The messaging company WhatsApp was recently bought by Facebook for a whopping $19 billion. The owners of the start-up will receive $4 billion in cash, $12 billion in Facebook stock and the remaining $ 3 billion in the form of restricted stock units, which will vest over the next four years. In rupee terms, Facebook paid close to Rs 1,18,000 crore (assuming one dollar is worth Rs 62.2) for Whats-App, a company with just 45 employees. This amount is greater than the individual budgets of most ministries of the Indian government for the next financial year, except the defence and the finance ministries. So what is it that made Facebook pay so much money for WhatsApp? Lets compare this with Instagram, a company that Facebook acquired in 2012 for a billion dollars. Interestingly, Instagram had just 13 employees, when it was acquired. Why did Facebook a billion dollars for a company with just 13 employees and 19 times more for another company with just 45 employees? Computer scientist and philosopher has an explanation for it in his book Who Owns the Future? As he writes “When it was sold to Facebook for a billion dollars in 2012, Instagram employed only thirteen people…Instagram isn’t worth a billion dollars just because those thirteen employees are extraordinary. Instead, its value comes from the millions of users who contribute to their network without being paid for it. Networks need a great number of people to participate in them to generate significant value. But when they do, only a small number of people get paid.” In the above paragraph replace Instagram with WhatsApp and the logic stays the same. As of the end of 2013, WhatsApp had around 400 million users worldwide. So Facebook was essentially paying to acquire the number of people who used the messaging service rather than the knowledge and the technological prowess of the people who ran it. But wouldn’t it be cheaper for Facebook to just build a similar application? In fact, it wouldn’t take much effort on the part of Facebook to develop a similar and even a better application than WhatsApp. So why pay so much money for it? In fact, WhatsApp like Facebook and Twitter before it is a classical example of what economists like to call a network externality. This is a situation where demand for a product creates more demand for the product. As economist Paul Oyer writes in his new book“A product has a network externality if one added user makes the product valuable to other users…The rise of the internet has made network externalities more apparent and more important in many ways…Perhaps the best example of the idea is Facebook. Essentially, the only reason anyone uses Facebook is because other people use Facebook. Each person who signs up for Facebook makes Facebook a little more valuable for everybody else. That is the entire secret of Facebook’s success—it has a lot of subscribers.” Again, replace Facebook with WhatsApp in the above paragraph and the logic stays the same. What made WhatsApp very valuable is the fact that it has close to 400 million users. Hence, even though Facebook can create a similar application at a much lower price, it can’t get 400 million people to use it. Take the case of Google, which launched Google+ a few years back to take on Facebook. The experts felt that Google+ was a better product and some of them even went ahead and predicted that people would now move on from Facebook to Google+. But that did not happen. As Niraj Dawar writes in Tilt – Shifting Your Strategy from Products to Customers “For those who want to be a part of a social network, it makes sense to congregate where everybody else is hanging out. There is only one village square on the Internet, and it is run by Facebook. Being on a different square from everyone else doesn’t get you anywhere—you just miss the party.” This was the main reason why people did not move from Facebook to Google+, even though it may have been the better product. “Google + may offer features such as greater privacy or group video chat,” writes Dawar, but it fails to “create the positive feedback loop, because it makes sense for everybody to be where everybody else already is.” So even though Google+ was believed to be superior to Facebook, the users continued to stay put with Facebook. As Oyer puts it “Google+ has signed up many users, but it has not put any real dent in Facebook’s dominance. Nobody is going to switch to Google+ from Facebook unless most of her friends do, too, and it seems very unlikely that whole groups of friends will act in a coordinated fashion to move from one social network to another.” Given this, even though Facebook could have launched a better version of an application on its own, there was no guarantee that people would start using it. Chances were that they would have continued to use WhatsApp. And that explains why Facebook paid a bomb for it. Also, in a way Facebook was just buying out prospective competition. Many youngsters have their parents and family, as friends on Facebook. This obviously limits the frankness of the conversation that they can have with their “real” friends. This has led to teenagers preferring to use messaging services like WhatsApp rather than Facebook. In fact, in a recent earnings call Facebook admitted that teens were spending lesser time on its service and were fleeing to messaging applications like WhatsApp WeChat etc. Mark Zuckerberg, the chairman of Facebook, believes that kids are fleeing the format because parents spam their walls with inspirational quotes and tagging them in photographs which they really do not want their friends to see. Another explanation on why teenagers are fleeing Facebook was offered to me by a friend who has worked extensively in the technology industry in the United States. When it comes to technology, Facebook is not a light app, like the chat sights. There is a newsfeed comprising of various kinds of data and there is always a chance that things get lost to your intended audience under large piles of such data. Also, it might need more memory, something that the lowest priced smartphones, which the kids are likely to use ave may not have. Due to all these reasons Facebook paid $19 billion for WhatsApp.
