Terrible Business Plans, Wonderful Businesses

“Solving problems using rationality is like playing golf with only one club.” – Rory Sutherland

Imagine you’re an investor and I make you the following pitch of a business plan:

We’re going to open a new chain of grocery stores. The stores will sell zero branded items. No Coke. No Budweiser. No Lucky Charms. Everything will be private label.

There will be no advertisements on TV or social media. Nothing in the store will ever go on sale. There will be no coupons accepted, no loyalty rewards cards and no Sunday newspaper circulars. There will be no self-checkout kiosks. The aisles in the stores will be narrow and the stores and parking lots will be relatively small.

Who wants to invest in this company?

Michael Roberto, a professor at Bryant University, likes to give his students this pitch to gauge their response. Of course, most people would assume this is a terrible idea.

Then Roberto tells them this store already exists. It’s Trader Joe’s, only one of the most successful grocery chains in the world.

Freakonomics did a deep dive into the grocery store that has a diehard following by many of its customers. They discovered how this unorthodox business plan has allowed Trader Joe’s to outsell every other grocery store chain on a per square foot basis.1

There’s a lot more that goes into the store’s success besides being different than most grocery stores (the culture, the people, the quirky products they sell, their private label strategy, store location, etc.) but it’s always fascinating to discover business models that sound insane in theory but work in practice.

Here’s another one:

Let’s say you would like to compete with the likes of Coke and Pepsi in the non-alcoholic, cold beverage space.

Here’s the pitch: Put the drink in a tiny can, sell it at a high-end price, ensure it’s an odd color and make it taste kind of disgusting. When you perform taste tests before launching this drink, ignore the fact that the agency running the test claims it’s the worst reaction to a newly proposed carbonated beverage they’ve ever come across. Don’t worry about the subject who claimed, “I wouldn’t drink this piss if you paid me to.”

I just had one of these drinks recently and it made me feel like my heart was going to jump out of my chest all night.

What is this drink?

It’s Red Bull, which defied the terrible early reviews to become one of the most popular cold beverages on the planet.

Rory Sutherland profiled Red Bull in his book Alchemy to show how it became so popular despite everything it had going against it from the outset:

Red Bull is among the most successful commercial placebos ever produced – its powers at hacking the unconscious are so great that it is repeatedly studied by psychologists and behavioural economists all over the world, including the great Pierre Chandon at INSEAD, one of the top business schools in Europe. So potent are the drink’s associations that the very presence of the logo seems to change behaviour. However, no command economy could ever have produced Red Bull, and nor could a bureaucratic large multinational – it took an entrepreneur. The most plausible explanation for the incredible success of Red Bull lies in a kind of placebo effect. After all, it shares many of the features of a great placebo: it’s expensive, it tastes weird and it comes in a ‘restricted dose’. 

My contention is that placebos need to be slightly absurd to work. All three elements that seem to make Red Bull such a potent mental hack make no sense from a logical point of view. People want cheap, abundant and nice-tasting drinks, surely? And yet the success of Red Bull proves that they don’t.

There are a host of new tech businesses that follow a similar path of sounding ridiculous in theory when they were launched but now work in practice.

Remember how scared we all were of interacting with people when the Internet first hit mass appeal? How nervous we were to share our credit card information?

I’m not the first to point this out, but Uber is literally hailing a stranger to come pick you up in their car. Airbnb involves paying a stranger to sleep in their house or apartment. I’ve heard a number of venture capital investors talk about how these worries kept them from investing in these companies in their infancy.

And can you blame them?

Sutherland reminds us, “The fatal issue is that logic always gets you to exactly the same place as your competitors.”

The business world would be much easier if logic ruled the day but sometimes consumer decisions make no sense.

Sutherland makes the astute point that adding hyperloops or high-speed trains may make travel 20% faster and cost millions of dollars but making travel 20% more enjoyable might cost nothing at all. Movies about the future tend to show newly designed buildings, cities, and roads but he thinks the future of design could have more to do with psychological design:

It seems likely that the biggest progress in the next 50 years may come not from improvements in technology but in psychology and design thinking. Put simply, it’s easy to achieve massive improvements in perception at a fraction of the cost of equivalent improvements in reality. 

It’s interesting to think about the types of businesses, many of which may make no sense on paper, that could come out of a potential psychological revolution.

Further Reading:
Simple Business Models

1One study pegged Trader Joe’s at sales of $2,000 per square foot, more than Whole Foods ($1,200) or Walmart ($600).

 
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