Looking for the fundamental contradictions.
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We had an interesting meeting last week with someone very high up in the Minnesota Department of Employment and Economic Development, where the subject of 6 Gingerol came up. 6 Gingerol is a compound that can be isolated from common ginger which has been shown to be effective in reducing certain cancers. Not only that but it can also be produced very cheaply, apparently for around $14/dose.
Unfortunately this is a problem because the big drug companies aren’t interested in medicines that can be produced inexpensively. In order for their economics to work, they need drugs that cost lots and lots of money to make and which can then be sold for even more money. Ironically, this is also why drug companies aren’t lining up to cure some of the biggest diseases in the Developing World, because the Developing World can’t pay the prices required to fund expensive product development. (According to the person we spoke with, this has led to a situation where development and research on 6 Gingerol is stalled waiting for a smaller drug company to see some potential and take it on.)
I think of this as a very fundamental contradiction in the system. A system structure that rewards companies for doing the wrong thing. A system that, in the case of the pharmaceutical industry, simultaneously forces companies to look for the most expensive way to solve a problem and that prevents them from solving the most pressing problems.
A lot of other industries have very fundamental contradictions such as these. The credit card industry is built upon making money from the failure of its customers, the consumer electronics industry is built upon the lack of longevity of its products. In fact, there’s probably a contradiction somewhere in the systems of most industries. I think these fundamental contradictions are very interesting because can be the starting point for innovation. For example, as I wrote the other day, Netflix used a fundamental contradiction in the video rental industry as a starting point for its business. I also think that these fundamental contradictions are fairly easy to spot. The only question you need to ask is whether or not the financial gain of the provider is directly tied to what’s best for the customer. The fact that these contradictions still exist simply says that this question isn’t asked that often.
Contradições « Run, Motherfucker, run Says:
August 10th, 2009 at 4:03 pm[...] ao Adrian Ho, que mais uma vez escreveu bonito e eu, pateticamente, mais uma vez corri para postar aqui: A lot of other industries have very [...]
ed cotton Says:
August 12th, 2009 at 4:03 pmAdrian, You are onto something with this. It would be great to see a giant list of companies who make money out of abusing their customers. I think this is a similar idea to Umair Haque's concept of “thin” and “thick” value creation?
sgerson Says:
August 12th, 2009 at 7:53 pm“A lot of other industries have very fundamental contradictions such as these.”
if many industries exhibit fundamental contradictions in that the success of the industry is dependent on what amounts to failure to the consumer, might these contradictions not be coincidental, but instead indicators of an even more fundamental contradiction of our economic system? (ok fine, that is a semi-rhetorical question
also note the different scales of organization we're talking about – this is not a contradiction at the scale of the company or industry, but it is a contradiction at the scale of the economy/society.
Matt Daniels Says:
August 12th, 2009 at 8:00 pmInteresting post–I can't help but see the parallels between your post and Atlas Shrugged.
-Agreed that this specific drug company would not develop such a cure if it cannibalized its other more expensive solutions.
-But it seems to me that if this were truly a viable solution, there would be “money on the table” to produce a ginger-based cure from some start-up/off-shoot/etc.
-I also wouldn't say that this is the “wrong” thing. Should drug companies use investor money to produce a drug at a negative ROI?
-”The most expensive way to solve the problem” is a common consumer mindset–companies will try to charge me the most possible for a product, be it electricity, wireless internet, or drugs. But market economics seem to always win in the long-run, and expensive solutions typically works in only monopolistic environments.
-Credit card companies were built on merchant fees and debt revolve–not customer failure.
-But despite all of these nit-picky things, agreed that whenever customer/company motivations are aligned, it's all win-win.
adrianho Says:
August 12th, 2009 at 11:17 pmI think Stephanie put it best in her comment where she says the contradictions I'm talking about aren't at the individual company level but rather they're at the economic/societal level.
However, on expensive solutions, I think most studies would show that the real money in most industries comes when prices have dropped to the point that the masses of mainstream people can buy into it. Therefore it should “pay” companies to look for cheaper solutions but you are right this is only in systems with competition.
