This article is an excerpt from the Shortform book guide to "The Voltage Effect" by John A. List. Shortform has the world's best summaries and analyses of books you should be reading.
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Is your idea scalable? If so, what’s the best way to scale it over time?
In his book The Voltage Effect, John List uses the word “voltage” to describe the power and momentum of scalable ideas. He lays out a framework for building and preserving your idea’s voltage as you scale.
Continue reading for an overview of John List’s The Voltage Effect.
Overview of John List’s The Voltage Effect
Published in 2022, John List’s The Voltage Effect is an economics text designed to help you understand the characteristics of scalable ideas. Scalability is the capacity of an idea to transition from a relatively small initial audience to a much larger one.
List is a professor of economics at the University of Chicago and a former member of the President’s Council of Economic Advisors. With The Voltage Effect, he explains how to scale your ideas, whether you’re an entrepreneur, a policymaker, or simply someone with an idea that you think could benefit your community.
We’ll first examine List’s four red flags—the characteristics of ideas that are unlikely to scale successfully. (While List describes five negative patterns to avoid, we’ve condensed these into four red flags to avoid overlap.) Then, we’ll cover List’s strategies for scaling your idea.
The Four Red Flags
Scaling is the process of bringing an idea from a small audience or sample size to a much larger one. Many businesses, nonprofits, and individuals want to scale their ideas for a variety of reasons—to make more money, do more good, or simply to spread their ideas as widely as possible (or some combination of the three).
List details the characteristics to look out for when trying to figure out if your idea will scale. Ignoring these red flags and trying to scale the wrong idea can lead your enterprise to suddenly and dramatically lose momentum when scaling—List calls this a “voltage drop.” When an idea loses momentum at scale, you lose time, energy, and (potentially) funds, and the project collapses in on itself.
Red Flag #1: Lack of a Scalable Audience
The first red flag is the lack of a scalable audience. According to List, individuals and organizations often incorrectly assume that, because an idea is popular with its original audience, it will continue to succeed when scaled to a broader audience. However, if your original audience doesn’t accurately represent the larger audience you hope to scale to, you may find that your idea fizzles out at scale.
To determine whether your idea will have an audience at scale, you need to figure out who is in your current audience. The best way to do this is to test your idea in multiple markets that include a wide variety of demographic groups. Testing your idea as broadly as possible will give you the data to determine who your product appeals to, and why.
If your idea appeals only to select groups of people, and you still want to find a way to scale it, you may need to tweak your idea to have a more diverse audience. The key to broadening your audience is figuring out the needs that different groups of people share.
While having a broad appeal can help to scale your idea, your product doesn’t need to appeal to everyone to be scalable. What’s important is that you understand your audience and only scale your idea to markets where you’re confident it will succeed.
Misleading Results
When determining whether your idea has a big enough audience to scale, remain alert to misleading results. Misleading results, or “false positives,” as List refers to them, are data that overstate the appeal of your idea.
It can be tempting to believe in misleading results because of confirmation bias, a phenomenon in which people interpret new events in a way that reinforces their prior beliefs—if you believe in your product’s appeal, confirmation bias can make it more difficult to see the product’s flaws.
Misleading results occur for a variety of reasons. Often, misleading results arise from failing to sufficiently test your idea. List recommends that you replicate your tests to double-check their results, in addition to testing your idea in diverse markets. By replicating tests, you ensure that initial positive results aren’t flukes that occurred randomly or due to an unforeseen factor.
If testing indicates that your idea is likely to scale well, you can retest the idea by introducing it in just a few locations before fully scaling up production. If the initial result was accurate, and your idea is scalable, it’ll perform well in these markets. If your idea doesn’t perform well in these new markets, it’s a sign that your initial results may have been misleading and that your idea may not scale.
Red Flag #2: Dependence on Talented Individuals
The next red flag List advises you to look out for is dependence on talented individuals. Specifically, List argues that, if the primary driver of your success is the talent of one or several above-average performers, your idea will not scale. Ideas that depend on talented individuals fail to scale simply because it’s impossible to scale a human being—while you can continue to hire the best available talent, you can’t replicate an individual’s unique talents and abilities.
