Julian is a 34-year old who lives in Berlin and works for Stripe. He also writes a very interesting blog. In this blog he explains that much of what we, as humans, do is driven by “signalling”. This is not a novel idea of course but Julian’s blog develops the idea very cleverly. The central idea behind this blog comes from Robin Hanson & Kevin Simler’s book ‘The Elephant in the Brain’: “The book makes two main arguments:
a) Most of our everyday actions can be traced back to some form of signaling or status seeking
b) Our brains deliberately hide this fact from us and others (self deception)
So we think and say that we do something for a specific reason, but in reality, there’s a hidden, selfish motive: to show off and increase our social status.”
Simler & Hanson give several examples of how our spending decisions are systematically driven by the need for us to signal our status whether it is whilst buying a Rolex watch, investing in an Ivy League education, playing the Rubik’s Cube or whilst making charitable donations. “In fact, Hanson believes that “well over 90 percent” of human behavior can be explained by signaling.”
Julian then develops Simler & Hanson’s concept by saying that signalling can be broken into three parts: “Signal Message, Signal Distribution, and Signal Amplification”. He then elaborates upon each of these components.
“The first component is what I call the signal message. This is whatever (hidden) subtext you are trying to convey. In the case of our sneakers this is probably something along the lines of “I can afford to spend $100 on a pair of shoes” and “I live an active, healthy lifestyle”.”
“So how are you going to distribute the signal message of your sneakers? You simply wear them where other people can see them. The obvious constraint here is that your signal distribution is limited to things you can display in public. This is why people are willing to spend hundreds of dollars on shoes but not on socks.”
“The third component is signal amplification: If everyone is wearing cool sneakers .. how do you make sure yours stand out? You could buy the pair with the most noticeable design or the one with the flashiest colors, for example. These signal amplifiers help you to better compete against status rivals.”
Then Julian develops the idea another notch by shifting it from the real world of physical products to the virtual world: ““Real world” products are great at visualising a signal message due to their physical nature. However, as a consequence there are also physical boundaries to distribution because there are only so many people you can signal to at once.
But what about software?… Digital products have one crucial disadvantage over atom-based products and services: Intangibility. Apps live on your phone or computer. No one can see them except for you…
I believe that this is the main reason why consumer software companies have a harder time monetizing than their physical counterparts.
Here’s another example: eBooks have never caught up with paper books despite being more convenient. On the contrary, physical book sales have remained stable (and in some markets even increased) in recent years. Interestingly though, people spend less time reading them. Their value seems to stem from lying around the house to impress visitors (see also coffee table books) – a benefit digital books simply can’t offer.
The app that comes closest to a luxury service that I can think of is Superhuman, which charges its users $30 a month for an email client (which you could also get for free by just using Gmail).
But there’s a difference to other software products: Superhuman has signal distribution built in. Every time you send an email via Superhuman, your recipient will notice a little “Sent via Superhuman” in your signature.
In a similar fashion, apps like Strava use their built in social networks as a signal distribution channel for their premium subscriptions. Users who have upgraded get a little premium badge and appear in exclusive premium leaderboards.”
Julian then explains that what social networks like Facebook do is provide “signal distribution as a service… This is the primary value that social networks like Facebook, Snapchat and Instagram provide. These services don’t contain a hidden signal message. All they do is provide signal distribution at scale. Want to increase the number of people who can see your sneakers? Just take a photo and post it on Instagram.”
However, the ultimate monetisation of our desire to emit signals Julian says is not “signal distribution as a service”; it is “signal amplification as a service… While Instagram, Twitter and the other above-mentioned social networks are free to use, other companies have figured out a clever way to monetize their signal amplifiers. The two companies who have done this most successfully are Tinder and Fortnite.
Tinder is a social network for dating – or in other words, a signal distribution network to display your mating worthiness. Like other social networks, Tinder is subject to network effects: The value of the network increases with its size. The obvious strategy therefore is to make memberships free so that as many people as possible can join.
Tinder’s primary proof-of-work mechanism is to optimize one’s profile picture for a maximum number of swipe rights. But with millions of rivals on the same platform, competing for status with just a few pixels of profile picture real estate becomes a really hard task.
Luckily, Tinder offers a variety of additional signal amplifiers that help you to stand out. The sole purpose of features like Tinder Boost and Super Likes is to outcompete status rivals by giving you preferential signaling treatment. And guess what – they come with a price tag.
Tinder’s entire business model is built on the assumption that people are willing to spend money on signaling. That assumption seems to be correct: Tinder made a staggering $1.2 billion in revenue last year making it one of the most successful apps world wide.”
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
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