Bob and Rick were two consultants from Detroit. Their business was helping bakeries and snack-food companies develop new products.
Their latest project was helping a fast-food chain sell more milkshakes. So they did what companies typically do when testing out new ideas. They conducted focus groups and peppered milkshake consumers with questions like:
- How can we improve our milkshakes?
- Do you like our flavor selection? If not, what flavors would you like to see?
- Is the milkshake to chunky? Would you prefer a smoother texture, etc., etc.?
After collecting feedback, they made changes they thought would satisfy the largest number of milkshake buyers.
But after a few months, nothing changed. Not an uptick in revenue, no word-of-mouth buzz, nothing.
So they decided to attack their problem differently.
What job arises in people’s lives that causes them to come to this restaurant to “hire” a milkshake?
They staked one restaurant for eighteen hours. And tried to answer a few questions:
- What time of day did people buy milkshakes?
- What were they wearing?
- Were they alone?
- Did they buy food other than the milkshake?
- Did they drink it at the restaurant or get it to go?
To their surprise, a large number of milkshakes were sold before 9:00 a.m. to people who came into the restaurant alone. And it was the only thing they bought. Also, most of them got their milkshake to go.
After observing this behavior, they asked them: “What job were you trying to do that caused you to come here and hire this milkshake?”
It soon became clear the early-morning customers were hiring the milkshake for the same job: to make their long commute to work less boring.
But why a milkshake? Why not something else?
It turns out, they tried to hire other products for this job.
But bananas weren’t filling, doughnuts made their fingers sticky, and a snickers bar seemed like they were eating candy for breakfast. But a milkshake was easy to consume and filling enough to satisfy pre-lunch cravings.
So alas! They finally figured out their answer to why people buy milkshakes.
Plenty of milkshakes were also sold in the afternoon and evening. What job were they hired for?
In this context, they discovered milkshakes sold in the afternoon and evening were hired to help parents connect with their children or as a reward for good behavior.
Parents say no to their children all week. An occasional yes feels great.
Same customer, but two different circumstances the milkshake was hired for.
With this information, the analysis and innovation available to the company were broadened.
Instead of asking, “How can we make this milkshake tastier or offer more flavors,” the company asked, “How can we make it easier for commuters to buy a milkshake on their way to work.”
- How about a drive-through? So they don’t have to come in and wait in line.
- Instead of employees’ making the milkshakes, let’s put a self-serve machine with a swipe card reader so commuters can dash in and out quickly.
- If they want a healthier option, offer chunks of fruit, etc., etc.
Instead of an afternoon milkshake, parents could’ve hired a cookie or bought their kid a toy. Anything that would’ve helped them reward or connect with their kid competed with the milkshake.
By focusing on the job-to-be-done, you can see who a product’s real competitors are.
The milkshake story was paraphrased from Clayton Christensen’s book — Competing Against Luck: The Story of Innovation and Customer Choice.
He is a professor at Harvard Business School and wrote the classic book on disruption theory — The Innovator’s Dilemma.
Why Jobs Theory is useful
From Competing Against Luck:
At its heart, Jobs Theory explains why customers pull certain products into their lives: they do this to resolve highly important, unsatisfied jobs that arise. And this, in turn, explains why some innovations are successful and others are not.
Jobs’ theory is not the be-all, end-all of analysis. It’s one framework, that when paired with other frameworks — like the one below — helps us gain insight into which innovations have the best chance at sticking and which ones don’t.
The overserved/underserved customer is a framework within disruption theory.
It helps us identify markets with explosive growth potential.
First, what is an overserved customer?
It’s a customer being served too much by the features and functionality of an existing product.
In other words, customers are satisfied with the current features of a product, and adding more functionality is a waste of resources.
For example, burgers are an American staple. There are hundreds of burger franchises in the U.S. Including mom-and-pop joints, high-end restaurants, food trucks, and all the other places you can buy a burger.
