Forget Customer Pain. Find Arbitrages

by on October 17th, 2012

The basic advice that entrepreneurs are given when starting a business is, “solve a customer pain.” It’s simple advice intended to help you filter ideas – to help you determine the best idea to pursue. Yet, it remains a simple filter. A better way of thinking about customer pain that can help you identify more profitable ideas is to instead identify arbitrage opportunities.

Often there is a cost for a customer to relieve their pain with a solution. Yet, with arbitrage opportunities, while there may be a standard cost that most customers pay for their solution, there are alternative solutions which have a cost that is significantly lower. These alternative solutions are inaccessible to the mainstream market of customers. Thus, if you were able to find a way to get mainstream customers access to these alternative solutions, you could add your own fee for providing these alternative solutions, and still provide customers with incredible value.

Many of today’s Internet businesses already take advantage of such arbitrage opportunities. As the Internet became widespread, it became possible for these Internet businesses to offer what was once a niche alternative solution to a much wider audience. Examples of such arbitrages include Dell.

The original premise of Dell Computers was to wipe out the distribution costs of PCs – removing warehouses, retailers and other parties in the chain between the person building the PC (the manufacturer) and the customer. Through the Internet, Dell could offer cheaper PCs than those sold at high street shops, for similar or superior specifications, while still keeping a nice margin for themselves.

It had always been the case that a person could buy all the components of a PC and build it themselves for a cheaper total cost. In fact, the founder – Michael Dell – would build such PCs from his bedroom and sell them. Yet, for the mainstream customer, this “build it yourself” solution was not a viable alternative solution. The Internet enabled Michael Dell to offer this alternative solution to the masses. In doing so, Dell realized an arbitrage opportunity.

At PreScouter, we believe that universities are a significant untapped resource. Corporations have many ways in which they develop new inventions, from utilizing internal R&D to working with suppliers. However, universities are an alternative solution for sourcing inventions that many corporations struggle to realize full value from.

In the US alone, almost $50Bn is spent on research at universities, yet very little of these innovations are commercialized out into the real world. Yet some those that have been commercialized have had significant impact, and range from the Google search algorithm out of Stanford, to Lyrica, a drug out of Northwestern that contributes $2.5Bn to Pfizer’s annual revenues. What could it mean for corporations, and society at large, if more Googles and Lyricas were to reach the real world? Our mission is to find out.

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