The following tip of the week is from podcast Ep43: Why Angels Don’t do Drugs | Life Sciences Investing (Sergio Gurrieri):
With all this talk on drugs today, it got me thinking about why consumers buy and reminded me of previous discussions on vitamin pills vs. the pain killer. And needs in general have been studied at length with lots of good material out there including Maslow’s hierarchy of needs. But today I want to look at it a little differently and talk about rational desires (needs) vs. irrational desires (wants) and how purchase motivation can vary widely between the two.
We’ve spent a lot of time on the rational and logical needs. These are often reducing frustration, pain, time, expenses. They are logical needs and typically work well for buyers that are focused on efficiency, speed and cost… which is why products and services w/ this focus work so well for enterprise B2B customers. And many investors focus on startups addressing large pain points because it’s very reasonable to assume that the target market will purchase something that is solving their most painful problem.
But the fault in our logic, is the assumption that people are rational…
when, in fact, the only certainty is that people are irrational. This category of irrational desires is more nuanced but maybe even more powerful. It includes the things that people do not need, but they really want. These could be physiological, sensory, emotional, self-esteem-related, addiction-related, etc. The fact is that we are humans and the majority of the time we don’t make the most logical decision. When one is feeling stressed or down, do they always make a positive choice like going to exercise? No, people often make less healthy choices w/ more immediate gratification. When ordering food do we always choose the healthiest option on the menu? I’d argue that the majority of the time we do not.
So, this is’nt meant to be a lesson on how to make better decisions. More of just an acknowledgment that want is very powerful. When people see something they want b/c it fulfills an irrational desire, it can drive purchase decisions even moreso than a pain point.
A decent example of the intersection between wants and needs is Nest. On a recent episode of the Podcast, the Pitch, I reviewed a company called Flair, which is in the IoT, home automation space. The founder had mentioned something interesting about Nest… that it’s fundamental function and value is to adjust temperature in a living space to save energy. Yet, the real reason why many people buy Nest is to have a cool looking thermostat on their wall, maybe as a conversation piece. So, while the rational need may be to save money, the main reason why people are buying is to show it off to their their friends.
It is tremendously hard to predict people’s irrational desires. And even post-purchase, consumers will often justify a purchase as a rational need when really it was based on impulse or desire. Are Nest buyers ever going to admit that they purchased it to show off? Probably not. But the underlying motivations are there and the investor that has an appreciation for what people want as well as what they need, will look at startups through a whole new lens.