Think how repeatedly every time we go to same grocery store to buy our day to day merchandise. Or how frequently we take the same route to our office everyday though there being a couple of routes of reaching it. We go to the same garage every time our car needs some work to be done. We almost religiously eat the same brand of noodles, brush our teeth from same brand of toothpaste and shave from the same brand of shaving gel & razor month after month. It is startling to see this type of consistency in our day to day life in an era where in ‘disruption’ is the most used (and abused 🙂 ) term!
One of the reason behind all of this is that we humans are loss averse which means our mind wishes to avoid the need for frequent decision making and rather stick with the status quo if it satisfies our basic needs. Given the complexity which the decision making process involves, we satisfice ourselves.
Edgar Rice Burroughs in his book ‘The Beasts of Tarzan’ writes –
We are, all of us, creatures of habit, and when the seeming necessity for schooling ourselves in new ways ceases to exist, we fall naturally and easily into the manner and customs which long usage has implanted ineradicably within us.
So, unless our needs change, our decision remains more or less the same which overtime becomes our habits. As such, ‘creatures of habit’ is an important mental model. Think about the wealth it would have created – and is still creating – for those that have been on the receiving end of this right from our regular grocery store to multi-billion dollar global conglomerates.
Businesses Enjoying this
Let’s see how some of the successful businesses globally are utilising this tendency to their advantage.
It is the world’s largest restaurant chain operating in about 119 countries selling burgers & fries which is certainly not difficult to make or imitated by others. Then what explains this type of success enjoyed by it over the years? Rory Sutherland, Vice-Chairman of international advertising firm Ogilvy & Mather in his interview says –
Why do we go to McDonald’s? Is it the best food in town? Probably not. The search cost of finding the best place to eat in town, given that we’ve only got one shot at having a meal in a strange town, would be pretty high. But also when you go into McDonald’s you know you’re not going to be ripped off, you’re almost certainly not going to be ill. By contrast I’ve become ill after eating at Michelin-Starred restaurants quite frequently. Once you understand the perfectly sensible evolutionary instinct to satisfice, then the preference for brands is not irrational at all: I will pay a premium as a form of insurance for the reduced likelihood that this product is appalling.
So as much as the quality & taste of the delicious food it serves, its huge network of restaurants spread across almost every important city on the planet and the mindshare it has built over decades enables it to compete and succeed by doing something as simple as making and selling good quality burgers.
It is worth prodding the reasons behind the success of a café serving expensive coffee – whose prices were multiple times that of competing brews when it started its operations. Dan Ariely beautifully explained this in his book ‘Predictably Irrational’ –
You are sleepy and in desperate need of a liquid energy boost as you embark on an errand one afternoon. You glance through the windows at Starbucks and walk in. The prices of the coffee are a shock—you’ve been blissfully drinking the brew at Dunkin’ Donuts for years. But since you have walked in and are now curious about what coffee at this price might taste like, you surprise yourself: you buy a small coffee, enjoy its taste and its effect on you, and walk out.
The following week you walk by Starbucks again. Should you go in? The ideal decision-making process should take into account the quality of the coffee (Starbucks versus Dunkin’ Donuts); the prices at the two places; and, of course, the cost (or value) of walking a few more blocks to get to Dunkin’ Donuts. This is a complex computation—so instead, you resort to the simple approach: “I went to Starbucks before, and I enjoyed myself and the coffee, so this must be a good decision for me.” So you walk in and get another small cup of coffee. In doing so, you just became the second person in line, standing behind yourself.
A few days later, you again walk by Starbucks and this time, you vividly remember your past decisions and act on them again—voilà! You become the third person in line, standing behind yourself. As the weeks pass, you enter again and again and every time, you feel more strongly that you are acting on the basis of your preferences. Buying coffee at Starbucks has become a habit with you.
Its rich ambience, huge network of café covering every nook and corner of the US and brand recall adequately supported by distinguished menu makes it a business which its competitors envy.
It happens to be one of the world’s most valuable brands with its products – razors & blade – enjoying 70% market globally. Will you buy a product offered by its competing local brand which happens to be 10-15% cheaper? Never. You don’t wish to run the risk of hurting yourselves while shaving. Besides, you might think, the life of a branded product may end being longer than that of a local unbranded one thereby more or less compensating for the price difference.
Great product, almost omnipresent like availability of its products and strong brand recall is something which Gillette enjoys to its advantage.
There are several examples of businesses enjoying one or the other competitive advantage due to the tendency of its customers to maintain status quo and to satisfice rather than acting as rational beings 24×7.
Did you notice the common thread running across the above examples? For this principle to work, there must continuity which must be maintained i.e. habits should not be interrupted or broken else they may change. And what ensures that kind of continuity which works in their favour?
Well, first thing is availability i.e. product or service should be available whenever required. Starbucks would have been in a weaker shape had it not been in every corner of US and so would be Mc Donald’s. They need to be present where ever their customers need them. That is another reason why we find Mc Donald’s more frequently nearby interstate highways. We plan our journey stops depending upon where its stores are located so as to avoid eating potentially unhygienic food. Similarly, Gillette’s blades need to be present at a stone’s throw away distance where ever its customers reside.
Second, they need to continuously invest in advertising & marketing to maintain and expand the mindshare which they enjoy. It is an intangible asset which they are building but which gets no mention on their annual balance sheets – given that it cannot be precisely measured. There are a few things cannot be precisely measured but that does not deny their existence..this is an another topic altogether which can be saved for some other day.
Amount spent on it is charged against current profits but it would be reasonable to expect the benefits to flow for quite a long period.
Every mental model has its limits. Recognising those limits are sometimes more important they knowing the advantages they may enjoy.
Let’s go back to our garage example. If the mechanic which frequently repairs your car happen to be replaced by a new recently trained one who made a small mistake while working on your car such that it is in a far worse condition now then you had left it in, you might think twice about bringing it back to the same place next time. In the words of Mr. Burroughs, there is a seeming necessity now to retrain yourselves.
When needs change, it is only reasonable to expect change in people’s behaviour which was otherwise set.
So, if tomorrow another competitor selling razors & blades happens to establish trust similar to what Gillette enjoys while selling them at a fraction of what Gillette charges, it would put their business at risk. They key is to assess how deeper has the challenger managed to build that trust and can Gillette also lower the amount which it charges by lowering its cost to its competitor’s levels? In essence, it becomes a race: whether Gillette would be faster to build those cost competencies – and disrupt its own business – or whether the challenger would go on building a combination of cheaper economics and strong mindshare. By the way, as we speak, this race is actually being unfolding sparked by a small start-up called ‘Dollar Shave Club’ now acquired & resourced by Unilever.
This was just another attempt in order to assess and better understand how far does this simple concept of habit goes – and how powerful it is. It is never just one thing which ensures investing success in a world as complex as the one in which we live. It is rather a latticework of such models. Hope you enjoyed reading this and it added to your understanding of how world works just as much as it did to me while writing this. Cheers.