Planning for Positive Externalities

December 4th, 2013

In the past decade, two trends have picked up steam with the press relating to new business models. The first was “going green”, in that consumers wanted environmentally friendly products and were willing to pay a premium for it. As a result, a new crop of companies catered to this need. The second trend was that of the “sharing economy”, in which younger generations, instead of owning and controlling things like real estate, cars, household tools, etc. were sharing them with others and making some money in the process. This sharing was attributed to more of a yearning for community among younger generations.

These descriptions sound nice, but the reality of the situation is much different. Successful eco-friendly products like the Nest Thermostat and the Toyota Prius and successful sharing startups like Airbnb and Zipcar are actually successful not because of these trends, but in spite of them. Companies that relied on eco-friendliness or community/sharing alone have not thrived. So, what’s the difference between those that are succeeding despite these elements and those that have failed?

The answer is of course more simple than the rhetoric in the press behind these companies. It’s about value. The Nest Thermostat is successful because it saves you money on your electric bill and is easy to use. The fact that it is eco-friendly is a “bonus”. The Toyota Prius saves you money on gas as prices for gas continue to rise. The fact that it doesn’t pollute the air as much is a bonus. Airbnb is cheaper than a hotel for a guest, and a way to earn extra money as rents skyrocket for hosts, many of whom are not making the wages they were five years ago. The fact that you can meet interesting people is a bonus. Zipcar is cheaper than owning a car because you don’t have to worry about maintenance, and you only pay for when you need a car. The fact that it reduces emissions due to people no longer using cars for every travel activity and searching for parking is a bonus. Some may argue that we are more selfish in the way we spend our money on than ever.

These bonuses are what economists call externalities, and they are very important. They are side effects of transactions that have a positive or negative impact on others not even involved in those transactions, and not the reason those transactions took place. This trend of companies becoming successful due to value creation, but creating positive externalities for everyone is a pattern that should not be overlooked. In fact, I would argue it presents a playbook for those that want to change negative elements of our economy. Instead of expecting people to care more about certain causes that will help shape our world so that they donate money or refuse to transact with perpetrators of the opposite of what you want in the world, a better way may be to create something of value that has the side effect of a positive change in this world. Even if you don’t necessarily care about these issues as a business owner, solving them indirectly creates huge opportunities for branding and PR that, even selfishly, may make sense for you.

Perhaps the greatest example of all is Tesla. Electric cars are better for the environment, but no one cared enough to stop buying gas-powered cars. So Tesla created one of the most luxurious cars on the road, and made people desire it because it’s luxurious (see part VI. B.). The fact that it’s electric and better for the environment is a bonus. By associating electric power with luxury, Tesla may do more to drive a more eco-friendly future In the automotive industry than Toyota, who focused solely on value.

So, the next time you want to change something bad about the world, think about if there’s a way to attack the problem indirectly, whether by starting a business, aligning yourself with a corporation’s needs, etc. It may be the most successful way to accomplish your goals. If you’re starting a business, think about the problems you can solve indirectly by how you choose to build what you build. The opportunity is there, and companies are only starting to scratch the surface on how to apply them.

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