By: Jake McKenzie, Chief Executive Officer

On February 11th, internet startup Brandless announced that they were shutting down and ceasing operations, leaving over 80 employees unemployed. Brandless’ core idea was to sell generic, non-branded versions of common items, such as shave gel and body wash, direct-to-consumer. This shutdown startled the tech community since Brandless had been funded by Softbank, the investment group famous for major early investments in companies such as Uber and WeWork. However, the collapse of the business was not a shock to those with an understanding of modern psychology research.

The reason for the brand’s failure may have had to do with something as simple as how people think decisions are made versus how purchasing decisions are made. First, let’s look at what most people believe about consumers.

Nearly everyone with a college degree most likely had an economics course at some point where they were exposed to micro-economic theory. The core tenant of old-school micro-economic theory was that consumers always make “rational” decisions in order to maximize something called utility. The takeaway of this theory for most of the business world revolved around price and value which meant they either needed to make a better mouse trap or produce them more cheaply if they wanted to dominate the marketplace. Following this logic, a business like Brandless makes perfect sense to succeed. Sell familiar stuff at cheaper prices!

The flaw in this logic is that the microeconomic theory we were taught is wrong, at least partially. In short, people don’t always make rational purchase decisions. To their credit, economists recognized this flaw and awarded the Nobel Prize in economics to a psychologist, Dr. Daniel Kahneman, in 2002 for proving that people don’t always make rational decisions. Kahneman illustrated that we often don’t make rational decisions because we have two decision-making systems in the brain, not one.

He showed that humans can be rational beings, as economists had preached for 120 years, but that people don’t normally use that system to make purchase decisions. The reason was simple. The “rational” system (complexly called “System 2”) is resource intensive, so we don’t like using it. Much of the time, the brain uses another decision-making system (cleverly called System 1) to drive most decisions. This other system (System 1) isn’t directly rational, nor very resource intensive, yet we use it all the time. System 1 relies on shortcuts to make decisions, rather than weighing through a rational process.

In 2017, Richard Thaler, a “behavioral economist,” was awarded the Nobel Prize in Economics for confirming that most purchasing decisions aren’t rational either. Much of the time, consumers only resort to “price” as a tie breaker in a commoditized space or when there is a large perceived value.

So, how do consumers decide which version of shower gel to buy? It turns out that the brain, using System 1, looking for a shortcut to avoid deep thinking, has a strong preference for “brands.” In psychological terms, a brand is a short answer to the question “why you” for products and services. Brands communicate value to their consumers through marketing, so consumers prefer them, often regardless of price. This makes the brandless proposition null and void.

Launching a company on a premise that all people want is a lower price is flawed from the outset. There is a reason that companies like Proctor and Gamble spend tens of millions each year to develop and establish actual brand preference – it’s how consumers are wired. Based on what modern behavioral sciences research has shown, Brandless was doomed from the outset. It’s simply not how people make purchase decisions.

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