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