
These two stories illustrate the power of reframing (a concept also referred to as framing): gaining an advantage by changing the perception of a situation. Reframing is especially powerful if you can reframe to appeal to the interests of the other side of the negotiation. There are two ways to reframe: change the context of the situation or change the meaning of the situation. “Context reframing” means taking the same behavior, experience, or event but seeing it in a different context. The story about smoking and praying is context reframing. The behavior, praying and smoking at the same time, remains unchanged. What is changed is the context of the behavior—whether it takes place when one is smoking or when one is praying.
The story about President Roosevelt’s brochure has an element of “meaning reframing.” Meaning reframing is taking the same situation and context but changing what it means. The situation in the Roosevelt case is that the campaign wanted to use the picture from Studio X. The situation could be interpreted to have two very different meanings for Studio X. One meaning was this was another customer that wanted to use its picture. So the natural reaction would be to charge the campaign office. But the campaign office got Studio X to interpret the situation differently. Instead of “just another customer,” it was a privilege and a marketing opportunity for the studio. So the natural arrangement would be to ask studios to bid for the privilege. This is content reframing.
fyi this is nothing new. It’s an old trick in business (and in this case, the purchasing of properties).
This case below is similar in concept, and is from the 1960s. From Unit 1, Using Agents in Negotiations, Prepare & Plan Your Negotiation Strategy with Professor George Siedel at the University of Michigan via Coursera:
“Sometimes, companies for various reasons, don’t want the other side to know that they are in back of the deal and so agent A thinks that he or she is negotiating with agent B and doesn’t realize that agent B is secretly representing another side. This is a fairly common business tactic.
For example, there’s an American businessman named Walt Disney. And Walt Disney early in his career, made what he always felt was the worst business mistake ever. He built an amusement park in Los Angeles called Disneyland. And when he built the park, he bought 80 acres of land in Los Angeles. Problem was the 80 acres quickly began to be surrounded by other businesses, so he could never expand. And so, he vowed that if he ever built another amusement park, he would acquire considerably more than 80 acres. When he moved to Florida; therefore, he acquired, instead of 80 acres, 27,000 acres. About twice the size of Manhattan. Same size as San Francisco. And, to do this, he had to use secret agents because he knew that if the people selling the land realized that he was behind the purchases, property prices would skyrocket.
So, after he acquired the 27,000 acres, once word got out that he was behind the deal, prices jumped from $183 an acre to $1000 per acre. But by that point, he had his 27,000 acres. So he hired, again an army of secret agents. He hired real estate brokers, bankers, lawyers. He set up dummy corporations. A whole array of secret agents who infiltrated the Orlando area to acquire this land.
I’ve been told, I’m not sure if it’s true or not, that if you visit Disney World, and walk down main street, you’ll see the names of some of the dummy corporations that he created as secret agents on the facades of the offices on Mainstreet. (1)(2)”
(1) Verified as true: http://www.disneyparkhistory.com/the-florida-project1.html
(2) Additional source: http://en.wikipedia.org/wiki/Reedy_Creek_Improvement_District
What you’re seeing here is something similar to what Hare Krishnas do. Dr. Robert Cialdini talks about Hare Krishnas in his book “Influence” and how they are using a psychological concept known as reciprocation. He describes how the Krishnas, an Eastern religious sect comprised of “devotees – often with shaved heads, and wearing ill-fitting robes, leg wrappings, beads and bells” successfully grew in the number of followers as well as in wealth and property in the United States during the 1970’s. He sets the situation for the successful reciprocation tactics that helped this group amass wealth by stating “The average American considered the Krishnas weird, to say the least, and was reluctant to provide them money to support them.”
So what did the Krishnas do to overcome this negative bias?
“The Krishnas’ resolution was brilliant. They switched to a fund-raising tactic that made it unnecessary for target persons to have positive feelings towards fund raisers. They began to employ a donation-request procedure that engaged the rule for reciprocation, which … is strong enough to overcome the factor of dislike for the requester.”
The … strategy … involves the solicitation of contributions in public places with much pedestrian traffic (airports are a favorite), but now, before a donation is requested, the target person is given a “gift” – a book (usually the Bhagavid Gita), the Back to Godhead magazine of the society, or, in the most cost-effective version, a flower. The unsuspecting passerby who suddenly finds a flower pressed into his hands or pinned to his jacket is under no circumstances allowed to give it back, even if he asserts he does not want it. “No, it is our gift for you,” says the solicitor, refusing to accept it. Only after the Krishna member has thus brought the force of the reciprocation rule to bear on the situation is the target asked to provide a contribution to the society. This benefactor-before-beggar strategy has been wildly successful for the Hare Krishna Society, producing large-scale economic gains and funding for the ownership of temples, businesses, houses, and property in 108 centers in the United States and overseas.”
http://www.garyasanchez.com/what-hare-krishnas-can-teach-us-about-marketing
Dinner with Thomas Flohr, the private- jet mogul, began with a ruse. He was already seated by the time I arrived at the Milanese trattoria, where nearly all diners were squeezed two-by-two into white-tablecloth tables that nearly touched. Flohr’s table was different.
He had told the waiters we expected a third person to join us, so the staff adjoined a neighboring table to ours. An extra place setting was laid, along with an empty wine glass. When a bottle of red arrived at the table, Flohr told the waiter to go ahead and pour for the phantom diner. Perplexed, I asked who else was coming.
“No one,” he replied. “I hate small tables.”
Flohr wanted a buffer between us and the trattoria’s bustle, and concocting a cover story was merely his way of securing it. The price of privacy is something of an obsession for Flohr. His company, VistaJet, sells flights aboard private jets for an hourly fee, a business he aims to make as seamless and consistent as checking into a luxury hotel.
VistaJet’s Thomas Flohr: A collector with a view from the clouds
We’re off to Nobu, the fantastically expensive Japanese restaurant that was co-founded by Robert De Niro and whose celebrity chef, Nobusan Matsuhisa, is a friend of Mr. Flohr. A bottle of water alone costs £6, or more than $10. It turns out that Nobu is one of VistaJet’s caterers.
Nobu is just off Berkeley Square and is packed with wealthy patrons, although the place has a casual, buzzy feel about it. Mr. Flohr doesn’t like small restaurant tables, so he had booked a table for four even though we were only three.
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