The article originally appeared in the Mutual Fund Insight magazine dated April 2014
(Vivek Kaul is the author of Easy Money. He can be reached at [email protected]. He would like to thank Somnath Daripa for providing some excellent thoughts on the topic)
Niraj Dawar, Professor at the Ivey Business School (Canada and Hong Kong), is a renowned marketing strategy expert who has also been on the faculty of leading business schools in Europe and Asia. He works with senior leadership in global companies and has executed assignments for BMW, HSBC, Microsoft, Cadbury, L’Oreal, and McCain on three continents, as well as with start-ups in the biotech and information space. His publications have appeared in the Harvard Business Review, the M.I.T. Sloan Management Review and in the leading academic journals. Most recently he has authored Tilt: Shifting Your Strategy from Products to Customers (Harvard Business Review Press, Rs 1250). In this interview he tells Forbes India why the opportunities of capturing value in the downstream are relatively neglected and have huge payouts when they are recognised. Your follow up question to managers often is that why do your customers buy from you rather from your competitors. This is after you have asked them what business are you in. Why do you do that? The reason I ask that question is to encourage managers to ask themselves that question because it really allows you to understand that the reasons that customers buy are related to the interaction between the firm and the customers. The reasons are often about reliability, trust, relationships, comfort, the ease of doing business and reputation. In fact, very rarely does the answer to this question has anything to do with better products or cheaper prices. The reasons are almost entirely between the softer aspects of the interaction between the buyers and the sellers. What is the centre of gravity of a business as you talk about in your book Tilt? If you look at the activities of a firm all the way from sourcing of their raw materials, transformation of those materials, production, innovation, and supply chains—then towards the downstream, customer acquisition, customer retention and customer satisfaction, those are all activities that the firm engages in. Not all of those activities contribute equally to the cost of the business. And not all those activities contribute equally to the value that the customer buys, sees, and pays for. And not all of those activities contribute equally to the competitive advantage of the company. So what are you suggesting? If we can answer the following three questions i.e. which of these activities accounts for the bulk of their cost? Which of those activities accounts for the value that the customer sees, pays for, comes back for, and becomes loyal for? And which of these activities accounts for the source of competitive advantage? If we can answer those three questions then we start to locate the centre of gravity of a business along the spectrum of value creation activities. And I believe that increasingly that the centre of gravity of successful firms is going to reside in the downstream activities, in the activities related to customer acquisition, customer retention and customer satisfaction. Could you explain that through an example? Imagine all Coca Cola’s assets i.e. there trucks, their supply chains, their factories, all their physical assets were to go up in flame overnight. How likely is it that they would be able get financing to start operations tomorrow? And the answer if you were to ask any reasonable manager would be that it is very likely that they would be able to get financing to start operations again tomorrow. If you take the second half of the thought experiment and imagine that a colourless, odourless gas leaks out of a weapons research laboratory somewhere and it envelopes the world and seven billion consumers forget about the brand name Coca Cola and all of its associations. Now how likely is it that Coca Cola can get financing to start operations again tomorrow? The answer is quite unlikely. When you compare those two situations what you recognise is that sources of competitive advantage do not reside inside the four walls of the company but out there in the minds of the consumers. And they have to do with the brand and the reputation, and not the product. And that’s how a company’s centre of gravity can be assessed. So Coca Cola’s centre of gravity clearly resides in the market place. Any other example? If you take the entire pharmaceutical industry and map the companies according to their centre of gravity, the centre of gravity of some companies resides in the massive sales forces that they have, in the relationships they have with doctors, whereas for some other pharmaceutical companies their distinct advantage lies in the laboratory, in creating new molecules, in patenting them. The question I have is, which of these companies is in the driver’s seat? Who is acquiring whom? The answer is that the companies which have downstream assets i.e. the relationships with the doctors and the subscribers, are the ones acquiring those that have the patents. And not the other way around. You talked