Sometimes in the B2B world it’s easy to assume business decisions are driven solely by an ROI calculation, neatly tied with an Excel bow around a carefully curated formula. Or in the farm world, that every decision is justified by the output of the almighty shirt pocket calculator.
But in the real world, rarely can an ROI be fully captured numerically. Other factors impact decisions, including the psychological factors. I summarize this as Egos & Incentives.
Numerical ROI is necessary, but it’s not sufficient. At the margin, decisions are made based on their impact to our egos and incentives, including decisions about adopting new products, practices or ideas:
- Incentives: How does this help me achieve what I’m incentivized to achieve, what I want to achieve?
- Egos: How does this impact my view of myself and my place in the world, aka my ego?
We’re all out here responding to incentives, intentionally or unintentionally, doing the things to get the job, the bonus, the contract, the new customer, the promotion, the upsell, the renewal, the fill in the blank. And no surprise, we all have egos. Every last one of us, even those who say they don’t (perhaps especially those). The advertising industry is built around these fundamental truths of human nature.
And though it can be framed at an individual level, I believe it’s just as true at an organizational level because, of course, organizations are just big groups of individuals, still responding to egos and incentives.
Sarah Nolet & Matthew Pryor, partners in Tenacious Ventures, described this dynamic in the context of agtech adoption quite elegantly:
“The wine industry presents an illustrative example. Wine makers often contract the growing of some or all of their grapes to other growers. This makes sense to get to scale and mitigate risk, but this distributed production method poses serious challenges for managing the cost and quality of wine making. Despite the fact that good tools are available to assess grape quality and yield as harvest approaches, individual growers are not likely to take them up as the ROI for their business is not strong enough. For the wine maker, though, these tools are invaluable: over supply, under supply, and poor grape quality all have major financial implications for winemakers. In other words, though the growers are the users, the real beneficiary is the winemaker. Therefore, until winemakers create incentives, and perhaps even supply the tools directly to the growers, growers are unlikely to adopt and the benefits from far greater visibility of the yield and quality of the coming harvest will remain unrealized.
Another notable characteristic of agtech 1.0 was that as this dynamic played out again and again, agtech companies (and their investors) blamed the farmers! Agtech conferences and industry reports featured claims about “laggards,” pointing fingers at the users for being “traditional” and “resistant to change” in an industry “based on handshakes.” In reality, the problems were with business models and incentive alignment.”
Their example describes the
exact dynamic that trips up so many technology creators in livestock. The sentiment from creators goes something like this: ‘We made this widget for producers that is really beneficial to everyone but only kinda to the producer. Also we built our business model so the producer pays for the product and the rest of the value chain gets the value. Also also it’s SO weird how producers aren’t interested in our technology, what laggards🙄.’
The fundamental question to ask about new products is,
where does value accrue and where is cost incurred? If the packer accrues the value but the producer incurs the cost, well….that’s probably not going to go well because incentives are not aligned. The challenge of incentive alignment is why business model innovation can be just as high impact as tech innovation, if not more so.
This dynamic extends from adoption of new products to adoption of new practices. Silver Fern Farms, New Zealand’s largest meat processor, recently announced their planned launch of Net Zero Carbon Beef. The most interesting part of the story was this little line:
“Silver Fern Farms is committed to supporting our farmers to contribute to these goals, through knowledge transfer and
Did you catch that phrase missing from most announcements around carbon/sustainability/any type of change requested of a supply chain?
I asked Nick Rowe, Innovation Manager at Silver Fern Farms, for some background on the program. Here’s what he said:
“When we derive an in-market premium we will share that value with the supply chain (consumers, customers and farmers) on our path to a regenerative future. Without the incentive, it’s hard to drive change. People won’t change the way they do things unless they are incentivized to do so. We are launching net zero carbon beef that makes sense commercially.”
That is the most effective model to drive behavior change in a supply chain, regardless of the behavior.
All that said, what ARE producer’s incentives? The universal incentives are around generating revenue, increasing pounds or increasing $/lb, maintaining a customer, growing market share, etc but of course every individual producer has unique incentives and is prioritizing those incentives in a unique way. Related: feeding the world is not on anyone’s incentives bingo card, neither is curbing climate change or any other macro good. That’s why those macro problems have to be broken down to
specific problems for specific someones, or specific incentives for specific someones.
Which brings us to ego. In agtech where ego can become a road blocker is around decision support tools. IMO these are some of the most challenging products to sell because in order for the product to be high value, it has to support high value decisions. And
high value decisions tend to be high risk decisions. And
high risk decisions tend to be deeply personal, whether a decision to sell a 1 billion bushels of corn or 10 weaned calves.
Excerpt from 👆🏼 this piece:
I once asked a feed yard manager if this (when to sell cattle) was a decision where analytics could help drive a more precise & profitable decision. His reply was “probably not, we’re good at this decision.” I asked how they know if they made the optimally timed decision and he replied “well, did we make money?”
And THAT is the fatal trap for any analytics product. If there’s no control to compare against, how does the user know what money has been left on the table? If the opportunity cost is undefined, how does the prospective user determine if an analytics tool makes them any better at making the difficult decisions than the hard earned insights from the school of hard knocks? The burden of proof rests on the innovator.
That excerpt describes the value proposition challenge for decision support tools, but in my experience there are always ego impacts to consider – whether it’s the software tool to help asset managers make better trading decisions or the software tool to help the crop farmer determine the optimal time to irrigate. The ego objections are usually some variations around
relevance (does this tool make me or my hard won insights less important in the world?) and
skill (how will my team build their hard won insights if they have tools to help them?). (Though the skill objection is like people back in the day worrying that kids will get worse at math if they use a calculator.)
Creators of decision support tools have to take into account the ego considerations in everything from product design to marketing.
Here’s the second part of Nick’s comments that struck me:
“Net zero carbon beef is really an extension of our journey to provide consumers with branded meat they can trust is better for them and ultimately the planet – it was the natural next step
. When something is hard and we don’t have all the answersit takes people with a
pioneering ethosand a company that is
not scared of leading, to take charge and drive change.”
Yes, “we’ve always done it this way” is real and maybe it is more prevalent in ag than other industries – though I’m not entirely convinced that’s true. But the forward thinking, innovating early adopters are also real. And the burden of adoption rests on the creators of new products and the food companies who want to drive new practices to make their value proposition relevant by accounting not just for ROI, but also for egos + incentives.
P.S. If you like thinking about the traps around how businesses or industries structure incentives, then you’ll love this piece from The Hustle.
In the short run, change involves risk. In the long run, not changing often poses more risk. Over time, failing to evolve is a recipe for mediocrity and obsolescence. When you weigh the immediate costs of changing, don’t overlook the lasting costs of clinging to the status quo.
Welcome to those of you who are new to Prime Future! Many of you found this newsletter through Shane Thomas and his newsletter, Upstream Ag Insights. I highly recommend subscribing to Upstream Ag Insights if you don’t already – he writes on all things agtech on the crop side of the industry with a lens on agribusiness strategy.
I’m interested in all things technology, innovation, and every element of the animal protein value chain. I grew up on a farm in Arizona, spent my early career with Elanco, Cargill, & McDonald’s before moving into the world of early stage startups.
I’m currently on the Merck Animal Health Ventures team. Prime Future is where I learn out loud. It represents my personal views only, which are subject to change…’strong convictions, loosely held’.
Thanks for being here,