Economists can be the acceleration for any startup looking to grow fast.
One of the problems in the startups ecosystem in Middle East is their tendency to underestimate the role of social science specialists to drive growth for the company. Google, Amazon and others proved something special about economists. (You’ll read the stories in the article.)The typical hiring plan is get “rockstar” technical gurus to develop the product. They can also work on some business aspects to to grow the company .
You’ll never see them never hiring psychologists or economists because they can do neither tasks. I will change your mind. In this article, we’ll show how economists (and economics) can make a product better and drive growth.
What do economists understand better than team members with business or technical backgrounds?
Economics is an empirical science, focuses on testing theories, identifying mechanisms and understanding causal inference. Which means that economists have two main valuable skills: ability to assess and interpret relationships within data, and understanding and designing markets (and incentives). Let’s dig deeper into each. This can make them great analysts and engineers.
1. Economists as Analysts: Assessing relationships & working with data.
One of the main concepts in economics is understanding relationships between variables, which relationships are causal and which are not. To understand what works, what doesn’t and why.
For example, if we could see that a one star increase in restaurant rate on (Yelp) can increase the revenue by 5% then we need to figure out what can cause a one-star rate increase based on empirical analysis.
Economists also understand the relationship between short-term metrics (easy to observe, but doesn’t represent the company goals) and long-term metrics (hard to observe but represent company goals).
For example, what’s the relationship between email-open click rate and the company revenue?. How does (and how much) user-generated content frequency can increase the Customer Lifetime Value (LTV)?
In macroeconomics, They always think about intended and unintended consequences of policies and decisions. (That’s why economics is a dismal science, right?) We in tech economics should think about the same. Many startups fall in this trap by taking decisions without thinking of the unintended consequences.
Think about this example. If Google AdWords in the early days based its revenue system on maximizing revenue. They could’ve made ranking system as a traditional auction – pay high to rank high.This would maximize Google revenue but for how long? Months, a year, maybe two?
After a while, search results would be dominated by only those who have big budgets not by those who have answers for users questions, and why would then anyone use Google ? So, if every time I Google something and I find only irrelevant ads not what I look for, I wouldn’t use Google anymore. If Google auction design was based only on money, they would win on short term not on the long-term.
How did Google solve this, how did they design the online auction to maximize revenue on long-term? They asked an economist to answer! We’ll talk about it in details later.
2.Economists as Engineers: Understanding and Designing Markets
The most common college major between CEOs is not business, it’s engineering. There’s a reason for that.. Engineers have a unique way of thinking, based on solving problems by building new things or fixing the old. Engineers don’t talk too much about the problem like politicians.They go solve the problem then talk about it later. I think economists can work as engineers at startups to design better products.
As they taught us, microeconomics is about understanding how consumers and firms make decisions in markets. Economists have a deep understanding of how markets work using supply and demand frameworks.
An economics Nobel Laureate called “Alvin E.Roth” said that although supply and demand drive both stock exchange market and education market, they work very differently. Each market has different procedures.
For example in commodity markets, the price is the main factor of making decisions and it’s very simple, but in education market you find Harvard and Stanford University are competitors. very year thousands apply for both universities, but they accept few hundreds. The demand is much higher than the supply. Both universities should be happy, but why they are competing on the same few hundred applicants while there are thousands of them? Because the price (tuitions) is not the main factor in this market.
The Economists Magazine Test: More is More
Behavioral economist (Dan Ariely) says in his book that supply and demand is a fallacy, because it can be manipulated by setting decoy and anchor prices. A decoy price is like what The Economist magazine did at their subscription model.
- Website subscription was priced at $59
- Print subscription was $125
- Combined web/print subscription also $125
In an experiment by Prof. Ariely, he found that 84% chose the combined plan,16% chose the website plan and zero chose the print-only plan. if we removed the useless plan that nobody purchased, would it affect their decisions? Yes, after removing it, 68% of customers chose the website plan and 32% chose the combined plan.
By taking into consideration what the two economists said, we can say that economists can not only understand market, but also they can design it. – Market design is a new branch of economics based on experimental economics and game theory. Economists can design a market that have continuous increase in demand on the short-term and long-term.
Let’s take a step back…
Remember the Google AdWords Story?
In 2002, Erich Schmidt CEO of Google was reading a book about information economics, he was inspired by it then called the author and asked him to join Google as Chief Economist Officer (prof. Hal Varian). His mission was to design the online advertising auction system of Google in a way that increase demand and incentives for both users and advertisers. Furthermore, Microsoft had Prof. Susan Athey as Chief Economist officer to work on similar mission, plus other tasks like policy, regulations and investments.
Online Market design is about how to increase demand . It heavily exists on designing the perfect auction system like Google system, the right pricing model like (the economists magazine) and the right reputation system like (Yelp), taking into consideration that online rating/reviews is a strong variable in changing the demand curve as it builds trust between strangers: one-star increase on Yelp, increase restaurant revenue by 5%.
There are tons of business problems that requires economists to solve. Amazon has +150 PhD economists working on different issues and there are dozens of economists working at Facebook, Uber and Airbnb.
Here are the main positions that fits an economics background
Data Analytics: By using observational & experimental data to answer business questions. Economist data analysts are better than CS data analysts in the ability of identifying the business problem and asking the right questions. Beside that economists knew machine learning before it was cool (in studying econometrics).
Experimentation(A/B Testing): to answer product or platform design questions. Economists can manage the design, process and analytics around randomized controlled experiments.
Marketing Analytics: Evaluate the effectiveness of advertising, optimize marketing spendings and predict the success of advertising campaigns.
Product design: economists draw causal inferences from data: using difference-in-differences methods to evaluate impact of new product or feature. conducting experiments to guide product design or algorithms.
Public Policy: working on regulations and litigation issues plus helping to partner with policymakers, often through data sharing and analysis.
Seek to have a Decentralized Economist Team where every member has a specific role in Marketing, Finance or Product but work with different departments solving problems like pricing, partnerships, acquisitions, forecasting, market entry decisions, etc.
Should Wuzzuf hire a labor economist? Or that Vezeeta should hire a health economist? Should you hire one at your 15 employee startup? Probably you are not big enough to do it. But what you can do is to hire someone with a good economics background for the roles you need!
-Economists in Technology – Susan Athey.
-Predictably irrational – Dan Ariely.
-Economics of Matchmaking and Market Design – ALvin E.Roth.
-Insights on Google Adwords Auction System – Hal Varian.
– Why Economists make great data scientists – Matus Luptak.