Ankesh talks about Federer's unique deal with Uniqlo.
Federer was 36 years old when he broke off with Nike. After 10 years with them, he didn’t renew his contract and decided to walk off. Because he found a deal Nike could not match.
Nike may have increased their sponsorship to $15 million. But Federer got Uniqlo to offer $30 million per year, for a period of 10 years. Tripled the old Nike deal. (And what’s more, Uniqlo would pay him even if he retired from playing tennis the next day!)
Nike was the biggest athletics wear company in the world. They dwarfed Uniqlo’s sales figures by 5 times! So then why could Nike not match Uniqlo’s offer and retain Federer? Because Nike was already sponsoring a roster of other top tennis players: Serena Williams to Rafael Nadal to Maria Sharapova. Their budget didn’t have space.
Whereas, Uniqlo had no top players. They are not even known for athletic wear. But they wanted to grow beyond Japan. It made sense for them to go with an icon: someone everyone in the world recognized.
Read that again - Uniqlo was ready to pay him $30 million per year for 10 years. Even if he retired the next day!
Federer's story highlights two general principles about the nature of price and value.
Principle 1: Value lies in the eyes of the beholder.
As Federer's story shows, you're not selling a product. The customer is "hiring your product to do a job".
In Nike's case, the job was "Consumers should see Nike in every sports match they watch".
In Uniqlo's case, the job was "Consumers should see Uniqlo on at least one major sports icon".
That's why Nike wasn't ready to pay the big bucks. If Federer didn't renew, they still had other major players. And he was about to retire anyway.
But in Uniqlo's shoes, the cost-benefit analysis looked very different. Without Federer, Uniqlo had no major icons in its roster. Without Federer, Uniqlo wasn't even a sports brand.
You're not selling quarter inch drills, you're selling quarter inch holes.
One of the things I talk about a lot is: Price is not about cost. Price is about value.
How much would you pay for:
A small buzzer (the kind you use when you play Taboo): maybe INR 25 (USD 0.30). You can buy a pack of 5 at the dollar store.
A doll that plays music, for your 2 year old: INR 100 if you don't care about the brand.
A device that makes a sound each time you get paid: INR 300 setup and a monthly fee of INR 125 AND silently thanking the provider each time it beeps. Kaching!
In a way, you're paying for almost the same thing in all three cases. A speaker that takes some input and makes a single sound.
In another way though, these are entirely different products!
Every customer “hires” your product for a “job to be done”. The customer wants a hole in the wall. So she buys a drill. And when you buy a Rolex, it’s not because you want to tell the time.
And why do you think people buy a milkshake every morning en route to work? As McDonald’s found out, it’s not for the taste. It’s to make their boring work commutes more interesting.
Stewart Butterfield (Founder, Slack) captures the essence of this in his 2013 memo to his team – “We don’t sell saddles here”. You’re not selling a feature. You’re delivering a benefit to the customer.
Remember: The value is in the eye of the beholder.
I was browsing through a pet store last weekend, and I found the most stupefying products on display.
Anti-wrinkle balms and "snout soothers" for dogs.
Slices of goat lung, "air-dried to perfection for dogs".
(Butchers typically throw away lungs and other organ meat as offal, because no one wants to eat them).
Stuffed lions, hippos, and panthers (!).
Because somehow these are part of dogs’ natural habitats?
It struck me then: they're not selling to pets!
They're selling to pet owners. Who cares whether these are useful to pets!
Reminded me of this (likely made-up) anecdote from Charlie Munger:
[One day at the beach] I saw the guy who sold fishing tackle. I asked him, "My God, they're purple and green. Do fish really take these lures?" And he said, "Mister, I don't sell to fish."
Principle 2: What is scarce, sells.
This is another timeless lesson from Federer's story.
From Uniqlo's perspective, a sports icon wearing their label was scarce. No wonder they were ready to part with their CEO's kidney to sign Federer!
The entire luxury industry stands on this exact principle.
Massively and artificially constrain supply, and you can charge whatever you want.
And the reverse happens too. When supply overflows, prices crater.
The diamond industry illustrates both these countervailing forces:
At the turn of the 20th century:
Diamonds weren't a scarce commodity at all!
De Beers changed that. They bought a majority of the diamond mines, and constricted supply. They made diamonds artificially scarce.
The result: "Diamonds are a girl's best friend".
Today:
The equation has flipped completely.
Lab-grown diamonds have flooded the market. They are available at 20%-60% of the price of natural diamonds. And they are perfect, because they look exactly like natural diamonds.
De Beers is doing its best to differentiate lab-grown and mined diamonds. But it won’t work... because they are actually the same thing.
Diamond prices have fallen 18% from their peak in 2022. The most expensive rough diamonds have fallen by more than 40%.
Lab-grown diamonds are already 9.3% of diamond sales (nearly 4x vs. 2020).
If recent numbers from India (the global hub for diamond cutting and polishing) are any indication, this will accelerate. The share of lab-grown diamond exports has 9x-ed (!) in the last 5 years.
Create artificial scarcity.
Packy McCormick gives another great example, in his 2020 article, Wackos and Zoomgluts. He talks about a plot from an episode of Hey Arnold:
In the classic 1997 episode “The High Life,” Arnold’s best friend, Gerald, desperately wants to buy the new B.O.M.B. Rollerblades, but he doesn’t have any money. Instead of mowing lawns or waiting tables like most ambitious 9-year-olds, he responds to an ad promising big bucks for selling Wacko watches.
