Conducting Business the Right Way: What's Legal Isn't Always What's Right

I recently attended a conference in Asia for entrepreneurs. A lot of the people I really look up to were in attendance at this conference – people who have done amazing things – and it was fantastic to meet some of them in person.

I wasn’t the only one excited to mingle with the superstars of online business; indeed, the most prominent online entrepreneurs are quite famous in our community and we all hope to emulate some of their success.

However, what struck me wasn’t so much the hoards of people hoping to follow in the footsteps of the trailblazers by putting in the hard yards and building something that has value, longevity and substance.  Instead, very often, too often; I encountered ‘fly-by-night’ operators, building their business empires on the sand of fads, junk and exploitation.

If a person builds a business by exploiting another person’s lack of knowledge – whether it’s selling them a website for $3,000 that they get built for $150 on oDesk or selling a ‘miracle’ supplement to help their anxiety, in full knowledge that it won’t – that is at best a sly, and at worst a morally bankrupt, way to build your empire.

If you feel you need to take advantage of people to make a buck, then you shouldn’t be in business.  On the other hand, if you are determined to stick around for the long-term and build something that truly helps people, then you should be able to charge handsomely for the value you provide.

I’m going to write in the abstract about actual businesses, without identifying information, to demonstrate what some of the most unethical entrepreneurs are doing.  And we stress that they aren’t doing anything illegal – just the modern-day equivalent of snake oil salesman.

Supplements and Miracle Cures

As far as products go, this is the area that most readily gets my goat. There is a time and a place for everything in life – including some supplements – but unless the person producing the supplement not only understands what is in it and how it works, but would gladly use it themselves, there are serious questions to be raised.

To my understanding, the global supplements market has been allowed to grow, largely unregulated, for decades. In the United States (and I’d like to point out this is all information I gleaned from experts at the conference, so I do believe it) as supplements are not considered food – or drugs – they fall into a regulatory black hole, under which they experience little to no regulation from the FDA.

And that doesn’t just extend to a requirement for the product to be safe for human consumption. There is actually no legal requirement to backup claims you make as the healthiness or effectiveness of what you’re selling people to put in their bodies.

There are definitely some legitimate supplements out there that are genuinely helping people, no doubt; but taken as a whole, the supplements market is a scam. It’s a scam in which the self-proclaimed ‘masters of the universe’ are reaping billions of dollars in profits every year.

I met a number of people who not only didn’t formulate their own products (they outsourced to a factory in China and then white-labeled under their own brand to sell through Amazon), but who didn’t even know whether their products had any benefits at all for their customers.

When we asked one such ‘entrepreneur’ about his powder supplement the question (which we thought inherently reasonable) “does it work?” he responded: “I don’t know, I guess it does because people keep buying it.”

That is the kind of value-subtracting morally unscrupulous behavior that we’ve often experienced with people in this industry. And it’s tragic, not only because their customers are suffering but because they’re giving the whole industry – legitimate players included – a really bad name.

I sat at a mastermind table with a couple of these folks and they spent a full hour talking over definitions of certain words they use on their packaging and how far you can push the envelope. At one point, one of the smug (I’m just going to say this) assholes at my table said “I’ve spent a lot of time on the phone with my lawyer, and he assures me I can put the words ‘all natural ingredients’ on anything I want.”

So yeah, in case you trust America’s proud labeling laws, don’t.

But that wasn’t even the worst of it. This guy had two products, one of which was a melatonin spray; the idea being that you spray it down your throat to help you get to sleep. Melatonin is a naturally occurring substance and does help you get to sleep. So far, so good.

Until he proudly announced to the table: “You only need 2 milligrams of it [melatonin] – in fact, any more than 2 can’t be absorbed by the body. But my competitors put 4 in theirs, so I put 5.”

That’s right – he’s putting 2.5 times the required dose of a chemical in his oral sprays, simply so he can market it as more powerful than his competitors. Any health consequences be damned!

