All posts in Mental Models

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 →

Many evolutionary psychologists believe that reason evolved to justify our actions to strangers. This justification was necessary because strangers couldn’t take one another’s claims at face value. Such claims had to be backed with reasons to convince the other that one is not taking advantage of him/her.

As we all know, actions speak louder than words. And emotions drive our actions.

Even though the capacity to reason is a highlight for our species, most of our decisions are made emotionally. Who we fall in love with isn’t rational but we can always find good reasons to justify our choice of partner. Similarly, our reasons for choosing to use certain products or services have a strong emotional factor, even though when asked, we will happily give rational justifications for the same. ...  Read the entire post →

You get pitched by other companies all the time. It’s estimated that we get to see thousands of ads every day. How many marketing messages from yesterday can you recall? If you’re like most people, it’ll be difficult for you to recall even a single message. At best, if you stress hard, you’d be able to recall only a few ones.

If you, the marketer or the entrepreneur, cannot recall ads or marketing messages you were exposed to, how do you expect your customers to do so? 

Marketers spend a significant amount of time creating their campaigns, so they become biased into assuming that if their target customer sees the ad, she will remember it and take action whenever the need for the marketed product arises. But that’s not how customers’ minds work. They see an ad and move on with their life as if nothing happened. ...  Read the entire post →

Most of us are lazy. We do not wake up every day trying to actively seek new ways of improving our lives. We prefer the comfort of things that are known to work for us. That is why we frequent our favorite restaurants, watch our favorite TV shows and take our favorite routes to the office. Even though we like to think we’re not comfort-seekers, our actions usually speak otherwise.

Most of us are risk-averse when it comes to trying something new.

However, some of us are truly adventuresome. If you’re not someone who is comfortable trying the new-new, you may have a friend who prefers to go to newly opened restaurants with no ratings. Such people are early adopters and as the name suggests, they take pride in being among the first ones to try something new and are seen as a tastemaker among friends and community. ...  Read the entire post →

As an entrepreneur, you worry about customers all the time. And you’re correct in doing so. Focusing on customers is obviously important but customers will never ask you to introduce switching costs, which are precisely what you should do in order to continue making profits.

Once you’ve been able to build a defensible business by building a big moat, you can pat yourself on the back. Your business now won’t get killed by competitors.

You’ve successfully thwarted risks from direct competition but your business is now likely get killed as collateral damage to something else where you weren’t even a player. Microsoft Windows had an absolute monopoly on personal computing and that’s why Linux or Mac OS didn’t impact its growth. What weakened its grip, however, was the shift of computing from the desktop to mobile phones that accessed services running on cloud servers (none of which were running on Windows).  ...  Read the entire post →

A business is said to have network effects if each new customer increases the value derived by all other customers. Take a telephone network. Each new customer with a telephone line helps increase the value of the network for all other customers because now more people can talk to each other than before. Contrast this to other businesses such as the appliances manufacturing business. It’s obvious to see that if I sell one toaster, none of my other customers benefit from that sale.

A business with strong network effects gains a competitive advantage over time because new entrants have to start from scratch and a customer choosing between two alternatives will go with the one that delivers more value, which is often the one with stronger network effects. Because businesses with network effects keep attracting new customers who make such network effects stronger, these businesses soon become almost impossible to beat in their category. Think Facebook, WhatsApp, and Instagram.  The value of these apps is not in the technology they provide but in your network of friends using them. ...  Read the entire post →

Business opportunities that seem easy, or those that require minimal effort or investment are easy for everyone (and not just you). Most people naturally gravitate towards work that’s easy, enjoyable, or sexy. This is why you have so many entrepreneurs make mobile apps because coding an app is fun and relatively easy. 

Real advantage, however, lies in doing what others aren’t willing to do.  Such work is either really hard, or takes an enormous amount of time or requires enormous capital, or is extremely boring or is unsexy. The fewer number of competitors in these less popular domains usually translates into a much higher chance of building a profitable business. ...  Read the entire post →

Capitalism rewards rare and valuable. Making something that customers value is important, but so is making something rare. Markets are competitive and initial success usually leads to other companies or new startups trying to copy and replicate such success for themselves. The last thing you want is for someone else to come along and capture your entire market for themselves.

It’s true that copying by competitors may or may not happen, and such copying by others may or may not be successful. But why leave that to chance? In fact, companies that are copying your business will likely use all their unfair advantages to crush you. If they have more funding, they can out-market you. If they have better engineers, they can develop a more stable product. If they have a brand name, they will use it.  ...  Read the entire post →

Entrepreneurs have to be confident in their abilities, otherwise, they’d never take the risk of starting a business. However, this confidence can backfire if it’s adopted as a company strategy. If you think you’re smarter or more hard-working than your competitors, your competitors are also thinking the same.

Competitive advantage arises out of true and exclusive advantages that give you an edge over competitors. Believing you’re the best or the most hard-working is probably neither true nor exclusive to you. Invest in actually building some real, hard-to-copy advantages in your business. ...  Read the entire post →

Proven physical theories are called laws because they dictate how our world operates. If there were such a “law” of capitalism, it would probably be the fact that profits attract competitors who try to eliminate it by offering customers either a lower price or a higher quality. This law thus allows for only two types of businesses to exist: cost-focused business or quality-focused business. Think of a McDonald’s v/s your neighborhood gourmet burger restaurant. Any business that tries to be both doesn’t work out in the long run. ...  Read the entire post →