Search Results for: money

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 →

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 →

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 →

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 →

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 →