This is what is so worrying about the current state of affairs in the supplement market. It’s the wild west out there and there is no longer a sense of personal accountability, let alone responsibility. As the word has become more corporatized and the internet has made commerce so much easier – and so much less personal – it’s easy for a young guy to start selling dangerous substances to people without comprehending, let alone properly understanding their impact on the end user.

But as long as he puts a disclaimer on the bottle, it’s ok, right? No, it’s really, really wrong.

While I was sitting at my table listening to these guys share marketing tactics and hail ‘Dr Oz’ as the be-all-and-end-all in their chosen field of endeavor (“there’s him – and then there’s nobody”), I did consider for a while looking into just how deep the fraud went, but independently came to the conclusion that I didn’t want any part of it. If you can’t beat them, sometimes discretion (i.e. spending your time on something you can actually impact) is the better part of valor.

So you can imagine how pleased I was when one of my favorite TV hosts, the ‘pull-no-punches’ John Oliver, took him on.

I’ll give you my highlight in a minute, but instead why don’t you view the epic takedown here?


Evidently, Oz has come to the notice of the US Senate recently, following the publication of a study by the British Medical Journal, which only found evidence to support 46 percent of his televised recommendations (that’s less than half for those of you keeping score at home) and contradicted 15 percent of them. A further 39 percent found insufficient available evidence to back his claims (but were not necessarily contradicted).

After a group of ten (actual) doctors from the Columbia University Medical School, citing his “egregious lack of integrity by promoting quack treatments” called into question his credentials and asked for him to be taken off staff there, Oz, rather than defending his qualifications invoked the First Amendment – arguing that by making the request, they were imposing on his inherent right to speak freely – no matter how many medical irregularities he wished to espouse. Very doctorly indeed.

Cue Mr Oliver, and my favorite part of the rant:

“No. You are scientifically wrong about that as you are about so many things. Let’s be clear: The First Amendment protects Americans against government censorship, and that’s it. It does not guarantee you to simultaneously hold a faculty position at a prestigious private university and make misleading claims on a TV show. It absolutely protects you to say whatever you like on it, just as it protects my right to say what I think about you on mine, which is this: You are the worst person in scrubs who has ever been on television — and I’m including Katherine Heigl in that. Do you have any idea how difficult it is to be worse than Katherine Heigl? You are also the admittedly handsome ringmaster of a middling mid-afternoon snake-oil dispensary and it says something that even when you do a show with seven fake models of human feces, the biggest piece of shit on the stage has his name in the title.”

This article isn’t supposed to be a takedown piece on Dr. Oz; the John Oliver piece did that far better than we ever could, but it goes to show that even the brightest shining light in the industry has a lot to answer for – and if the US Senate can’t even get the guy kicked off TV, then change is hardly around the corner.

In summary, to anyone out there wishing to manufacture and market a supplement, I’d just ask you to ask yourself one question: Am I truly adding something to the world that it needs?

If the answer is no, please move on – there are plenty of real problems in this world that need good entrepreneurs to fix.

Business Built on Information Asymmetry

The internet is supposed to be a democratic, free, society where everyone has equal access to information. Barring autocratic countries like China, this is largely the case.

But at the same time, cottage industries have sprung up around those wishing to get onto the internet, whose business model relies on the fact that their customers don’t understand the technology and terminology of the web.

A good recent example of this is my Aunt, who hired a local ‘expert’ named Graham to turn her manuscript into an ebook and create a website through which she could sell it.

Six thousand dollars later, she has an extremely basic, web 1.0 website – built on custom HTML with no CMS, no mobile responsiveness and a Facebook page, which apparently alone cost $1200 to set up. She’s also paying him $30 a month (prepaid a year in advance, of course) to have him host it. The ebook component, the part that actually required his skill, only contributed to one third of the cost.

Now, obviously I don’t blame her for the fact that she chose someone she trusted, and who she considered competent to do the job. I consider her to be a victim of information asymmetry; quite simply, if she knew that WordPress was free and that she could essentially build the website herself with all the components she wanted, would she have paid so much money for this?