On Credit – most of the money is not made through merchant fees it is made through interest on revolving debt and that is failure in my eyes.
Matt Daniels Says:
August 13th, 2009 at 12:53 amAgain, not to be too be nit-picky, but coming from a Credit Card company (American Express), I can guarantee you that much of the income of the credit card industry is from the discount rate on merchants, not the APR. It's in the credit card industry's best interest that you stay current on your account. The interest rate is to account for the risk associated with financing certain consumer's spend.
But I get your point–it's a failure to align your business model with such fees like interest on revolving debt.
But some people need the interest on the revolving debt. If may think that 20% APR is bad, but you should see what we charge people in developing countries on Kiva.org, upwards of 200% APR! Does this suggest that such micro-financing also a failure?
Getting people to use your service. | From The Head Of Zeus Jones Says:
August 13th, 2009 at 11:08 am[...] From The Head Of Zeus Jones « Looking for the fundamental contradictions. [...]
adrianho Says:
August 13th, 2009 at 2:51 pmYou may have more recent research, but the figures I've seen say that the credit card industry gets about 75% of its revenue from interest on revolving debt. http://www.nacba.org/files/new_in_debate/Credit... (pdf link)
I agree some people need it, but I think it's unfortunate that the economic system rewards companies for providing it. If (as I think you agree) the good of the company was aligned with the good of the customer, it's possible that fewer people would use it and fewer companies would offer it because it probably isn't that good for a lot of people.
FWIW I think of Amex in a different light as their primary product (I think) is still the charge card. They are actually a model I use often in presentations.
Matt Daniels Says:
August 13th, 2009 at 3:07 pmAwesome find by the way. Perhaps this provides more clarity on the credit card industry: the stat references “Credit Card Issuers,” which are just a small fraction of the credit card industry. Companies like Visa and Mastercard, for example, make nothing from customer revolve. The value chain for credit card companies include every player from the terminal, merchant acquirer, processor (Visa/MC), Issuer (e.g., Citibank), and Co-brand (e.g., American Airlines). It's the equivalent of suggesting that the auto industry is governed by dealerships.
I think that we definitely are in agreement–half of the reason the Issuers get 75% of their revenue on interest is from Consumer ignorance. People do not grasp the concept of APR, especially those with investments or savings accounts! I guess the question is whether there is a paternalistic need for the government to step in and stop rewarding companies for capitalizing on this customer stupidity.
And regarding the charge card, one could argue that it is also not aligned with customer needs. The charge card model is to maximize customer spend by providing no credit limit–certainly this is not always in the customer's best interest.
Subbu Says:
August 14th, 2009 at 12:41 pmYou have hit upon a topic that is close to my heart. I do not have examples like credit card companies to share here.
Yes, the contradictions are a good starting point for innovations to blossom. In a developing country such as mine there are companies that have overcome 'contradictions' to help people and also make a decent profit. The biggest case-study that is recognised worldwide is Aravind Eye Hospital (http://www.aravind.org) I covered them in one of my..er..post http://bit.ly/mow4F. If I am not wrong Aravind was recently featured in the Top 50 Innovative Companies by FastCompany.
Your experience vis-a-vis Gingerol brings a smile to my face as the pharma industry led by the MNC's are notoriously famous for crushing low-cost health solutions. Countries such as China and India that have a rich heritage of traditional medicines have been at the receiving end of this 'behaviour'. This is a messy topic that could easily become a pointless debate of 'left vs right' or 'capitalist vs others' etc. I think the film 'The Constant Gardener' brilliantly highlighted this.
BTW, there is an interesting organisation or movement in the USA led by a lady called Annie Leonard who has come up with this amazing video called the 'Story of Stuff' (http://bit.ly/al9zt) You might get more examples like credit card companies out there.
Nice post, Adrian. It is easy for people in the 'brand' business to get carried away by the greed of corporations, many of whom are our clients. It also requires a sensitivity to ask uncomfortable questions. It can only lead to a healthy debate and hopefully a solution that helps people who need these solution most.
adrianho Says:
August 14th, 2009 at 2:36 pmThanks Subbu and thanks for the links too, they're very interesting.
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