And they all compete along the same dimensions: quality of patty, type of bun, choice of cheese, condiment selection, and a dozen other ways to customize a burger.
It’s safe to say we are overserved by the current selection and ways to dress a burger.
Second, what is an underserved customer?
It’s a customer whose needs aren’t being met on some dimension they value but might not know it.
For example, watch Ray Kroc’s reaction the first time he ordered a burger from McDonald’s.
Before McDonald’s, you had to go into a restaurant, sit down and order, and wait for the burger to be delivered to you.
McDonald’s innovated, not by making a tastier burger, but through speed and convenience.
In other words, customers were underserved on the dimension of speed and convenience, even if they didn’t know it.
Ray was shocked by how fast the service was. He didn’t realize this way of consuming a burger was possible.
As you can see by his facial expression, he loved it. He was in awe😲
A vital component of the underserved customer is they need little education on how to use the product that solves their job-to-be-done on a dimension poorly served by incumbents, which is why you see an explosion in demand for that product or service.
And that brings us to a much-debated category. Alternative meats: Beyond Meat ($BYND) and the Impossible Burger.
Fad or Sustainable Trend?
“First they ignore you, then they laugh at you, then they fight you, then you win.”
The origins of this quote are unknown (often misattributed to Gandhi) but a great thought to keep in mind when screening for investment ideas.
Most products that power our lives were initially ignored and laughed at. The internet, light bulbs, T.V., the list is endless.
But it’s this skepticism that gives way to opportunity.
So when Beyond Meat and the Impossible burger hit the national spotlight, many labeled them as fads.
But is that true? How can we distinguish between fads and sustainable trends?
Jobs-to-done-theory and the overserved/underserved frameworks give us a good start.
We have discussed that burger joints compete along several dimensions: quality of patty, type of bun, choice of cheese, condiment selection, etc. And on these dimensions, we are overserved as a burger eating population.
Question? What dimension of the burger-eating experience has been underserved?
Maybe a plant-based alternative that tastes like a real burger, or close to it?
The veggie burger has been around since 1982 and was aimed at a small segment of the population. In the U.S., vegetarians account for about 3% of the population.
And most veggie burgers taste awful and have no chance of attracting meat-eaters who want a plant-based alternative that tastes like the real thing.
In comes Beyond Meat and the Impossible Burger. A plant-based burger for people who love burgers but want to live healthier lives.
In other words, they were underserved on the dimension of a tasty, plant-based burger. And the fact that it tastes good is critical. We won’t eat food, even if it’s healthy for us, if it doesn’t taste good.
A demand explosion
The Impossible Burger debuted in 2016 at David Chang’s famous New York City restaurant — Momofuku.
In three short years, the Impossible Burger grew to serve more than 8,000 restaurants in every state in America — as well as Hong Kong, Singapore, and Macau.
During the second quarter of 2019, sales quadrupled in Asia alone. Beyond Meat saw similar growth.
Customers needed little prodding to try great tasting, plant-based burgers. They had been underserved for years and were ready and waiting.
The incumbents could have done it. They had the distribution channels and the capability.
Now they are playing catch-up by coming out with their version of plant-based burgers and hoping customers will see little difference between their products and the upstarts.
Jobs-to-be-done theory helps us answer one of the most critical questions when analyzing investments — the Why.
Why do people hire this product, from this company, for this job, at this moment?
The answer isn’t always clear. And you won’t find it in a company’s financial statements.
But by attempting to answer the why, we might gain insight into the true nature of a company’s competitive advantage or lack thereof.
Overserved/underserved helps us find mispriced pockets of opportunity that many write off as fads.
Remember, pay attention to what the crowd ignores, laughs at, and ridicules. Those opportunities might be mispriced relative to their potential.
Thanks for reading, and have a great day!
Mr. Market Newsletter
Get the latest news and analysis for stocks, IPOs, and crypto sent directly to your inbox.