Of course not – you’d be insane to do that.

Whether Graham understands platforms like WordPress or not is an open question, but the fact that he felt confident charging such an egregious amount of money for such a straightforward website setup, in today’s market (even for custom sites) is an example of – in my opinion – overt exploitation.

But the website wasn’t even the worst part. Perhaps you can justify charging $2,000 for an ebook setup – I have no issue with that, it takes a lot of time and you can see the work that goes into it.

Perhaps, if you agree with your client that you’re going to build a custom, unusable, HTML-coded site without a CMS, you could charge $1800 for it. Perhaps. In this case, of course, no such agreement was made, but if a client enters into an agreement having had all these things explained to them then there is no issue.

It was when he started making things up and saying things that were just patently incorrect that we became involved.

For instance, after having charged her $1200 for ‘web optimization’, without explaining what he meant by this, he requested more money to undertake work on SEO. As it transpires, we think the $1200 was charged to set up a Facebook Page, Twitter account and Google Webmaster Tools.

How he reached that number is clear – he called it ‘optimization’ and they didn’t understand what he meant, so assumed it was necessary and handed over the cash.

This is the crux of the issue – if you go to a doctor and he rattles off a bunch of long words before telling you to come back in two weeks, you’re entitled to assume he’s not just interested in making money off you. Why? Because he’s duty-bound and legally obligated to act in his patient’s best interest. No such obligation exists for web developers, designers, etc – which creates a perverse incentive to overquote, overcharge and over-promise.

Most of the time, they obviously get away with it. Graham’s reply to our email will go down in our memories as one of the most hilarious we’ve received in any context. Without directly responding to any of our questions or requests, he claimed to have been “insulted” by our audacity – to ask him for access to the hosting account and Facebook page, for instance – and to point out to him that placing content on Facebook will not, in fact, assist your website’s SEO.

The best part was when he demanded an apology before he would talk to us again – the man essentially lied to rip my Aunty off several thousand dollars and then demands an apology from us for being rude? We’d actually written a much more direct email first, then redacted the parts we thought were too direct before sending it. That won’t be the case in the reply.

Another good example (from the same Graham) was his assertion of copyright over elements of the site and ebook, but he’d happily assign his copyright in exchange for an additional payment.

That’s called blackmail, Graham.

But in any case you thoroughly misunderstand the nature of copyright law. If a person hires you for a specific task, then pays you money for your time and the end work you are not entitled to claim copyright in that work. Full stop.

Imagine the issues Pixar would have if their animators claimed copyright? Ha! Secondly, from the other side of the issue, you aren’t entitled to claim ownership of anything created while you’re being paid to work for somebody else. This is why the inventors of the Post-It-Note and Tetris didn’t get to live out a life of happily hedonistic luxury – their inventions never belonged to them (although there might have been a Soviet Union element to the latter as well, I concede, the principle remains the same).

Yes, Graham is a very good example of taking advantage of information asymmetry to do business the wrong way. But there are plenty of others, including some that I came across at this conference.

Pricing a good or service can be done in correlation with its cost, or with its value to the end user. That is, you can either figure out how much it costs to provide a good or service, add your desired margin on top of that and make that your final price – or, you can determine what the product or service is worth to the person receiving it, and price it accordingly.

There’s nothing wrong with either of these pricing approaches, provided they’re applied evenly to everyone – irrespective of their understanding of the product or market.

It’s when a person applies a third strategy that we run into ethical difficulties. This is what I’ll term the ‘opportunistic’ pricing model, and it relies on not the amount of value created for the end user, but an assessment of how much money they will be willing to pay for the service or product in the specific circumstances.

This leads to a situation where one customer who is perhaps less market-savvy will pay significantly more for exactly the same thing than the person next to them.

We encountered this on a bus tour in to the Great Wall of China. We booked online, paying the lowest amount possible – about USD15 each for the day. However, those on the bus that had booked through their hotels or over the phone paid multiples of this amount; up to USD60. It led to a spectacle when, at the end of the day, each person had to pay their allotted amount in cash.