about the centre of gravity of companies shifting downstream. Can you talk a little more about that? Take Coca Cola once again. In most cities around the world you can buy a can of Coca Cola as a pack of 24 in a supermarket and it will cost you about 25 cents per can. Now consider an individual who is in a park on a hot sultry day and he has been out for two hours. He wants a Coke. He sees a vending machine and he can easily drop two dollars into the vending machine and get a can. The vending machine delivers to the customer a can of Coca Cola, at the point of thirst, in a single serve and chilled. For those reasons, single serve, at the point of thirst and chilled, the premium that is charged is 700%. And the customer willingly pays for it… Yes, there is a 700% price premium and the customer willingly pays that premium. Where does the value come from? The value came from a downstream activity of ‘how’ as opposed to ‘what’. It pays for the company to recognise these sources of value and to create ways of delivering and capturing that value. Many companies fail to recognise that. They build a product and they think that is the value they have created without recognising that there are opportunities around the product to develop offerings which are customised to the situation and the context of what the customer is looking for. Think about it this way, many companies spend a huge amount of money doing business process re-engineering, or reorganising their operations, or making their supply chain and operations more efficient. The result is a 2-5% cost saving,which might double their margins, which is huge. But think of the opportunities in the downstream where you capture 700% growth in value. If you compare these two, I believe that the opportunities of capturing value in the downstream are relatively neglected and have huge payouts when they are recognised. Why are they neglected? They are neglected because we have spent the last 250 years building factories, since Richard Arkwright, in the middle of the 18th century England, built the first one. Having built the factory one of the things he realised was that by streaming together all of the innovations in the textile industry like the spinning jenny, the flying shuttle, he reduced the cost of producing textiles by 90%. Even though he had reduced the per unit cost of production that came with the cost of leveraging. He had borrowed money to build these factories. So at the end of the month he had to pay interest regardless of whether he was able to sell or not. What happened was that his business became driven and obsessed with just one question, how much of this stuff can we sell. That was his obsession because everything else depended on that question. And that’s carried on since then? For 250 years strategy has been about how much more of this stuff can we sell. We have not asked the question what else do our customers need. We have not asked the question why do our customers buy from us and not from our competitors. These are downstream questions. The upstream question is how much more of this stuff can we sell or can we make a better product. We have had the factory at the centre of business. What I am arguing in Tilt is that the customer is at the centre of business. So where does the title of your book Tiltfit into this? Tilt is a shift in the centre of gravity from the upstream to the downstream. And I am arguing because costs, value and competitive advantage have shifted from the upstream to the downstream, management attention and strategy need to be focused on the downstream rather than the upstream. And that is why the title. Do you see companies tilting? I do see companies tilting. There are a lot of examples of things that companies can do to tilt. But I don’t see one single company doing all of those things. In other words, there are lots of opportunities even for companies that are doing one or two things well, to do the other things well. So Tilt is an incomplete project. It is happening but it is far from complete. You also talk about some marketing myths in your book. Lets talk about some of those myths. Sure. Does a better product always win? No a better product does not always win. If you look at the innovation graveyard, it is full of better products. What matters is the ability of a company to change and influence the customer’s criteria of purchase. Let me give you an example. For the last 25 years everybody has known that Gillette’s next product will be a razor with one more cutting edge. Why is it then that competitors have not pre-empted Gillette and come up with the next cutting edge before Gillette? Introduce five cutting edges when Gillette only had four. Why has that not happened? The answer is that customers only find it credible when it comes from Gillette. So four blades are better than three only if Gillette says so. There is no value for competitors to develop a better product unless Gillette develops a better product. What is driving innovation is not the better product. It is consumer’s acceptance of the better product. So downstream reasons not upstream reasons drive innovation. So is a better product the answer? No. Understanding customer’s