All posts in Mental Models

Switching costs determine how valuable your business is because investors value a business equal to its expected future profits. If your customers are able to switch easily to a competitor, potential investors see that as a risk, and hence will not value the business highly as potential future earnings of a business can easily be taken away by a competitor.

If building a business is hard, building a defensible business is harder and that’s why they’re rare. Warren Buffet’s top criteria for evaluating a business is the presence of moats. In old times, castles were protected by trenches filled with water which were known as moats. Such moats protected against an enemy attack as they were not easy to cross. In business, moats are whatever deters a potential competitor from taking away your customers.  ...  Read the entire post →

End customers typically get value through a series of businesses adding value on top of each other. For example, imagine the value chain required to bring a laptop to the end customer. The production begins with suppliers of metals and raw materials which are used by computer part manufacturers to build components like CPU, screens, and disk drives. These components are then assembled to build a laptop. The laptop needs software that’s typically written by some other supplier like Microsoft. And, finally, the fully functional, ready-to-use laptop is shipped by a logistics company to a warehouse. Customers transact with an online or offline seller of laptops which is typically yet another company (Amazon or BestBuy).  ...  Read the entire post →

Picking problems to solve is a function of attention. Wherever and whatever you’re paying attention to is going to reveal problems in that domain to you. Solving such revealed problems is going to absorb you and will reveal even more problems worth solving in that domain.

So this creates kind of a feedback loop.

Because every domain of life has such richness, it’s easy to get lost in this feedback loop and spend an entire life solving problem after problem in that domain. In fact, this is what (traditionally) is meant by a career. There’s nothing wrong with going deeper into a niche if one is mindful and conscious of it. However, in my experience, few people consciously choose what problems to solve because very few consciously choose what to pay attention to. ...  Read the entire post →

Can an app built on top of Facebook become bigger than Facebook itself?

It’s easy to believe that you will get limited by how big is the businesses on which your business is built. But that’s not true. An app built on top of Facebook can become bigger than Facebook because the customers and desires that Facebook serves are very different than customers and desires that the business that’s built on Facebook is trying to serve. Facebook, in this case, is simply an enabling platform while the real value to the customer is being created by the app. ...  Read the entire post →

No business delivers value to the end customer all by itself. In reality, a business does very few things within its boundaries. Everything else must come from other businesses: from renting servers on AWS to leasing offices, and from advertising on Google to buying laptops from Dell. Most of the time, such dependencies emerge naturally and evolve without any conscious effort. However, sometimes some business dependencies can (and should) be deepened explicitly through partnerships.

If nurtured well, business partnerships create positive feedback loops that help rapidly grow a business. Consider the case of Apple, a famously vertically integrated company that makes its own OS, processor, and many other phone components that other companies typically purchase from vendors. However, their iPhone App Store is proof that even Apple realizes that it can’t thrive without partners. Apple supports many thousands of 3rd party software developers who create millions of amazing app for the iPhone. These apps wouldn’t have been possible without the underlying technology supplied by the iPhone. Similarly, the iPhone wouldn’t have been as successful as it, if it didn’t provide the multitude of functionality that its users have now come to expect because of all the 3rd party apps available on the platform. So, the iPhone helped the developer community build a business on top of it, and with that, iPhone benefitted massively. ...  Read the entire post →

All startups live in an ecosystem where different businesses directly or indirectly support one another. For example, in the case of the automotive industry, the ecosystem consists of car manufacturers, car parts manufacturers, petrol stations, car service centers, car insurance companies, and government regulators.

All of them mutually support the entire ecosystem, which means the growth or decline of one business will directly impact all other businesses.

Ecosystems are not always as easy to spot as the automotive industry. Often they are hidden and only apparent in retrospect.  ...  Read the entire post →

Entrepreneurs are irrationally attached to innovation. In some cases, fresh ideas are absolutely required but an attachment to originality and the corresponding aversion to exploring ideas pioneered by others can often lead to a significant delay in success (or even failure).

This desire to innovate everything in-house even has a Wikipedia page: not invented here.

Startups can fail for many reasons. Even if an entrepreneur gets everything right but errs on a specific aspect (say distribution, pricing, onboarding, or even the choice of technology), it’s possible that her entire project fails.  ...  Read the entire post →

Entrepreneurs are always in a hurry. They want the product to be out so that they can get customer feedback sooner.

This hurry is understandable yet misguided because it prioritizes getting the idea out in front of customers over everything else. The initial excitement about an idea can easily lead to months of wasted development effort. Imagine discovering major flaws in pricing, distribution, design, or market after all that effort.

Isn’t it much better to flesh out ideas with a few weeks of research than to spend months developing them? ...  Read the entire post →

People have busy lives and they usually don’t think much about the products and services they use in their lives. It’s a myth that people are on a constant lookout to (marginally) improve their lives. The reality is that unless the value delivered by a new product or service is substantially higher, most people will not change how they live their life and by virtue of that, they won’t change what they buy or use.

It doesn’t mean that people don’t want to improve their lives at all. New products arrive in the market and replace the old ones all the time. But displacement of existing solutions happens only if people expect that the new product will have a material difference in their quality of life (at work or at home). The important keyword here is material. Slight improvements over existing solutions are usually not worth it for people to overcome inertia, change their habits and start using your solution. ...  Read the entire post →

Most markets are like the car market. Some people like bigger cars, others like efficient cars and then there are some who like premium cars. That is, markets aren’t homogeneous. They consist of different sets of people who value different aspects in a solution.

Because different segments value different aspects, an improvement in one aspect will only be appreciated by that segment and get ignored by everyone else in the market. For example, if the customers in a particular segment are price-insensitive, your discounts won’t work on them. In your mind, a discount should clearly work but for a certain segment of customers, it may actually decrease the appeal of your product for them. But, if a customer segment is price-sensitive, and you give them a clearly higher quality product at slightly higher prices, they may not care enough about the quality to make a switch from what they usually use. ...  Read the entire post →