Adopting a game theory point of view to succeedBusiness is often looked upon as war: A war to gain market share. While wars can be won and lost, this viewpoint (of business) restricts only winning as the outcome. The frequently abused phrase “idea is good but execution is the key”, captures the real essence of running a successful business. Executing the idea or playing the game well is the key to success. Businesses play the game of values: creating or capturing them. So how do you know if you are executing or playing the game well? How do you know if you are really creating value? What are the hurdles and how to take the right decisions to effectively cause value increment? Let’s try to answer these questions using game theory.
So, "Game theory!" sounds fancy! What is it? Well, in 'aam bhasha', game theory is a framework to assess and predict the outcomes of a cooperative or competitive scenario.
Let me start with a scenario. Few years back, when the e-commerce space was warming up, someone hit upon an incentive plan to acquire users. The game began with a 100 rupees on sign up, going on to 2000 rupees now. It’s a pure-play lose-lose situation for the companies. Worse still, customers have been seasoned to expect discounts and rebates, thus attaching their loyalty to discounts and less to the brands. The companies who started the trend are themselves facing the brunt as these rebates lead to a customer acquisition cost (CAC) greater than customer lifetime value (CLV). Expecting anything more than 2-3 transactions from an average user is insane, unless you are in travel. Can we find an alternative to this discount-mania which is hurting all the companies?
I will come back to this scenario post a discussion on competition and cooperation.
Which game are you playing?
According to game theory, there are two games: Rule based and Freewheeling. In rule based games, players interact based on some rules or structure while in freewheeling games, players interact without any external constraint. For rule based games, the principle is “To every action there is a reaction (need not be equal and opposite)" and for freewheeling games, the principle is “You cannot take away from the game more than you bring to it”. Depending on the sector in which your business operates, you will be playing one of these games with the other players. It’s imperative to realize that at any point of time you will be playing different micro games like game for cheaper customer acquisition, cheaper supplier rate, building a distribution network and so on. In all such games, one needs to first find the game that he is playing.
Who are you playing it with?
Now, who are the players in your game? It’s not just your immediate competitor but your partners, your suppliers and your substitutors that form your value net. The value net needs some explanation. Traditionally, we constrain ourselves to think of only immediate competitors, while all the players play a vital role in creating or capturing value (which is what business is all about).
The value net, along the vertical, has raw materials and resources that flow from suppliers to customers via the company and the money flowing in the opposite direction. Along the horizontal, non-transaction based interactions take place.
We often overlook complementors, considered friends, in our value net as our focus is purely on our competitors whom we look upon only as enemies. The thing to understand here is that the roles in a game are dynamic. It’s not necessary that the competitor is an enemy in each micro game that you are going to play. Nor is every game a traditional win-lose game played against your competitor. Sometimes you have to co-operate and sometimes you have to compete, based on macro value creation, as we will see in the example scenario too. It will help to replace competition with a new term “coopetition” to recognize this.
Let’s come back to our scenario discussed earlier: The micro game of customer acquisition. Dot-coms are locked in a destructive competition of discounts in a typical win-lose strategy, with price as the competitive lever. Each one is trying to outdo the other by matching or surpassing the offered incentive. The consumers have become habituated to these discounts, thus causing a loyalty deficit. This price war consumed brands like Taggle and also forced brands to change their business model altogether viz. Snapdeal. Fashionandyou recently admitted to the atrocities of flash retail and their shift in focus.
So, what’s the way out? Let’s take a fictional dotcom: myStory.com. myStory.com decides to replace the destructive one-off signup incentive with a R&R program which incentivizes usage with incremental discount percentages for becoming a member. The net effect will be to increase the cost that the non-member – someone who plans to buy the product from theirStory.com, for eg. - will have to pay for the product. The program thus allows theirStory.com and the likes, some breathing space to redesign their incentive program. This will further allow myStory.com to increase the costs without fearing to lose customers to its competitors. The result is a win-win dynamic between myStory.com and its competitors, effectively changing the win-lose game to a win-win one. What if theirStory.com also copies the same incentive program? Well, this can be the topic for a different post all together, but keeping it short, imitation is an awesome compliment and in effect will lead to warming up the audience for the new incentive program, causing better adoption. But more so, the game has shifted from a destructive one to a constructive one, which is good!
The key takeaways from this example are:
1. Game theory preaches the importance of shifting the focus from self (egocentric view) to others (allo-centric view). This allows for a better understanding of your added value and what each player is bringing to the table. Recognizing the value contribution of each player in the industry, helped in changing the incentive plan with an expected response from the market and players.
2. Recognizing the game being played is important to play it well. You need to know if you are playing the right game so that you can actively shape the game and not just play it. Recognizing that we are playing the wrong game of discounts, helped in designing a fresh strategy, which then resulted in actively reshaping the game itself.
3. A subtle effect of this change in game is a change in the role of players too. In effect, the strict competitors cooperated to bring about a new game. This is an important point, read it again. The roles of players are dynamic and they keep changing as per the requirement of the game being played.
Game theory is largely a mathematical construct that helps in decision making; in essence, to back the gut-feeling with pure numbers. It has found its application in diverse fields and new applications are being discovered and discussed as we talk. You need not be a mathematics wizard to tame game theory; a primer shall help in adopting a game theory point of view. According to me, that’s the key.
Did I miss something? Will love to hear more interpretations and other solutions!
At the cost of blatant self-promotion, at Tushky.com, we applied the same approach to capture audiences. We designed the whole incentive program around incremental discounts and rewards on usage, effectively gami-fying (is that a word?) the whole site. Will love to get a feedback on the same!
Want to make your startup journey smooth? YS Education brings a comprehensive Funding and Startup Course. Learn from India's top investors and entrepreneurs. Click here to know more.