criteria of purchase is the answer. Influencing that criteria of purchase is the answer. Any other examples? In case of mobile phones very recently the chip has become very important just like it became important in the PC industry during the 1990s. Now people are suddenly paying attention to questions like is it a single core or a dual coe? In fact, now we are upto quad core. Why are the cores important? There are technical reasons why they are important. For example, a mobile phone can shut down half the CPU if you are making a phone call rather than using graphics. Why is that important in a mobile phone? Because it saves battery life. And it allows you to have more functionalities with less battery life. You don’t have to recharge it as often. If you have a dual core it is a battery saving feature. If you have a quad core, it is an even better battery saving feature because you can shut-down three cylinders and run on only one cylinder when you don’t need the other three. When you need the other three they fire up quickly and you have all the four cylinders running. So its essentially that. What is the point you are trying to make? Right now we are upto quad core. And everyone wants a quad core phone. In China there is a company called Meizu and it has just launched an octa core phone. Consumer acceptance for octa core phones, even though everyone knows that the next logical step is octa core, is not there unless Samsung or Apple introduce octa core phones. Then it will become a criteria. Exactly like the blades. So what is more important? Is it technology? Or is the consumer’s criteria of technology? The answer is marketing. It is the downstream not the upstream. The next marketing myth I wanted to ask you about is does it make sense to listen to your customers? Not always. For a long time we were told that you needed to go and ask customers what they wanted. So you had focus groups. You ran surveys. You had questionnaires. All these were ways of finding out what does the customer want. That is really old technology. Today you find out what the customer wants primarily based on customer behaviour. What do they click on? Which products do they compare? Which pictures do they look for? How much do they pay today? How much are they going to pay tomorrow for same product? What is their price elasticity of demand? What is their cost elasticity of demand? You need to get deep into customer behaviour today simply by observing behaviour as opposed to asking. Can you give us an example? So Zara for example places products on the shelf. They will put 300 units in the store across 10-15 stores. If these units fly out of the shelf, then they put in 30,000. If they don’t sell, then they stop that product. They put in hundreds of new products every month. What flies they put in more of. What doesn’t fly, they cull. This approach is very different from asking the customer what he actually wants. In fact, it is cheaper and quicker for Zara to actually make the product and put it on the shelf and see if it actually sells, rather than ask the customer if you like the product. But the thing with Zara maybe that it has a short turn around time, which may not be possible for other industries… The answer is that it is becoming possible for more and more industries. In the textile business, the lead time used to be six months to a year. You had to plan the next winter season in January. And, showed that the model could be broken. They went down to a lead time of three weeks. I think there are many industries which are sitting ducks because of the long lead times that they have. They are still using the old technology of what do you think customers will want. And that is not viable. The article originally appeared in Forbes India edition dated March 7, 2014
Vivek Kaul Google+ was launched sometime in 2011. It got rave reviews and many technology enthusiasts claimed that it was much better than Facebook and advised users to switch. More than two years later Facebook continues to be the leader and Google+ is at best an also ran. The moral of the story is that a better product doesn’t always win in the market place. And there are various reasons for the same. In case of Google Plus versus Facebook it was a clear case of the network effect. As Niraj Dawar writes in Tilt – Shifting Your Strategy from Products to Customers “For those who want to be a part of a social network, it makes sense to congregate where everybody else is hanging out. There is only one village square on the Internet, and it is run by Facebook. Being on a different square from everyone else doesn’t get you anywhere—you just miss the party.” This was the main reason why people did not move from Facebook to Google+, even though it may have been the better product. “Google + may offer features such as greater privacy or group video chat,” writes Dawar, but it fails to “create the positive feedback loop, because it makes sense for everybody to be where everybody else already is.” Hence, people stayed on Facebook because everyone else was on it as well. So, even though most people may have the mandatory Google+ account, but ask them where they spend a good amount of their social