If you think about it, Homo Sapiens is the only species that is capable of hacking its own evolution, unlike others. We are going from a less efficient state to a more efficient state at an exponential rate.
No matter how much people complain, we are indeed living in better times. Payments are more secure, food is better, and the internet is awesome. It would be hard to find something that was more efficient in the past than at present. Traffic might have been better in the past, but traffic is a state. Cars are products that have significantly improved over the past decades.
If you think about it, all efficiency is in the future, and this process of going from a less efficient state to a more efficient state does put some obstacles in the path, and these very obstacles are opportunities to make money. In other words, if humanity is craving for something that is not there right now, it’s an opportunity to make money. The obstacle is the way.
For example, back in the day before spectacles were invented there was a strong need to see better, and it presented an obstacle to those with eye problems. Back when there was no electricity, it presented another obstacle as lanterns and candles weren’t very efficient. Before air travel, trains and ships took a a lot of time to go from one country to another, and you hit a wall when you wanted an efficient and faster means of travel. All these obstacles were opportunities for businesses, products, and innovations to make money.
Let’s take Shopify as a recent example. Before Shopify, if you had to start an online business, you had to invest a huge amount of money and engineering work to get everything setup. With Shopify you can get started in minutes.
Similarly, iTunes had made it extremely easy to get any song in the world without worrying about the price. Previously you had to buy the whole album, and the prices varied according to the record companies. With iTunes, you could get any song for $0.99.
Having said that, it doesn’t mean that if your new solution is just a bit better than the existing solution, it would simply take off. Every product or service can be thought of in terms of an old state and a new state, so it depends upon how much more efficient the new state is. Kunal Shah, an Indian investor and entrepreneur, refers this by the term Efficiency Scoring.
Take online railway ticket booking, for example. Previously you had to go to the railway station to book a ticket, or call up an agent and pay them commission to do it for you. Now you do it online, and there’s no way anybody can convince you to move back to the old state. Granted the online service isn’t the best experience—sometimes it’s slow, often the payment fails or the server crashes, but it’s still significantly better than the old state. In terms of efficiency, if the old state was 2 out of 10, the new state would be around 7 out of 10.
Even though the new state isn’t perfect, you’ll see that its efficiency is still dramatically better. From this, we derive this theory that whenever the delta of efficiency (∆e) => 4, it’s an opportunity to make money, or as Shah puts it, “unlock your pot of gold.”
What’s interesting about this concept is that whenever ∆e (i.e. the difference in efficiency between the new and the old state) is equal to, or more than 4, the change is irreversible. Like I mentioned, nobody in the right mindset would want to go back to the old way of booking railway tickets, or reading without glasses, or going about their lives without electricity.
Having ∆e >= 4 also gives you UBP which is more relevant than USP, according to Shah. UBP stands for Unique Bragworthy Proposition. This essentially means that everybody experiences the new and more efficient state would scream at everybody who’s at an inefficient state asking them to move to the new state. If the new way of booking a cab is so much better, you would tell your friends about it. You would become an evangelist of the service because it solves such a big problem for you, and you are proud of using it.
If the new way of setting up an email newsletter is so much better, or the new way of making payments is so much better, or the new way of way of listening to music is so much better, you would brag about it. When a product has a UBP, its users automatically become its biggest salesmen.
Shah gives the example of TrueCaller. It’s very likely that you didn’t download TrueCaller after seeing an ad. You downloaded it after hearing about it from a friend. Somebody came to you and told you, give me any number and I’ll tell you who it belongs to. After seeing its magic, you wanted to use TrueCaller for yourself. TrueCaller naturally has strong network effects.
In its early days, Facebook’s users were its biggest proponents. Anybody who wasn’t in the network felt left out. This is only possible when the ∆e is large enough, even if the solution isn’t perfect.
Uber or Ola aren’t perfect. Online ticket booking isn’t perfect. But we do have a high tolerance for them despite these issues, because despite these hiccups, they new way is still much better than the old way. In conclusion, any product or service that offers ∆e >= 4 creates wealth. And interestingly, by the same rule we can understand what doesn’t create wealth.
Take online shopping for example. The efficiency score in buying shirts online vs. offline is a bit fuzzy. Sometimes it’s great, sometimes it isn’t very efficient i.e., sometimes ∆e is negative. So every time you come across a product that has ∆e < 4, it ends up being a reversible behaviour. One bad experience would make you say that it’s absolutely useless, so there’s less tolerance. On top of that, the new state isn’t bragworthy. You won’t hear people telling other people to go ahead and try this new format of buying shirts. It might be good, it might be novel, but it definitely isn’t great.
This brings me to what Paul Buchheit, the man behind Gmail said, “If your product is Great, it doesn’t need to be Good,” which means, if your product or service solves one or two major obstacles, the other menial missing features or bugs won’t be an issue. Before Gmail, all email service providers provided only 4MB storage quota. Gmail started with 1GB. That one feature in itself gave the new state ∆e > 4. It didn’t matter if Gmail didn’t have a good address book because when ∆e >= 4, the tolerance is extremely high.
One good thing about users, and humanity in general is that, we inherently know when ∆e >= 4 for us. If I don’t have time to do laundry or dishes, it makes more sense for me to get a domestic maid. It’s cheaper and more efficient than getting a laundry service. Similarly, no matter how efficient BigBasket of Grofers is, it’s still far more convenient, time saving, and efficient for a large segment of people to get groceries and veggies from nearby local shops.
Services that don’t have 4+ ∆e artificially increase efficiency by giving heavy discounts and cashbacks to retain customers, thereby eroding wealth instead of making wealth. Don’t invest your time and money where ∆e < 4 because humanity will not brag about it. Make something bragworthy instead!
The world is a big market, and there’s ample amount of user segments to make money from, so you definitely don’t need everybody to start using your new product or service. Having said that, this is a good framework to keep in mind when you are thinking of building a business, or putting money in somebody else’s business. It’s a common sense approach that is very likely to give you a good picture of the future value of a business, thereby saving you from a lot of bad decisions.