🍀  The Winning Strategy: How Amazon and Costco Mastered the Membership Model with Sunk Cost and Endowment Effect 🏆

Hey there, it's Manav! Welcome to my newsletter.

✨ Every Monday, I'll be sharing my thoughts on productivity, life lessons, and helpful tips, all based on what I've learned throughout the week.

This weekly newsletter is my way of reflecting on life and keeping track of the fascinating things I discover or come to understand. It's also a promise to myself and all of you to stay mindful and curious and engaged with life's many lessons.

Each issue will dive into specific topics, and I'll be sure to add my own spin to them. So, grab a cup of joe and get ready for some weekly wisdom!

SUNK COST + ENDOWMENT EFFECT

Over the last weekend, I was listening to a 4-hour episode on Amazon.com on the Acquired Podcast and they made a great point about how Amazon Prime was the key inflection point in the history of Amazon that was just the right combination of Salt + Sugar to get the consumers hooked.

Let me explain.

For Amazon, it's all about changing shipping from a variable cost to a fixed one for the customers. Plus, they get to pocket that money at the start of the year. (Sweet & Juicy Cashflow)

For customers, they know they're getting the best deal. And if you're ordering stuff every week, it's a no-brainer.

Customer Happiness = Convenience + Savings. It’s a win-win.

A lot of retailers are playing this game now, but I want to dive into how Costco and Amazon are acing it.

It’s called the Sunk Cost + Endowment Effect, two important concepts in behavioral economics.

Sunk cost effect:

This refers to the tendency for people to continue an endeavor once an investment in money, effort, or time has been made, even when it might not be the best decision.

This is due to the fact that these costs have already been incurred and cannot be recovered.

In relation to Costco and Amazon, the sunk cost effect might manifest in annual membership fees.

For example,

once you've paid for a Costco membership, you may feel compelled to shop there regularly to "get your money's worth," even if you could find the same items for less elsewhere.

Endowment effect: 

This is the tendency for people to overvalue things simply because they own them. This means that individuals often demand more to give up an object than they would be willing to pay to acquire it.

For Amazon and Costco, the endowment effect could occur when a customer buys an item, especially a high-value item. Once it's theirs, they may value it more highly than the price they paid for it.

This might make them more resistant to returning the item if it turns out to be less useful or less satisfying than they initially thought.

In a nutshell, both these effects can influence consumer behavior and buying decisions, leading customers to potentially make suboptimal choices.

Businesses like Amazon and Costco may indirectly benefit from these biases, as they can encourage customers to continue shopping or keep items they might otherwise return.

💀 CHALLENGES 

Over the past week, I had a realization.

I'm not making and launching new products quickly enough.

Over the next few months, I will be assembling a strong team of ten commanders.

This team should be able to create and start selling products within a few days, not weeks.

They should make choices quickly, in a matter of minutes rather than hours.

The team should improve the products so quickly that the people buying them can't keep up.

But, while doing all of this, the team should also make sure that the products are of good quality.

I need designers and hackers who care as much about the business as I do.

I need people who go after what they want, not those who wait for things to come to them.

I need hunters, not gatherers.

Top 3 Business Podcasts of all time 🎧

1. Founders Podcast: Hosted by David Senra who reads a biography of an entrepreneur and summaries it. This podcast will teach you lessons from history's greatest entrepreneurs. His episode on LVMH was really good.

2. My First Million Podcast: It’s hosted by Shaan Puri and Sam Parr who every week do a deep dive into new business opportunities and interesting stories.

3. Acquired Podcast: This podcast is hosted by Ben Gilbert and David Rosenthal who talk about the biggest tech IPOs and acquisitions of all time. 'Acquired' helps you understand every great company's story and the playbooks they used to be where they are.