All posts in Mental Models

Journalists don’t get excited about new products and features the same way an entrepreneur gets.

This is because:

• First, a journalist gets hundreds of pitches every day and a particular product launch announcement is no different than the many hundreds of launch announcements sitting her inbox.
• Second, aliens visiting Earth is news but your product’s new feature is certainly not news. 

News is something that caters to basic human curiosity about the new and surprising. There is a reason why one death in a tragic car accident gets covered as news but thousands of deaths every day due to preventable diseases in poor countries don’t make it into the news. The former is surprising. People want to know how that particular accident happened. The latter is a statistic, a daily occurrence that people are familiar with and after a while becomes pretty boring to read. ...  Read the entire post →

Entrepreneurs generally confuse their 30 second pitch as something that needs to be about what they’re doing. This interpretation is understandable because usually anyone they meet ends up asking them what they do and the entrepreneur faithfully launches into her pitch.

Unfortunately, such a pitch often ends up with the listener quickly losing interest.

This is because even though people ask what you do with good intentions, they usually do not actually deeply care about what you do. What people care about is themselves, which suggests that a pitch should start and end with them and revolve around the world they live in.  ...  Read the entire post →

Mark Zuckerberg famously said that there’s no point in monetizing a consumer product unless you have a billion users. Consumers are habituated to getting digital services for free. This makes monetization for consumer products very tricky. Try recalling all the digital products or services you pay for as a consumer. In all likelihood, there won’t be too many as increasingly music, news, movies, productivity apps, and games are all free.

Businesses, on the other hand, prefer paying. For consumers, their salary is a cap on how much they can earn, so they can’t increase their monthly costs indefinitely. However, for a business, if an additional cost helps them grow their revenue and profits, they will happily pay for it. So, businesses are used to buying expensive stuff if they see returns from it.  ...  Read the entire post →

There are only a few dominant social networks because consumer markets are prone to winner-take-all effects. There are multiple reasons for this.

First, consumers want stuff for free or cheap which drives consumer companies to expand aggressively so that they can amortize their fixed costs over many such users.

Second, consumers want to conform with other consumers so inherent virality in products gets built-in. Once, a minimum threshold of consumers adopt a product, this word-of-mouth virality ensures the product becomes an obvious choice for the remainder of consumers left in the market. If you have Uber that all your friends are using and it has all the drivers in your city, why would you try something else? ...  Read the entire post →

Many failed B2C products might have worked out if consumers had the patience to understand what the product might do for them. But consumers are impatient and if the value is not delivered immediately and continuously, they stop engaging and abandon the product that could have been valuable later.

History is filled with complex gadgets with thick user guides that have failed spectacularly.

In contrast, for B2B products, the customer is habitual to getting sold. In fact, they prefer a sales process where a human explains to them the benefits and costs of the product. This preference to being sold allows an entrepreneur to communicate the total benefit of her product in a way that’s impossible to do in the B2C world.  ...  Read the entire post →

Most consumers at any given moment are more or less satisfied with what they have. Since we’re creatures of habit, we tend to go to the same restaurants that we like, buy the same stuff as we’ve always done and live our days without significant deviations. We’re less exploratory than we’d like to think.

This is because there’s a cost of change. Whenever we are trying a new product, we’re incurring a cost (of effort, time, or money). And, we go to great lengths for avoiding these costs.  ...  Read the entire post →

The price of products determines all other components of the business. This happens because price influences the number and type of available customers in the market (higher the price, lower the number of customers and the corresponding premium positioning that’s required).

This in turn determines:

• the distribution channels you need to tap in order to reach the target market,
• cost of customer acquisition,
• cost and nature of sales and service process, and
• all that in turn determines the organizational structure.

In short, setting the price of a product is akin to choosing a highly specific playbook for building your business.

This tight relationship between price and business model suggests that a mismatch between the two means failure. The most obvious case is keeping the price low for a market that has a limited number of customers. The limited revenue opportunity means that a startup can easily get killed by costs. The other case is keeping a price higher for a market that has a very large number of customers. In such cases, competition usually drives the price down and a higher price usually means slower or no adoption of that product which can result in failure. ...  Read the entire post →

It’s hard for people to know how much they should be paying for a particular product. Evolution has trained us to be skeptical of strangers’ claims. By default, people will always feel they’re getting ripped off. So, instead of evaluating rationally, people resort to their gut feeling, which is informed by the perceived alternatives for the offering. Hence, the positioning of a product becomes the main criteria by much price is judged by people.

But it’s also the other way around. Especially for new brands, price serves as an anchor to the customer for deciding which category to slot the product in. For example, the price of a newly launched car slots it either in the luxury or the mid-range or the budget market. It matters less if the car is actually luxury or not, but if the price of the car is similar to Mercedes or BMW, the expectations of the consumer and their willingness to pay will be similar to Mercedes or BMW. ...  Read the entire post →

Businesses don’t exist to make revenue, they exist to make profits. But the lure of revenue is hard to resist. It’s natural to admire the billions of dollars that big US retailers such as Guess, Macy’s, Radioshack and Toys R Us generate every year but it’s difficult to digest that they are in terrible shape because they’re not making any profit. These retailers are expected to close thousands of stores and fire many tens of thousands of employees. What went wrong?

You may have heard of this before, but a sure-shot way of making revenue is to offer $110 for $100. If you open this business, you’ll have no problem attracting customers and you’ll not even need to do any marketing (except when a new competitor springs up who offers $120 for $100). This example may seem worthy of nothing more than a chuckle but this business model is actually very common. Large eCommerce players in India (Flipkart, Snapdeal, and PayTM) grew by essentially handing out money to customers (in the form of discounts and cashbacks). ...  Read the entire post →

There’s typically an information asymmetry between what sellers know about their products and what buyers know. From buyers’ perspective, while engaging in a potential purchase, they never have enough information to know whether what they’re getting is worth the cost (in time, money, effort) that has been asked from them. Even when the seller gives information about the value the buyer will get, buyers suspect because both honest and dishonest sellers say similar things. 

So for new products, as buyers can’t tell good products from bad products, they typically end up wanting to pay (in time, money, effort) much less than what the seller demands. In many markets, this drives away good, honest sellers leaving only dishonest sellers (which further aggravates the mistrust). The most famous example of this is used cars market, but some version of this plays in all markets. ...  Read the entire post →