networking time, and the answer you will get is Facebook. An excellent example of the network effect being the main reason for the success of a product is the WhatsApp messenger. Despite the fact that there are other players in the market which are advertising very heavily, WhatsApp continues to hold its ground. Another area where the network effect plays out these days are the movies. “With social networks’ rapid dissemination of information, these types of brand network effects have been turbocharged—they occur more rapidly and forcefully than ever before. A movie now flops or hits as a result of the first forty-eight hours of tweeting and box office sales,” writes Dawar. The holiday season and long weekends are littered with examples of several bad movies, which people watched because everyone else had. At times what also happens is that the criteria for success that the company had backed on, turns out to be different from what consumers think it should be. Take the case of the VHS versus Betamax battle for the video standard, between Sony and Matsushita, both Japanese companies. Sony decided to concentrate on video quality whereas Matsushita decided to concentrate on longer recording time, which ultimately became the key differentiator between the two standards. By concentrating on the quality of the video Sony was just doing what it had done in the past. But consumers, it turned out, were looking for a longer recording time and were willing to compromise on the quality of the video. At times, the consumers don’t have a role to play and have to go with what is offered. Take the case of the battle between Blu-ray and HD-DVD, two competing DVD formats. As Karl Stark and Bill Stewart write in an article titled Why Better Products Don’t Always Winon Inc.com “Unfortunately differentiating factors aren’t always clear, and consumers don’t always get the right to choose. Consider the battle between Blu-ray and HD-DVD; while consumers could buy either product, ultimately the war was fought over which content providers would exclusively back each format. Since more content was available on Blu-ray, it ended up creating more customer value, despite the possibility that HD-DVD was a technically superior product.” Once the consumer is on the Blu-ray format, there is a huge cost of switching to HD-DVD, even though HD-DVD may catch up in terms of content that is available on it to be viewed. On occasions what also happens is that the brand association of a particular product being the best product in that category is very strong and competitors can’t break it. Take the case of Gillette. As Dawar writes “After more than a century of blade technology, Gillette still controls when the market moves onto the next generation of razor and blade. And even though for the past three decades, competitors have known that the next-generation blade from Gillette will carry one additional cutting edge and some added swivel or vibration, they’ve never pre-empted the third, fourth, or fifth blade.” Why is that the case? “Because there is little to gain from preemption. Gillette owns the customers’ criterion, and the additional blade becomes credible and viable only when Gillette decides to introduce it, backed by a billion-dollar launch campaigns.” The chip maker Intel is in a similar sort of situation. Consumers believe that the chip is the fastest chip in the market, only if it comes from Intel. “Both AMD’s K-6 chip and the PowerPC chip were faster than the fastest Intel chip on the market at the time of their launch. But the two challengers were unable to move the market,” writes Dawar. To conclude, let me quote Stark and Stewart: “Better products win when the total value – that is, the benefits minus the cost – is clear and measurable to the customer and creates more value than comparable offerings.” The trouble is it is difficult to figure out in advance what creates more value for the customer. Even the customer may not know the answer to that question. The article originally appeared on www.FirstBiz.com on February 25, 2014 (Vivek Kaul is a writer. He tweets @kaul_vivek)
Vivek Kaul The Indian Premier League (IPL), the world’s biggest T20 cricket tournament, has been surrounded by controversies for a while. The latest round started yesterday with a panel appointed by the Supreme Court indicting Gurunath Meiyappan for spot fixing. Meiyappan is the son-in-law of the BCCI president N Srinivasan. Srinivasan also owns the IPL Team, Chennai Super Kings (CSK). He is also scheduled to takeover as the first chairman of the International Cricket Council (ICC) from July 2014. This is not the first time that controversy has hit the IPL. In the past, there have been issues about the shenanigans of Lalit Modi, and how he started and ran the tournament. There have been issues about the union minister Shashi Tharoor using his late wife Sunanda Pushkar to pick up “sweat equity” in the now defunct IPL team Kochi Tuskers Kerala. Then there have also been issues about spot fixing, leading to the arrest of S Sreesanth, Ajit Chandila and Ankeet Chavan, who played for the Rajasthan Royals cricket team. But despite these controversies, the brand IPL has held strong and