I’ve often heard it said that if people buy the product a company or startup is selling, then the company must be creating value in the world. After all, why would someone buy a product if it were not creating value? It would be really nice if this were a valid argument (since then more units sold means more societal benefit). Unfortunately, it’s not.
I like entrepreneurship a great deal and think on net it has added huge amounts of benefit to the world. In fact, I’m an entrepreneur myself. But I don’t like flawed arguments that make it sound automatically beneficial when it’s not.
To help put the above flawed argument to rest, here’s a list of 13 situations where a product that doesn’t add net value to the world may still get bought in large quantities:
IMPERFECT INFORMATION
(1) a product doesn’t actually provide the benefit that it claims to, yet the marketing is persuasive (and it’s difficult to tell after whether or not you got that promised value)
Think: numerous supplement companies today whose products don’t do what is claimed. People buy not because they get value but because they think they will (and they keep using it because it can be hard to tell if the benefit is occurring – for instance, whether it’s really reducing your chance of serious illness).
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(2) the product benefits most users, but it harms a small number of users so much that it nets out as negative
Think: a slightly effective treatment for a mild disease that occasionally produces deadly allergic reactions. People buy because they want the slightly effective treatment, but the harm for those who are allergic is so great that in total the impact is highly negative.
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(3) the product adds value to the purchaser, but less value than its competitors would have offered, yet its marketing is more successful than its competitors
Think: accounting software that is well below average in usefulness, but it has a much more effective marketing team than other accounting software companies. People buy it because they recognize the brand but they would have been better off if they hadn’t heard of this brand because then they would have used one of the better competitor products.
EXPLOITING IRRATIONALITY
(4) the product is addictive, and while users get pleasure out of it, many vastly over consume it (relative to their own preferences), making the experience net negative overall.
Think: video games that have been optimized purely for addictiveness (rather than for fun), for instance making you feel bad when you stop playing. People keep playing and paying even though they are doing it more than they themselves would choose.
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(5) the product takes advantage of our tendencies to overweight small probabilities of very large benefit
Think: lotteries that are specifically targeted to extremely poor people who really shouldn’t be spending that much money on lotteries. The consumer buys because of their hope that one day they will win (which is an exaggerated hope because we humans struggle to deal with tiny probabilities) in combination with the direct enjoyment of playing (which is potentially real enjoyment, but not enough alone to make buying the tickets worth it).
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(6) the product gives us appealing but harmful false information
Think: a self-help book that paints an appealing vision of the world that people WISH was true (e.g. “you can get anything you want and you don’t even have to try! It will come to you automatically if you just believe!”), but the book is actually filled with terrible advice that will cause your life to be worse on average (e.g. the advice actually demotivates you from taking actions to achieve things, and the book claims that if its advice isn’t working for you then you aren’t following it properly so it’s your own fault).
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(7) the product gives consumers benefits immediately, but then causes harm in the future to those same consumers that more than makes up for the initial benefit
Think: a loan product that gives cash immediately, but which has sky rocketing interest rates years from now (the details of which are complex and hard to fully appreciate). People buy it because they are over emphasizing the immediate benefit relative to the greater long term future cost.
ZERO SUM OR NEGATIVE SUM GAMES
(8) the product does create value for THAT consumer, but it does so by making it easier for that consumer to take advantage of or harm other people
Think: software that makes it easier for you to spam people. People buy it because they benefit selfishly by spamming people, but at a direct cost to those other people.
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(9) the product provides value to you as long as you can convince others to become buyers of it too, but ultimately this is unsustainable so in the end someone pays the price
Think: various multi-level marketing companies that turned out to be pyramid schemes, where most of the value a consumer derives is not from using the product, but rather from convincing other consumers to convince other consumers to convince other consumers to sell the product etc. and eventually the whole thing collapses because there isn’t enough real demand. Consumers still buy it though because they see all the (real) success stories of people getting rich from it and because their friends have a monetary incentive to convince them to, and people don’t catch on right away to the unsustainability of the whole system.
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(10) the product helps the buyer get more of a resource that only exists in limited quantities, so it necessarily comes at the expense of someone else getting less
Think: a product that trains you how to do better on a specific entrance exam for a highly prestigious institution that has only a fixed number of open slots each year.
NEGATIVE EXTERNALITIES AS SIDE EFFECTS
(11) the product has negative environmental externalities that are greater than the value it provides to the purchaser
Think: a toy company that dumps their factory waste in a river, slowly and subtly poisons people living nearby. People buy because they like the toys, but the consequence is causing other people to be poisoned.
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(12) the product causes a large transfer of wealth from poorer people to richer people, leading to greater inequality
Think: an automation technology for private companies in a not very competitive industry that makes the service those companies provide WORSE for consumers, but it is still in the interest of companies in that industry to buy it because it allows them to fire many employees. So even though consumers are less happy and buy less overall (and a lot of people lose their jobs) the companies save so much money that they still make more profit. And furthermore, because the industry is not very competitive, the companies don’t subsequently fight each other on price and so are able to hang on to this extra profit (that they used to pay to their employees) for a long time.
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(13) the product gives some people a little value, but a huge amount of time from a huge number of people went into developing that product, and it was not an effective use of that massive amount of labor (or, even worse, the employees are treated terribly there).
Think: a bloated and poorly managed startup that raised way too much VC money and hired way too many employees, yet its product is only slightly useful.
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