Article I should be calling – What can we learn about business from brothels

Case studies are an effective way for learning business concepts. Invariably these case studies are about most boring businesses, like some silicate factory struggling with falling revenue. Occasionally we come across some truly entertaining ones that are accessible to all and very nicely illustrate application of core business concepts.

It would serve you well to read this story in Huffington Post about a brothel. While some may be tempted to interpret this as truly unique to these entrepreneurs and try to learn new lessons, I see this merely as a case study for learning time tested business first principles.

What are these core principles? Let me list the principles and quote from the article.

1. Start with the customer segments and their needs:

“Most brothels are basically trailer parks in isolated places and there’s nothing to do once you get there other than have sex”
“people aren’t just going to a brothel looking for sex”
“You can’t stay overnight in most of them”
“Since many of the customers are physically disabled or have difficulty finding sex without paying for it”

As you can see they are not targeting every male member or even after everyone who pays for sex. They are after two key segments. One, those who “hire” brothels for more than one reason and expect lot more from the experience and two, those who are disabled. Within these two segments they still only target those with higher willingness to pay for what they value.
2. Product Positioning (no pun):

“We see this as the Ritz-Carlton of brothels,”
“We’re selling luxury and fantasy, not just sex,”

Product positioning is is not something you do to a product but  do to the minds of customers. Positioning is creating a unique, relevant and differentiated positioning in the minds of the customers for your products.
Note also that by positioning it as Ritz-Carlton and not as  Embassy Suites (another place you could spend the night) they are signaling the price premium and likely able to capture it.
3. Segment -Version Fit (or Product – Market fit):

“We see them (ladies) as the ultimate caregivers; they’re almost geishas and great conversationalists”
” ideal sex worker would have training in both nursing and psychology”
“We’re not looking for Barbie dolls. They’re used to homage. I want someone who says, ‘What can I do for you?'”
“Not that there is anything wrong with sex. Austin says she’s gone to great lengths to ensure satisfaction for customers and the 50 or so sex workers who will be on site at any one time”

They got the segment and positioning right, next the product version must adequately serve the needs of the segments they are targeting. It is the Segment-Version fit that is more commonly referred to as Product Market fit. One does not take a pre-built product with rich features and force fit to any segment.  We must build and deliver a version that meets the needs of segment we are targeting. Finally, a product must serve the primary reasons it was hired for. There are always a basket of reasons customers are buying a product.  If the primary reasons are not met, it does not matter what other value the product adds.

4. Revenue Model and Product Mix – What are the different sources of revenue

“It costs nothing to stay at the resort. However, guests have to pay at least one of the women to accompany them around the Ranch at all times”
“this new establishment seeks to earn 40 percent of its revenue from goods and services unrelated to private time with the ladies “

The first source of revenue is no brainer. But that is just one source and scales only linearly. They added the second source not as an afterthought but with clear goal of how much it should account for. This is about maximizing customer margin and not product margin.

Another point to note is recognize what they don’t want to charge for. This is not a hotel and customer is not choosing it to spend the night in clean rooms. While clean rooms and hotel like atmosphere are important to pick the place that is not what they value. So this establishment does not attach price to rooms but only to the time with ladies.

There  you are, a quick review of segmentation, targeting, positioning, product-market fit and revenue models from a popular news story. I believe most businesses fail because they neglect the first principles. Conversely, applying first principles of business is the right place to start to fix any flailing business – be it world’s oldest or the newest.

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