WHY LUXURY APPS DON’T EXIST AND HOW TO MAKE ONE

We Signal Status With Our Everyday Actions And Our Brains Hide This Fact From Us.

Julian’s Signaling as a Service is one of my favorite essays on the internet.

The Essay is based on the book The Elephant in the Brain by Kevin Simler and Robin Hanson.

Julian’s essay illustrates two fundamental ideas:

1. Most of our everyday actions can be traced back to some form of signaling and status-seeking.
2. Our brains hide this fact from us and others

We say and think we do something for a specific reason. But in reality, there’s a selfish motive: to show off and increase our social status.

Take a Rolex watch:

It’s not better at telling time than a cheap Casio. But a Rolex watch signals something about its owner’s economic power and social standing.

We purchase luxury goods to signal wealth in order to attain or maintain a certain social status.

We Also Signal Status Without Luxury Goods

Consumption: Luxury goods aren’t the only thing we use to signal status. For example, we purchase green products to signal a prosocial attitude rather than actually helping the environment.

Other consumption signals: Loyalty to a sports team (Jerseys), a specific subculture (band’s t-shirts) health consciousness (athleisure clothing), or intelligence (Rubik’s cube).

Charity: We give to charity not to improve the well-being of others. Our charitable behavior is driven by:

• Visibility (donations are hardly anonymous).
• Peer Pressure (almost all donations are solicited)
• Mating motives (donations are higher and more likely when observed by a member of the opposite sex).

Education: Why do students pay tens of thousands of dollars for Ivy League schools while learning materials are available online for free?

Students learn worse if graded, so why do we use grading systems?

Answer: signaling and credentialing to potential employers.

How Signaling Works

Components of signaling:

• Signal messaging
• Signal distribution
• Signal amplification

Julian uses a pair of sneakers to illustrate these components.

• Signal message:

This is the subtext you’re trying to convey — “I can afford to spend $100 on a pair of shoes.”

• Signal distribution:

You need a signal distribution to get your point across to people: You wear them where people can see them.

This is why people are willing to spend $100 on a pair of sneakers but not on socks.

• Signal amplification:

You amplify your signal to better compete against status rivals. If everyone is wearing cool sneakers, the way to stand out is by buying a pair with the most noticeable design or the flashiest color.

So, what about software?

Software Can’t Signal Status Because It Doesn’t Have A Distribution Mechanism: This Is Why There’s No Software Equivalent Of A Rolex

Signaling with software doesn’t work because of ‘intangibility’:

• Apps live on your phone or computer.
• No one can see them except you.

Julian believes this is the main reason why consumer software companies have a harder time monetizing than their physical counterparts.

What is the software equivalent of a Ferrari?

An Interesting Way To Solve The Signal Distribution Problem With Software Is To Add A Physical Product To The Offering.

This allows signaling via casual contact just like in fashion products.

For example, N26 and Revolut, both Neobanks, reward their premium users with fancy metal cards which are noticeably heavier than normal credit cards.

There are few benefits to the €17/month price tag these banks charge their premium users — clear evidence that the primary monetization driver is signaling.

The internet has created a new signal utility: distribution as a service. It allows you to reach virtually an infinite number of people at once.

This is the primary value social networks like Facebook, Snapchat, and Instagram provide. They don’t have any hidden signal messages.

All they do is provide signal distribution at scale: Want people to see your new pair of Nike’s? Take a photo and post it on Instagram.

A positive feedback loop of likes and comments helps you quantify how successful your signal distribution has been.

Social networks are subject to network effects. Your incentive to use Facebook increases with the number of people you can distribute your signal message to.

This is why they are free to use. They need to acquire as many users as possible to maximize their signaling potential.

In the example of the sneakers, flashy colors help amplify our signal message.

Similar amplifiers exist in the software world. For example, the photo editor tool in Instagram applies filters to your photos. It makes them look nicer and more noticeable in the app’s newsfeed.

Julian mentions Tinder as one of the social networks that have successfully monetized their signal amplification.

Tinder is a dating social network. A place to display your mating worthiness.

But with millions of rivals on the same platform, it’s difficult to compete for status with just a profile picture.

To help you stand out and outcompete your rivals, Tinder offers additional social amplifiers like ‘Tinder Boost’ and ‘Super Likes’.

And they come with a price tag.

Tinder’s entire business model is built on the assumption that people are willing to spend money on signaling. Last year, Tinder made a staggering $1.2 billion in revenue.

Safe to say that assumption is correct.

Conclusion

Software Distributes Physical Goods At Scale

It’s easy to signal status with physical goods and services. But, there are natural limitations to distribution and amplification.

That’s where software comes in. Software compliments physical goods by distributing their signal messages at scale.

Physical Goods

Software intangibility makes it difficult to create, share, and monetize signal messages of their own. The alternative for software companies is to provide distribution for free and monetize users who want to stand out of the crowd with paid signal amplification.