Many years ago while I was still working in Silicon Valley, I got into this debate with a fellow co-worker over the subject of Amazon.
At the time Amazon already had the lowest price for books across all developed countries, mostly credited to its highly efficient system as well as economy of scale. To buy a book in France would cost about twice than it was to buy in USA over Amazon, especially given the exchange rate back then.
My co-worker, also a friend in private life, argued that cheaper books are always better for consumers even if it squeezes the profit of the publishers and writers. Ultimately the society gains more than it loses. His reasoning was very much in-line with all the main-stream arguments for laissez-faire market economics.
I won the debate easily by simply telling my friend, a senior engineer making comfortably six figures every year. that the real cost for a book buyer is not the book itself, but rather the time he or she has to invest in actually READING the book, hence the opportunity cost. In my friend's case, this opportunity cost could easily be 10 or 20 times the price tag of the book, whether it's on Amazon.com or in a small bookstore along La Seine. Whether Amazon's much-acclaimed efficiency really contributes to the greater good of the society should not be judged by comparing the nominal costs of book procurement for readers. Otherwise, we should just build more libraries since what's better than free books to read?
Opportunity Cost of Time
Today, with all the media, applications, games and social networks fighting for our daily attention, it seems to me that this opportunity cost is more critical than ever.
Every hour I spend on Netflix means one less hour I'd spend on watching cable TV. Every one minute I spend on browsing Twitter on the smartphone means one minute I spend less on reading the newspaper. And every 20 minutes I spend on figuring out how to use a new calendar app means 20 minutes I spend less on trying out another calendar app.
In the traditional marketing theories we talked about share of wallet of a consumer. For the world today it's more appropriate to analyze share of time awake of a consumer.
This is in some way why lean startups don't look lean financially anymore these days.
Based on the public part of the report by Mattermark, the average Series A amount received by Y Combinator's startups climbed steadily over the years and above industry level, which practically stays flat (see above). This could be due to one or several of the following reasons:
- YC has been really good in identifying and accelerating startups, therefore attracting better lean startups to join its program, thereby leading to a growing Series A funding for these more promising early-stage startups
- YC has built an aura around it that its graduates are automatically attracting more fresh money out of the batches
- There's just too much venture capital out there chasing deals and a good program like YC peels off certain risks for investors, allowing them to invest more for Series A
- These startups simply need more-than-usual Series-A capital to fight the war they're fighting
The reality is probably a combination of all four, but while the first three are mostly positive for said lean startups and even their investors, the last reason could potentially be really bad.
My theory is, lean startups with its low entry barrier has become such a trend that most of the time the key is execution, not the idea. This is a good thing since idea without execution has zero value. However, this also means that multiple products addressing a similar pain point will have to fight their teeth off for arguably the most precious resource of today's world — the users' time. And to achieve that, these startups need more and more capital for their Chief Growth Officers or Growth Teams to burn so as to grow faster than their competitors and reach dominance first.
This is one of the reasons why Facebook is making so much money these days, as startups burn investors' money to increase installations of their apps or trials of their services via expensive advertisements on this vastly addictive social network. This part is not unlike the dot-com bubble of the late 90's when startups bought TV commercials to advertise their websites.
Granted, this part of the game is not entirely zero-sum like in established FMCG sectors such as toothpastes or detergent powders. Startups are trying to create new needs and new markets so a certain part of this effort will turn into a larger market which would eventually justify the cost of war.
Still, it doesn't change the fact that there's fundamentally a nuclear-winter part of this status quo. For early-stage startups this can be especially costly as they have higher churn rates for their services than more mature startups. And as the Customer Acquisition Cost rises, at some point the Customer Lifetime Value (CLV) will turn definitively negative in all scenarios however you tweak the model. Then such business activity would mean little sense to a rational investor.
On the other hand, hardware (gadget) consumption follows a traditional constraint. While any consumer only has 24 hours a day whether he's a low-income worker in Shenzhen or the heir to a Swiss insurance tycoon, his expense on physical things has a much softer cap, which is in turn strongly tied to his disposable income — sometimes more than one's disposable income: think about all the Americans that carry credit card loans all the time.
With hardware consumption, we're back to the share of wallet concept. In the highly undemocratic share-of-wallet world, a bag can be a $2,000 Louis Vuitton or a $10 counterfeit, both occupying the same arm space of the person that carries it and the same space in the closet. A Keecker priced at $1,999 got more than 100 pre-orders on Kickstarter while deals websites give buyers comparisons of 20 different mass market projectors ranging from $200 to $600.
Marginal cost of zero and non-zero
Lean startups are successful due to zero marginal cost — having one more person use Duolingo practically costs nothing more for the popular language learning website. The prices that users eventually are willing to pay, either directly or indirectly, depend on how much utility they offer compared to existing solutions. Most users have a mental make-or-break point beyond which they would not continue to invest their time to use a certain app/service — let alone pay from their wallets. This results in the seemingly narrow range of consumer SaaS pricing that we are seeing today on the market.
On the other hand, the new hardware startups seem to depict a stronger pricing power than lean startups. Narrative Clip is selling the 2nd generation of its little plastic box for $199 while Canon and Nikon are struggling to sell their much more capable and powerful digicams at the same price. The most successful hardware startups today are creating perceived values that are beyond utility and performance much better than majority of the lean startups. It's true that hardware startups do not have zero marginal cost on their side, but the fact that they have the chance to price for the emotional part of the spectrum gives them an entirely different yet equally compelling narrative to tell to the investors.
if you are prepping your own lean startup, just like another million entrepreneurs on earth right now, you should keep in mind that it's no longer a lean war like a couple of years ago when the trend first revealed itself. You're fighting first for the share of time of the consumers before you can monetize them.
On the other hand, if you're a hardware entrepreneur, you are fighting for the traditional share of wallet and you should recognize the potential in creating perceived values that allow you to have a much more flexible pricing.