It's Rishi

After thinking for a while, I came up with the following list of those fundamental things that every human wants:

• attention
• importance
• companionship
• entertainment
• sex
• knowledge
• time
• relaxation
• success (at any challenge/goal)
• earn/save significant (relative to the individual) amounts of money
• and even though it’s sort of implied: power to get any of the aforementioned items

Is that a comprehensive list? Can anyone think of anything that’s missing? Any items that are there that you think don’t belong? Lemme know!

Last month I wrote a mini-essay titled “It’s cool…but I wouldn’t pay for it” in which I briefly discussed a phenomenon that is becoming more and more common. A company launches a good service but has trouble finding users who will actually open up their wallet and pay for that service. This has led most recent web-based companies to either offer their service free of charge – relying exclusively on ad revenue for cash flow – or give away the basic service free and try to upsell premium services.

After making that post, I started to think about what does make consumers open up their wallets. What are their motivations? I want to answer the simple question: Why do people buy stuff?

After a lot of thought, I came to the hypothesis that each purchase is motivated by the following 2 factors:

Functional – Many products we buy fulfill a tangible function. In other words, they have a measurable utility to us. Each function of a product has varying utility to each consumer depending on his or her needs. For example, a BMW M5 has a top speed of 205MPH. For the average buyer that function is offers little utility. But for a German driver who needs fast transportation on the Autobahn, the utility might be very high. Similarly, the fact that a buffet is all-you-can-eat may have high utility to a football player but little utility to someone dieting. On the other hand, a bottle of water has universal and similar level of utility to most consumers.

Emotional – There are a few primary emotional states that all humans strive for (whether they admit it or not): happiness, security, attractiveness, belongingness, and, above all, a feeling of importance. The interesting thing about emotional-based purchases is that they have no bound. Humans always want more. A man who owns a Casio wants a Seiko. A man who owns a Seiko wants a Rolex. Similarly, people are generally interested in spending money to achieve higher levels of the aforementioned emotions.

this leads us to…

Rishi’s laws of Consumer Behavior

If your product appeals primarily to the consumer’s functional needs: That consumer will likely open their wallets to you, but will probably do so unwantingly. Nobody particularly enjoys buying milk, toilet paper, or store-brand cola, but they do so because it fulfills their needs.

If your product appeals primarily to the consumer’s emotional needs: That consumer will likely want to open their wallets to you, but will probably not do so. People want Porsche 911’s, Rolex watches but few buy them, even if they could technically afford it. Now, if you intend your product to be a niche-market, luxury item then there’s no problem.

If your product appeals both to that consumer’s functional side and emotional side: The consumer will likely open their wallets to you, and feel happy about doing so. Ideally, you want your product to fit into this last category: appealing both to the functional and emotional side. This is not so much a product design exercise but a marketing exercise. The art of branding is all about how to make a product sell for more than it would if it was perceived as just a commodity (only functional). It’s the reason why Ralph Lauren (declare to the world that you’re successful with the Polo logo) can charge $60 for an ordinary polo shirt or why Coca-Cola (make every moment a memory by drinking a Coke) can charge more than store-brand cola. But, to accomplish this, it’s also important to remember that you must also fulfill a clear functional need for your consumer. A great (if obvious) example of a product which accomplishes both is the iPod. There are several competing hard-drive based MP3 players which are very competitive. Apple is able to not only dominate the market, but do so selling it’s products at a significant price premium. Through a combination of product design, packaging, and marketing, Apple has consistently made each iPod hip and luxurious. They made the MP3 player be more than a functional purchase, they made it an emotional purchase.

Few companies in the computer industry have been able to appeal to the emotional motivations of consumers. Specifically, I can’t think of a single software company that has. Possibly video game software, but one could also argue that it’s also functional: video games provide the function of entertainment. What about on the web? Are there any websites that you pay for that appeal to your emotional side? This is something I’ll be thinking about for the next few days…

These days, I hear this phrase all the time in reaction to the launch of a new Web-based company. In fact, as a result of this attitude most users have, the vast majority of Web companies that recently launched have no intention of charging their users. They know their users won’t pay, so there’s no point in stunting market adoption by even trying. Such businesses, those that don’t involve a transaction from which they can take a cut (eBay, PayPal), are built to generate cash flow through advertising revenue – at least for the forseeable future until a better revenue model is stumbled upon (or better yet flip the company to GYM before you need to deal with the revenue issue).

Why is it that many people have this attitude towards Web-based services? I think a big part of it comes from the fact that the Web is advancing at such a fast pace. No matter what the product category, barriers to entry are being broken down at an ever-faster pace. This means that whatever the product is, there is likely to be significant competition. And, in the rare case, that the product is the first of its kind, you can expect a couple formidable competitors to be right around the corner. Competitors will often try to gain an edge by charging users less for the service or offer it for no-charge at all.

This phenomenon is now very familiar to most Internet users. When I see a service that sounds useful but costs money, I’m either thinking:
a) Let me try to find a similar service that’s free, even if it’s not quite as good OR
b) I’ll just wait a little while for a competitor to launch the same service and give it to me for free.

Further contributing to this trend is the “lets launch it and see if it sticks” attitude of many Web businesses, especially in the now “Web 2.0″ culture of building simple, user-centric applications. Such applications are generally cheap to develop, launch, and operate. This allows for revenue generation to take a back seat to market share growth. This is reminiscent of the dot-com bubble except that now the cost of failure isn’t that high.

The good news in all this is that people are still more than happy to be profitted off of through advertising. We tolerate long commercial breaks in our TV programming, full-page ads in magazines and newspapers, and chunks of webpages dedicated to text and banner ads. Even though there is the AdBlock extension for Firefox, which effectively blocks most ads, I notice that most people don’t download and use it. But can you really build a big business on the Web that relies solely on ad revenue? From what I can tell, the answer is generally no unless you have tremendous scale (Google) or your service is closely tied to a transaction (Shopping.com).

What’s going to happen is that because, most products aren’t going to “stick”, competition in any one market will shrink significantly. Either of two cases will happen. The first case is that because competition will shrink down to just a couple players, all players will start charging and consumers will be forced into paying. The companies that do survive will have a kick-ass product that you won’t mind paying for (or willing to pay for “premium” service). The second case is that the product will continue to be offered for free by YGM with the intent that they will upsell one of their other premium services to you.

Side Note: An interesting trend that is sprouting up is sites such as Squidoo that will let you earn advertising revenue off of the content that you contribute to the site. As far as I can tell, the site isn’t blowing up with users or content. Contributing content involves me spending time. The amount of money I expect to earn must be significantly greater than the time-value I will invest. A big problem is that most people don’t really understand online advertising and are unlikely to see much dollar value potential in a couple AdSense text ads next to their content.