Cornering the Towel Market

If you and every one of your competitors sold the exact same product for zero dollars, how would you go about getting new customers?

We’ll come back to that question in a bit.

I always enjoyed it when my econ professors would teach us by way of the Robinson Crusoe Economy (RCE).

The RCE is a thought experiment economists use to simplify models. All you need is an isolated island, two or three humans, and some goods or services the humans can provide.

With just those few inputs you can explore and analyze concepts like production, consumption, comparative advantage, capital and interest rates, time preference, diminishing returns, and even economic growth.

I’m going to create my own Robinson Crusoe Market (RCM). I’ll use the same lingo as my econ professors. Here’s the setting:

Able, Baker, and Charlie are three entrepreneurs on a tropical island. A cruise ship visits each month. The visitors are there to soak up the sun and play in the water. The cruise ship provides those visitors with everything they need but towels, so our three entrepreneurs decide to get into the towel market. The problem, though, is they all get identical towels from the same towel wholesaler.

Baker and Charlie aren’t sure what to do. They think since their products are identical all they can do is market better than each other. But they’re horrible marketers. They couldn’t sell water in the desert, so they agree to sell their towels for a dollar each.*

Able overhears their conversation and starts laughing. The last time he was in Canada he couldn’t help but notice that a lot of businesses there actually pay people to become customers.

I’m going to pay these cruisers $1 a towel, Able thinks. I’ll run Baker and Charlie out of town. I can corner the market. Then, once Baker and Charlie are out of business, I can start charging $5 a towel.

A week later a cruise ship docks. Every single person rushes to Able’s kiosk. He runs out of inventory (and money) within minutes. Baker and Charlie are miffed but hope Able won’t be able to do this forever.

A cruiser looks at Baker and Charlie’s kiosk and starts laughing. We’ll call this cruiser Techbro. He’s wearing a fleece Patagonia vest (even though it’s 30 degrees out).

“Hey guys, my name’s Techbro. I’m from the Valley. I think I might be able to help you with this problem. How about you come aboard the ship for lunch? I’ll invite my friends VeeCee and Dubstreet.”

Techbro’s wearing fleece on a tropical island, but Baker and Charlie are desperate. They don’t want Able to win, so they join Techbro, VeeCee, and Dubstreet for lunch.

“The first thing you both need to understand,” Techbro says, “is that you don’t have a towel problem. You have a customer acquisition problem.” He pulls out his iPhone. “I can make you an app that’s so simple to use and so full of dopamine candy that every person on these cruise ships will be addicted. They’ll be able to pre-book towels – and they’ll want to! All you’ll have to do is have the towels ready when the ships dock.”

VeeCee pipes up. Until now he’s been sipping an expensive glass of red wine, looking completely disinterested. “I hear this Able person is paying people a dollar to take his towels. Here’s what you can do with my investment money: give people five dollars a towel. I’ll bankroll it. If they don’t want the money we can give them an iPad. Just show me you can get every possible customer. I want to see Able broke and out of business next month.”

Dubstreet’s been trying to get a word in all meeting. When VeeCee takes a breath, Dubstreet jumps into a long-winded speech. A speech he’s made hundreds if not thousands of times. “Once you two have cornered the market, that’s when we’ll monetize it. You’ll be rich. We can IPO. You’ll have more money than God. All you need is to get people paying for ‘Towel Club’ memberships. If they want fancier towels or towels with their names sewn into them, we’ll do that. I also know a gal in the cruise industry, so forget monthly ships. We’ll have ships docking weekly.” Then he whispers this next part. “You can even find out everything you can about your customers and then sell that data right back to VeeCee. He’ll never know.”

Baker and Charlie see money signs everywhere. They leap out of their chairs and shake hands with Techbro, VeeCee, and Dubstreet while shouting “It’s a deal!” They sign the paperwork and get back to the island immediately. Without VeeCee’s money, Able doesn’t stand a chance.

Able, Baker, and Charlie’s island doesn’t exist. But the business model does. So how do you get new customers when you and every one of your competitors sell the exact same product for zero dollars?

You offer them an iPad.

*To the economists reading this, please don’t contact me about how I’m butchering oligopoly theory. This is an RCM not an RCE.