Just as talented individuals cannot be scaled, systems designed by exceptional people cannot always scale. List notes that technology developed and tested by especially talented people can sometimes fail to scale when implemented across an entire organization. This happens because tech experts don’t struggle with the same kinds of problems as average people. When new technology is only tested by the experts, those experts might fail to notice design flaws that hamper wider, less adept audiences. Testing new technologies with an audience that accurately represents the average intended user of your product can help mitigate this effect.
Red Flag #3: Unintended Consequences of Scale
Another red flag to look out for as you try to scale your ideas is unintended consequences of scale, or as List calls them, “spillover effects”. List notes that, at scale, ideas often produce unintended effects, both positive and negative. Failing to account for the potential negative effects of scaling can prevent you from successfully scaling your ideas.
List notes that unintended consequences of scale often occur because markets naturally tend to stabilize after being disrupted—because of this principle, when a new product enters the market, it may experience an inflated level of success due to its price point, its novelty, or other factors. However, as suppliers of similar products adjust their prices and offerings, and consumers adjust their spending and expectations, a new product’s initial advantages can diminish, leading the new product to gradually lose steam as the market readjusts around it. As a result, ideas that initially seem to be scaling well may wind up struggling in the long run.
The Unintended Consequences of Workplace Social Dynamics
Unintended consequences of scale can also stem from certain workplace dynamics. As you scale your organization, you’ll inevitably have to hire more employees. With an increasingly large workforce, the relative costs of social problems such as demoralization, poor communication, and employee turnover can become increasingly severe due to the effects of scale.
It’s also common to run into unintended consequences of scale when adopting a new network or system at your organization. Generally, even if a new system is more efficient and effective in the long run, your organization will experience lower productivity as individuals adjust to it. At a smaller organization, these setbacks may seem relatively minor. However, at scale, even slight changes in productivity can be costly.
The Unintended Consequences of Wage Transparency
A common source of unintended consequences is organizational policy around wage transparency. According to List, wage transparency can have a variety of positive and negative effects depending on how it’s implemented at your organization. To avoid the negatives and benefit from the positives, List recommends taking a considered approach to wage transparency.
List conducted a study on the effects of wage transparency to better understand which practices produced the best results. In the study, employees worked harder when they knew how much their managers were being paid, as they aspired to get promoted and earn those wages for themselves. However, when employees knew how much other workers at the same level were being paid, they became resentful and demotivated if any of their peers were earning more than them. Based on the results of this survey, the best approach would be to let employees know what the average employee makes one step up the ladder—that way, your workforce will have something to aspire to, without knowing what their peers make in enough specificity to become resentful.
Red Flag #4: Runaway Costs
List’s final red flag is runaway cost. Runaway costs occur when per-unit expenses unexpectedly increase as your organization scales. Generally, as you scale up a product, your unit cost should decrease, since you’ll be able to take advantage of increased efficiency and lower component cost, while overhead costs remain the same. However, if your idea’s unit cost increases as you scale up, it may not become profitable, leading your idea to fail at scale.
To avoid being blindsided by runaway costs, when calculating your costs and setting prices before launching a product, overestimate your costs to account for the unexpected. By overestimating your costs, your business can remain profitable even if you end up having to spend more money than you’d like.
List also recommends doing whatever you can to lower your overhead cost before your product launches. By lowering your overhead, you’ll be able to introduce your product to the market at the lowest possible price point, which will allow you to target a wide audience. Additionally, the lower your overhead costs, the sooner you can make them up and begin to profit.
How to Scale Successfully
Once you’ve gone through the author’s red flags and determined that your idea is likely to succeed at scale, it’s time to put your ideas into action. As you scale your idea, List recommends a few strategies to help give your idea its best chance to scale successfully: Set the right incentives, avoid the sunk cost fallacy, and build a positive organizational culture.
Incentivize to Win
List’s first strategy for successful scaling is setting the right incentives to motivate your team. List argues that incentives are a more effective focus than leadership style or personality when it comes to managing your workforce at scale. It’s better to focus on incentives than leadership style because as we’ve learned, talented individuals don’t scale, making it impossible to replicate the unique qualities of gifted leaders across your organization. However, incentives are much more easily scaled as blanket policies across your organization.