When he sells his first box out in minutes, Mr. Wacko invites him into the Golden Circle, reserved for the “best salesman.” The Golden Circle entitles Gerald to weekly shipments of boxes that he can then sell at a profit to customers.
Life is good. Gerald is selling watches to everyone and making good money. He gives his sister a dollar because he likes her face, sets up two phone lines in his room, orders business cards, and tells his friends to buy whatever they want from the ice cream truck, on him.
That, though, is when things start to sour. Gerald has already sold watches to everyone in town. His dad has two of them. He even sold a watch to a baby. All of a sudden, he’s stuck with a neverending supply of boxes that keep coming, and no one left to buy them.
Fueled by his own success, he finds himself in the middle of a Wacko watch supply glut. Unsure what to do, he invites his friend Arnold to his house to problem solve.
…
Luckily for Gerald, though, his friend Arnold understands people and behavioral economics, and he came up with a plan.
Gerald marched confidently into Mr. Wacko’s office and asked him for more watches. He told him that he couldn’t fill all of the demand he was seeing, that he was selling watches for three times the list price, and that he needed to get more any way he could. He made Mr. Wacko think that there weren’t enough watches to meet all of the demand.
Gerald created the perception of scarcity.
And Mr. Wacko fell for it. Desperate to get his hands on more watches, he bought all of Gerald’s back at double the price, saving the 9-year-old entrepreneur from financial ruin before his 10th birthday.
Packy talks about how Clubhouse did the same thing:
Clubhouse’s founder Paul Davison carefully curated the first group of users from among the most Twitter-famous people in tech and VC. These are not only people he knew others would want to hang out with, but people he knew would signal their involvement to millions, creating a strong sense of FOMO…
While everyone else is begging “please!” Clubhouse is telling them “no.” It’s the one velvet rope in a world of two-for-one happy hours hawked by overeager promoters…
[JT Note: Now that Clubhouse has crashed and burned, you can look back and marvel. They created incredible hype and buzz, with such a simple tool: artificial scarcity.]
A year before Clubhouse, there was Superhuman, a luxury e-mail service that used a long waitlist to create scarcity and build demand.
Fifteen years before Superhuman, Google launched Gmail with a limited beta to only 1,000 users, creating a frenzy for invites.
And 44 years before Gmail, in response to increasingly abundant oil, OPEC formed in Baghdad to increase the price of oil by limiting supply.
Sometimes, price itself is an indicator of value.
Sometimes, high price itself signifies better quality.
That's why retailers love tourists. At the start of every tourist season, they hike up the prices of leftover goods from the previous year.
When the unsuspecting tourist sees a discolored trinket for $50, they think it's a steal! And if that doesn't work, the shop-owner would then put a sticker on it - "$30 - discounted from $50 only for 24 hours!"
TL:DR
Whatever you think your price should be, add a zero.
Before we continue, a quick note:
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In the United States, about 40% of adults are short-sighted, up from 25% in 1971. Rates have similarly soared in the UK. But their situation pales in comparison with that of teens and young adults in South Korea, Taiwan and mainland China, whose prevalence rates are between 84% and 97%. If current trends continue, half the world's population will be short-sighted by 2050. And the problem seems to be spreading at a faster rate than ever.
To make matters worse, while the typical age for a child to develop myopia is between eight and 12 years old, children are becoming myopic at a younger age.
Why is this happening? In a nutshell?
"Education has been shown to cause short-sightedness," says Ghorbani-Mojarrad, referring to education as measured by school years. "We don't know what it is about education – we suspect it is reading and spending more time indoors. Every year of education completed increases the expected amount of short-sightedness."
In a way, myopia is a hallmark of the progress of civilization. The more we invest in children's education, the higher the incidence of short-sightedness.
In a way, be grateful we have first-world problems.
- company making the most important and technically sophisticated industrial machines on the planet, utterly vital to the existence of modern technology
- make-up company
- handbag company
The people have spoken 🤷♂️.
4. Stop the press! Crypto has a use case!
It's been skeptic season on crypto these last several months. All the while, it has been silently building a massive use case - Stablecoins.
1. In 2022, stablecoins settled over $11tn onchain, dwarfing the volumes processed by PayPal ($1.4tn), almost surpassing the payment volume of Visa ($11.6tn), and reaching 14% of the volume settled by ACH and over 1% the volume settled by Fedwire. It is remarkable that in just a few years, a new global money movement rail can be compared with some of the world’s largest and most important payment systems.
3. Approximately 5mm blockchain addresses send stablecoins each week. This number provides a very rough proxy for global users regularly interacting with stablecoins. These ~5mm weekly active addresses send ~38mm stablecoin transactions each week, representing an average of over 7 weekly transactions per active address.
5. Of the ~5mm weekly active stablecoin addresses, ~75% transact less than $1k per week, indicating that small/retail users likely represent the majority of stablecoin users.
6. The outstanding supply of stablecoins has grown from less than $3bn five years ago to over $125bn today (after peaking at over $160bn) and has shown resilience to the market downturn with the market cap of stablecoins currently down ~24% from its peak, compared with a ~57% decline for the overall crypto market cap.
Has crypto found its first killer use case?
That’s it for this week. Hope you enjoyed it.
As always, stay safe, healthy and sane, wherever you are.
I’ll see you next week.
Jitha
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