How to Persuade Someone Who Is Hesitant to Change

People often act in their own self-interest when motivated by incentives. Benjamin Franklin emphasized the power of incentives in influencing behavior. In Poor Richard’s Almanack, he stated, “If you would persuade, appeal to interest and not to reason.”

Instead of charming them, he spooked them. Jerry, Gordon, and Steve feared that Howard would be disruptive. They decided not to hire him. Their rejection devastated Howard. It was a turning point in his life. His heart was set on joining Starbucks. Howard refused to take no for an answer.

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In 1961, Howard Schultz was seven years old. His father lost his job. Howard’s pregnant mother couldn’t work. Without income or savings, the family had to borrow money to make ends meet. Howard grew up in Brooklyn’s Bayview Projects. He pursued various jobs from a young age. After high school, he attended Northern Michigan University on a football scholarship.

Upon graduation in 1975, he worked at Xerox. There he excelled at selling word processors. Following that job, Howard secured a lucrative position at a Swedish company. They sold housewares and coffee makers through their subsidiary, Hammarplast. The company promoted him to general manager of Hammarplast for their US operations.

In 1981, Starbucks Coffee Tea & Spice was a small Seattle store. They placed large orders of Hammarplast coffee makers. This intrigued Howard. He visited and became enamored with its high-quality coffee. Howard wanted to be a part of Starbucks. He had big plans. Howard’s ambition was more than Starbuck’s founders and partners were ready for.

Part 58. Howard Schultz (cont.)

You can read this week’s TL;DR here.

Key Lessons:

• Don’t be a slave to your salary.

• Always be raising capital.

• People don’t like change.

• Appeal to self-interest.

• Raise the stakes.

Now there’s a collectible version of this newsletter! Methods of Prosperity newsletter number 21 is available to collect as of July 19, 2024. If you’re so inclined you can permanently own it!

It was the day after the Starbucks partners rejected him. Howard called Jerry back. “Jerry, you’re making a terrible mistake,” he said, “After all this time, we owe it to each other to isolate the issues. What exactly is the reason?”

People don’t like change. We like what we know and the uncertainty of change can be uncomfortable. We are resistant to new ideas. We tend to focus on reasons why the change won’t work.

Jerry and the Starbucks partners didn’t want to give Howard license to change the company. By hiring him, they would be committing themselves to a new direction for Starbucks. They believed Howard’s style and energy would clash with their existing culture.

Howard positioned his value as an incentive for them. He offered them an opportunity to take advantage of his marketing and sales ability. Howard’s experience managing a national sales force for Hammarplast was leverage. Howard Schultz has specific knowledge in enterprise level sales and marketing. Starbucks needed him.

Notice how Howard reframed the situation and raised the stakes.

“Jerry,” Howard rebutted, “this isn’t about me. It’s about you. The destiny of Starbucks is at stake. We’ve talked so much about what Starbucks can be. It’s your company. It’s your vision. You’re the only one who can achieve it. Somebody has to be courageous here, and it’s you. Don’t let them talk you out of something that you believe in your heart.”

Silence.

“Let me sleep on it,” Jerry responded, “I’ll call you back tomorrow.”

Howard didn’t sleep that night. The next morning, Howard picked up the phone on the first ring.

“You were right,” Jerry said, “I’m sorry for the twenty four hour impasse. We’re going forward. You have the job, Howard. You have my commitment. When can you come?”

Howard quit his high paying job and comfortable lifestyle in New York. He sacrificed his salary of $75,000, company car, expense account, and apartment. His wife would sacrifice her career as an interior designer. Her husband wanted to join a small coffee company in Seattle.

In 1983, Howard had been working at Starbucks for a year. The company sent him to Milan, Italy, for a national housewares show. During that trip, Howard discovered the Italian espresso bar experience. It seemed like they were on every corner. They were a vibrant part of every day life there. There was nothing like this in the USA. He had a revelation.

Starbucks was in the coffee business, but had overlooked this concept. The Italian espresso bars connected with their customers. Italians created a ritual around espresso that Americans lacked. The closest thing Americans had was the diner. Starbucks treated coffee as produce. Bagged and sent home with the groceries. What if Starbucks served espresso the Italian way?

His bosses at Starbucks weren’t convinced. To them, he was an over excited marketing director. They were hesitant to get into the restaurant business. Serving espresso, they feared, would dilute their vision of what a coffee store should be. The truth was that Jerry Baldwin wanted to buy out their competition, Peet’s Coffee & Tea.

Starbucks went into debt to buy out Peet’s in 1983. Their debt to income ratio was six to one. They became so over leveraged that there wasn’t enough cash left over for innovation. Experimenting with espresso wasn’t a priority. It took a year to merge Pete’s into Starbucks. In 1984, Jerry agreed to test out Howard’s idea. Starbucks opened its sixth store. Located on the corner of 4th Avenue and Spring Street in downtown Seattle, it opened in April. That’s where they introduced espresso drinks and the Caffè Latte.

Like a legendary explorer of the New World, Howard introduced Seattle to the Caffè Latte. Without any advertising, about 400 customers visited Howard’s espresso bar that day. At the regular Starbucks stores, on average, 250 customers visited per day. Within two months, Starbucks’ espresso bar served 800 customers per day. That location became a gathering place. He now had proof of concept.

Still, Jerry wasn’t convinced. Howard decided to leave Starbucks and start his own company. In 1985, Schultz founded Il Giornale. Jerry offered to invest $150K of Starbucks’ capital into Howard’s Il Giornale. “This isn’t a business we want to go into ourselves,” Jerry explained, “but we’ll support you.” Jerry also agreed to serve as director. Gordon Bowker agreed to be a part time consultant for six months. Gordon suggested the name Il Giornale, which translates to “daily”. As in, daily newspaper and daily coffee. Starbucks would become the first investor in Il Giornale.

That initial investment was encouraging, but it wasn’t enough. Howard needed to raise $1.7 million. He had no personal funds to invest, and he didn’t understand venture capital. He was hesitant to approach friends and family. To open the first location, he would need $400K in seed capital. Then he would need another $1.25 million to launch eight espresso bars. This would provide scale for his enterprise. He raised the first $400K by January. That enabled him to secure the lease for the first Il Giornale. The remaining $1.25 million was challenging. He rented a tiny office and spent all day every day raising money. That year, he approached 242 investors. 217 of them said no. Imagine that level of rejection.

The first Il Giornale espresso bar opened on April 8, 1986. Sales exceeded expectations, but it would be a long time before it made any profits. In the meantime, Il Giornale was burning funds. Money wasn’t coming in as planned. Howard needed to hit a certain amount of funding. He needed to raise $900K of guaranteed capital commitments. By June, an investor contributed over $200K. That provided a longer runway, but it still wasn’t enough. He had only raised half of what he needed. By August, Howard signed the lease for the second store and he didn’t know how to pay for it.

To be continued…

I like you,

– Sean Allen Fenn