List recommends taking advantage of loss aversion when setting incentives. According to List, people are generally more motivated by their fear of loss than by their desire to gain. To take advantage of this element of human nature, pay out performance bonuses for a given period of time before the period begins, letting employees know that they’ll have to repay the bonus if they don’t hit their targets. When employees get the incentive up front, they’ll be more motivated to work hard to keep it, thanks to loss aversion.
According to List, social incentives can also be powerful motivational tools. As we learned when discussing List’s red flags for scaling, workplace social dynamics can impact performance. Social incentives make use of the interpersonal factors that motivate your employees. Specifically, List notes that people tend to work harder when they know that their performance is being monitored, in a phenomenon known as the Hawthorne effect. By letting your employees know that you’re tracking their performance, giving them clear targets, and offering them encouragement, you can take advantage of the Hawthorne effect to get the best out of your workforce.
Avoid the Sunk Cost Fallacy
In addition to offering the right incentives, as you scale your ideas up, List advises that you take steps to avoid succumbing to the sunk cost fallacy. The sunk cost fallacy is the human tendency to invest additional time and resources into failing projects in an attempt to salvage resources that have already been invested in the project. In these situations, you should pull out of the failing project, as doing so minimizes your losses and maximizes the time and resources you’ll be able to invest in more fruitful projects.
Don’t Be Afraid to Give Up
List offers a strategy for avoiding the sunk cost fallacy: Give up. To prioritize your best ideas, you need to recognize when an idea isn’t scaling and give up on that idea as quickly as possible. When you’re able to quickly give up on failing ideas, you minimize your losses and free up resources so that you can successfully pivot to another project.
When you think it might be time to give up on an idea, List recommends that you consider alternative ways you could spend your time and resources. If there are other ideas or features that seem more lucrative, exciting, or scalable, it’s probably time to give up and move on.
Identify Diminishing Returns
List notes that ideas that aren’t scaling properly often suffer from diminishing returns. Diminishing returns are a phenomenon in which profit margins per unit decrease as production scales up. As we learned when discussing runaway costs, for an idea to scale successfully, cost per unit needs to decrease as the business scales.
To identify diminishing returns, you need to interpret your data correctly. List notes that many organizations fail to identify diminishing returns because they focus on the wrong metrics—for instance, on the average profit per unit. Instead of focusing on your average profit margin, List recommends that you calculate the profit margin on the most recent unit sold. If it’s lower than your average margin, you may be experiencing diminishing returns. If this is the case, it may be time to give up.
Build Teamwork and Diversity Into Your Culture
Lastly, List argues that you should focus on building a sustainable culture while you scale your ideas. Specifically, List writes that cultures that embrace collaboration and diversity do well at scale.
As your organization grows, collaboration becomes increasingly important. When an organization is in its infancy, the drive, talent, and ideas of one or two individuals may be enough to propel it forward. However, as we know, talented individuals don’t scale. Instead, as your organization grows, its success will depend on clear and efficient communication within a larger group of employees.
To incentivize teamwork, List suggests assigning each employee to multiple teams, which will help ensure that ideas are shared across your organization and help employees invest in the success of the organization as a whole.
Along with collaboration, diversity helps organizations to succeed at scale. Diversity enables your organization to solve problems creatively, as individuals from a variety of backgrounds will naturally bring a variety of perspectives, ideas, and problem-solving tools to their work.
List argues that you must demonstrate a real commitment to diversity to recruit a diverse workforce. Specifically, List notes that diversity statements fail to attract many candidates when they’re not paired with policy and action. However, when organizations commit to hiring candidates from minority groups and simultaneously commit to treating employees well and fairly regardless of their backgrounds, word gets around, which leads more strong minority candidates to apply.
Be Accountable
List notes that, even as you try to build a positive culture that embraces collaboration and diversity, you will sometimes make mistakes. When these things happen, List stresses that the best thing for your organization is for you to take responsibility for your actions and offer an apology.
When offering an apology, note that money speaks louder than words. However, don’t be too quick to apologize, especially in situations that are likely to recur. Apologizing too frequently lowers the value of each additional apology, especially if you’re unable to fix the issue you’re apologizing for.
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Here's what you'll find in our full The Voltage Effect summary:
- How to take ideas from the small scale to the big stage
- The red flags that signal you may have trouble scaling up
- Strategies designed to increase your idea’s chances of success