advertisers have thronged to it, year on year. Interestingly, the research firm American Appraisal, in a report titled Clearing the Fence with Brand Value: A Concise Report on Brand Values in the Indian Premier League found that “43 percent of the respondents thought that the controversies surrounding the tournament impacted their new or continued relation with the IPL as sponsors or advertisers.” But more interestingly, “almost half said that the controversies in no way influenced their decision to affiliate with the tournament.” American Appraisal reached out to over 300 companies and ad agencies that are involved with the IPL. So what is it that makes brand IPL so strong despite all the controversies that have surrounded it? India is a cricket mad nation and for any company which has a consumer oriented focus, some money to spend and a lazy marketing strategy, it makes sense to be associated with the IPL brand. But that as they say is a no brainer. The more important question to ask here is why have the companies continued to be associated with the IPL, despite all the controversies surrounding the tournament. Niraj Dawar possibly has an answer in his book Tilt- Shifting Your Strategy from Products to Customers. As he writes “Brands die hard…One consequence of the strong association of a brand with a criterion of purchase is that even when the brand falls behind technologically or fails to deliver on the product, it continues to benefit from the customers’ default assumptions for a long while…Customer associations provide the brand with the buffer that shields it from crises and quality issues.” The IPL brand is well settled in the minds of the Indian consumer and the controversies that have hit the cricket tournament have been unable to dislodge it. Given this ‘strong’ association of the Indian consumer with the IPL, it is not surprising that companies and their brands want to continue to be associated with the T20 tournament. This, despite the fact that the IPL may have failed to deliver on its main product, which is an honestly and competitively played twenty over cricket match. For all we know that may not be happening, given that the owners of IPL teams (like Gurunath Meiyappan of CSK and Raj Kundra of the Rajasthan Royals) may have been betting against their own teams. A report in the Mumbai Mirror newspaper points out “In his exhaustive and extensive report on the spot-fixing scandal in last year’s Indian Premier League, Justice Mukul Mudgal has raised suspicion about one particular game between the Chennai Super Kings and the Rajasthan Royals. While the 170-page report largely remains inconclusive over whether matches were fixed in the league, it clearly states this particular match needs to be investigated. “The Committee feels that there is enough information available on record to indicate that a further investigation is required in respect of the match held at Jaipur, between Rajasthan Royals and Chennai Super Kings on May 5, 2013,” the report says.” Despite this, the Indian cricket fan (who also happens to be a consumer) is not done with the IPL as yet. Once a brand is established consumers typically tend to give it a long rope. As Dawar writes “Microsoft was able to retain most of its customers even through the life of the ill-conceived Windows Vista operating system, a disastrous product that would have been the death knell for a start-up brand. Apple’s reputation was barely dented despite the antenna problems of iPhone 4, AT&T’s spotty coverage, and the embarrassment of prematurely launching Siri, an artificial intelligence bot that was not quite ready for prime time, and faulty Apple iMaps. The brand easily withered these slipups.” If a start-up would have made any of these mistakes, the game would have been more or less over for it. But that is not the case with big and established brands. Interestingly, the controversies started to hit the IPL only after the first few seasons, and by that time it had already managed to establish itself in the mind of the Indian consumer. As Dawar puts it “Customers are slow to switch, so that even if decline sets in, it is gradual allowing the company time to fix the problem and respond to challenges.” This time that consumers give a big brand to fix itself can also lead to complacency, as happened in case of BlackBerry. As Dawar puts it “It allows managers the room they need to remain in denial about challengers and challenges. When BlackBerry sales continues to rise, even into 2012 in some parts of the world, its newly appointed CEO felt free to declare early that year, “We have fantastic devices in a fantastic ecosystem. I don’t think there is some drastic change needed.” We all know what happened to BlackBerry after that. Consumers do give long ropes to big brands, but these are not infinitely long ropes. One day their patience does run out. Maybe, there is a thing or two, the Board of Control for Cricket in India (BCCI) which runs the IPL, can learn from this. The article originally appeared on www.FirstBiz.com on February 12, 2014 (Vivek Kaul is a writer. He tweets @kaul_vivek)
