Gross Margin and Social Status

Weekly I/O#64

The margin you can charge for a product depends on how much extra social status it gives the user. The gross margin on living room furniture is three times higher compared to bedroom furniture.

Podcast: Kunal Shah: Core Human Motivations [The Knowledge Project Ep. #141]

Gross margins exist when you allow human beings to jump their social status, and gross margins disappear when you do not help them increase their social status.

For instance, luxury cars and watches create a perception of belonging to a higher social class. Going to an ivy league MBA program offers people a chance to jump to a higher social status. Therefore, the Chief Marketing Officer of our brain envisions a higher social class and thinks justifying the extra price. This explains why ivy league schools and luxury brands can keep increasing their gross margin.

However, utility providers cannot increase their gross margin because people are willing to keep switching for a lower price. The department of our brain dealing with this is the Chief Financial Officer, who always looks for cost cuts.

Businesses that shift your social level are businesses with high gross margins. Kunal Shah mentioned these observations in the context of India, but they hold in a broader sense. He also noted that the gross margin on living room furniture in India is three times more than bedroom furniture because the living room is where people entertain guests, showcasing their taste and boosting their sense of higher social status.

Want to learn 5 bite-sized cool things like this every week to understand the world better? Sign up below for my free weekly newsletter and learn together!

Weeklyio Banner