What possible justification can there be for charging four times the amount for the same product? None, other than greed. And frankly, that is not how you build a trusting relationship with your customers.

The bus example is obviously minor, but when this logic extends to business consultants charging thousands of dollars for their services – and plucking numbers out of the air to charge – you can run into some ethical trouble.

Not that consultants shouldn’t be able to charge large amounts of money for a high-value service; of course they should – but it should be supported by some realistic measure of the volume they create. This can come from a plan for a client with a clear pathway to success, a strong track record of happy previous clients or milestones they have to achieve to justify the payments.

There are any number of ways you can be successful without taking advantage of people – and if you’re charging somebody more money simply because you think you can because they don’t grasp 100% what the actual value of your service is, then you are crossing the line.

Conversely, if you are able to clearly articulate the benefit of what you do and how it will help a person, then it’s a win-win and you would be doing yourself a disservice not to charge handsomely for the value you deliver.

It’s for this reason that the best consultants – strategists, copywriters, coaches – often work for a percentage of the return they help generate; this works well for both parties, as it requires them to work for their money but ensures that both get the benefit of success where it is created. Famously, Tony Robbins consults with one hedge fund manager on this basis and earns over a million dollars a year in commissions as a result.

The Third and Final Behavior

The third thing I’ll mention here, which I saw much of at the conference, was ‘fad-jumping’ – that is, people who build short-term, unsustainable businesses in order to turn a quick profit and move onto the next fad.

Teespring businesses are a good example of this; perhaps last year a lot of the people running them were affiliate marketers – and next year, they’ll be pimping dubious supplements or BPA-free water bottles.

Other than the supplements, there is nothing inherently wrong with selling these products and we don’t judge on the basis of product selection.

But…

There is a worthwhile question to ask here, which is similar to the supplement question above: “Are there already enough of these in the world?”

In the case of T-shirts, we would answer yes. There are plenty of people making T-shirts. We would say the same about water bottles.

So the real question for these guys should be: “How can I improve on this product and make life better for people”?

If you find a way to iterate on an existing product in a way that adds value, then that’s fantastic – you should be able to be rewarded for the value you created.

But if you’ve just taken an existing product, slapped your own label on it and put it to market, you haven’t created any value at all.

We saw another egregious example of this at the conference, with a brand that released a Kickstarter campaign for a wooden watch, raising over $120,000 before it came to light that they were simply re-badging a watch that was widely sold on Alibaba already.

After receiving a lot of negative press and destroying goodwill with their existing customers for their main product line, this company was forced to abandon the Kickstarter campaign and hand back all the money to the hopeful buyers.

Obviously, if you were one of the people who signed up to receive this exciting ‘new’ watch, you’ve got every right to be angry about the conduct of the company. For one thing, they have breached both the rules and the spirit of Kickstarter by using the platform to sell an existing product, rather than creating something new.

But secondly, they’ve taken you for a sucker because they know for a fact that you can buy the same watch on Alibaba for $10, but they’ll sell it to you for a hundred – typical information asymmetry marketing. I, for one, am glad they were found out and shamed as publicly as they were, because they were going to make all that money – and no doubt more – solely because of the fact that their buyers believed in their false promises. They would have been sorely let down.

You don’t have to be Elon Musk to make a worthwhile business. You don’t have to be making things that are fixing climate change, or improving recycling, or restoring sight to the poor. All of those things would be great, of course, but the contribution of most businesses exists in hiring, paying taxes and innovating solutions to the problems they face every day.

It’s entrepreneurship that got the world to the point where, today, you have more computing power in your watch than NASA did when they sent Apollo 11 to the moon. Making a business out of nothing is a really special thing and the power of entrepreneurship has driven human innovation for decades.

But if your contribution is a melatonin spray that doesn’t only give you twice as much melatonin as your body can absorb, but two-and-a-half times as much, then you’re not an entrepreneur – you’re a snake oil salesman. If you want some ideas for how you can use your skills to have a positive impact, then please do get in touch.