Vivek Kaul Recently I dropped my mobile phone into a bucket of water. The phone worked for a while and then stopped working. Given that, I had been using the phone for nearly two years now, I thought its time to buy a new one. And this is where my problems started. I have managed to stay away from using smart phones till now. For the last five years I have been using a dual SIM model from Samsung. Given a choice, I would have wanted to buy the same phone all over again, like I had done two years back. But sadly Samsung doesn’t make that model any more ( at least I couldn’t find it anywhere on the web). Thus, started the journey to figure out which mobile phone to buy. Gradually, recommendations started coming in. The people around me took it upon themselves to make sure that I bought the right mobile phone. But looking at the choice that was available I ended up being all confused. First and foremost one needed to decide on the price range. Then on the company. Then on the right model. And how did one do that? With every phone having so many features, how does one figure out which one was the better phone? In fact, feature creep is a huge problem with modern day products. As Geoffrey Miller, a professor of evolutionary psychology at the University of New Mexico in the United States in his book Spent – Sex, Evolution, and Consumer Behaviour “This [i.e. feature creep] is driven partly by the need to make each new product model different from last year’s, but also partly by the consumer’s unconscious desire for a product that is right at the limit of his cognitive ability, and one that therefore functions as a credible cognitive display. The male buying them thinks those features can be talked about in ways that will display my general intelligence to potential mates and friends, who will bow down before my godlike techno-powers.” The question is what about those people who just want to use a phone like a phone (i.e. make calls, send smses and probably take a picture or two once in a while). How should they go about choosing the right phone? And ultimately human beings have limited cognitive ability. It is simply not possible for them to analyse a product on every dimension and then make a purchasing decision. As Stefan Thomke, an authority in the management of innovation told me in an interview I did for Forbes India “We have been in many meetings where the entire meeting is dedicated to discussing more and more features. There seems to be an assumption that we are basically done when we can no longer squeeze more features into a product. Presumably assuming that the more features a product has, the customer actually sits there and counts the features, and that somehow drives our ability to price it.” The consumers tend to simplify this problem by trying to look at one or two dimensions, which they think are important. Take the case of computers. Here people rely on the processor speed of the chip to make a purchasing decision. But is it the right criteria on which a purchasing decision should be based. As Niraj Dawar writes in Tilt – Shifting Your Strategy from Products to Customers “Like any summary measure of a complex system, speed has its limitations: two computers with the same processor speed on their chips may perform very differently depending on the software loaded on the computer, the transfer speed of inflation to and from memory, its connectivity to the network, and many other variables. But most buyers leave these intricacies to experts and rely instead on the simple summary measure of speed.” This is how consumer simplify the purchasing decision by looking at an irrelevant criteria. And what true about computers is also true about a lot of other products. As Dawar points out “For example, consumers evaluate digital cameras using the simple summary measures of megapixels, when in fact the megapixel has little to do with the quality of pictures taken by the camera. It is the size of the light sensor rather than the megapixel count that determines picture quality. Similarly, automobile buyers often rely on horsepower as a measure of the muscle of the car, when it is actually torque they are looking for, as torque determines acceleration, which is the sensation that drivers seek. Customers rely on threat count when buying synthetic bed sheets, but threat count is irrelevant in synthetic fabrics—it only provides a measure of quality for natural fibers such as cotton.” Given these reasons I started looking for an irrelevant criteria using which I could figure out which mobile phone to buy. My search is still on. And as soon as I find one, I will go ahead and buy a new mobile phone. Meanwhile, I did the smart thing. I paid Rs 300 and got my mobile phone repaired. To conclude, let me quote what Thomke of Havard Business School: “We often talk about it as a quote attributed to Leonardo da Vinci that simplicity is the ultimate sophistication. To make things simpler is very hard because that requires you to have a very deep understanding of what the user really wants. And once you have that deep understanding, you have the confidence. Mark Twain once said, if I had more time I would write a short letter.” The article first appeared on www.firstbiz.com on February 7, 2014 (Vivek Kaul is a writer. He tweets @kaul_vivek)