Mental Models to profit and detect opportunities
Mental Models in Action
Soham DasThe Mental Models Guy
The Speaker
Some words of praise
“Its nice to meet another investing fanatic.”
-John ChewCsinvesting.org
“I really enjoyed your work. Great job… keep it up.”
-John HuberSaber Capital LLC
“Thank you for the write up. Its one of the best I have ever read”
-@narasimhagm
The Mental Models for today
Search Costs +
Switching Costs
The Story of Astral Poly
How Sandeep Engineer tapped Network Effects
• Back in 2002, he was asked to address a conference of Brihanmumbai Plumbers Association
• Stellar Response from plumbers- they wanted training, plant visits and a strong engagement with the company
An ecosystem of active users
• This created an ecosystem of active users in and around his company.
• He decided to replicate this model across the entire country.
• Went on to conduct training workshops, conferences and seminars.
A growth of 45% + ! in Promotional Expenses
2007: 93 cr
2008: 149 cr
2012: 610 cr
Building an Ecosystem
What was he really doing?
• All of it was a pretence to create a user base who had strong engagement with a company and its products
• Result : An ecosystem of users who actively shared knowledge and built word-of-mouth for the company.
• But was it really an expenditure or investment?
• While expenditure is the cost of running a business, an investment is the cost of bringing growth
A continuous investment in building
an ecosystem
100x since 2009
Some examples of network effects
• MCX,NSE, Financial Exchanges – networks of financial intermediaries
• Facebook, Twitter- networks of social users
Best businesses have a …
Synergy of Mental Models
…Acting together
Search Costs
• What are search costs ?
The cost incurred by a user of a particular product to search for its alternative
Works great with brick and mortar businesses- something about internet which has completely annihiliated search costs
• Who is the largest retailer in the world?• Which is the largest financial supermarket in
the world?• In India- who is the biggest cafe chain ?
Walmart, Wells Fargo, Café Coffee Day
The world of Search Costs: WMT
An average American is 12.5 minutes “Walk” away from a Walmart
The world of Search Costs:Wells Fargo Corp
• Very difficult to compete with an organization which can put up a map like this.
• For a competitor to compete with these behemoths, he has to put up a “store” closer to the average user than these behemoths are.
Extrapolate across the country- he will have negative return on capital.
Some Indian Examples
• Astral Poly
• Indag Rubber
• V-Mart Retail
What is Switching Costs?
• Given an alternative to an existing product which the user is using- what is the cost incurred to switch.
• E.g. there is a high switching cost in favour of Maggi Noodles when compared to any other instant noodles in the market
Search and Switching Costs
• The Different kinds of switching costs- psychological, emotional, cognitive
• Price Cuts & Switching Costs
Psychological Switching Costs
Familiarity
Brand Loyalty
Peer Pressure
Emotional Switching Costs
Associating positive emotions with a brand.
Switching Cost & Emotions
Positive Emotions invoked was transplanted to the brand
As a result when you try to think of switching you will feel an internal resistance to switch
Cognitive Switching Costs
“Trust in highly sensitive information regimes”
e.g. co-research on Intellectual Properties, research on defense projects, research on pharma projects
A challenger can be caught in a suboptimal loop
• In these cases, no amount of convincing is enough to persuade a business entity to switch partners
• Why?
• “I can’t trust, because we never had a prior relationship.”
• Or in other words- “I can’t trust you today, because I didn’t trust you yesterday”
PI Industries & trust
Contract Manufacturing
= A game of trust
Tr ust = Swit ching
Cost !
Promotional Costs as a Percentage of Sales
2008: 1.7%
2009: 1.4%
2014: 1.2%
A 6x in 3 years
What are Mental Models?
• They are lenses to understand businesses• They are a way of seeing things.• Having a knowledge of models will enable
you to see a business decision in its true light.
• Thus preventing you from throwing away Astral Poly or Vmart or PI Ind as just costly overvalued stocks.
Can you identify how coke is improving its switching costs?
Thank You