Go long the problem solvers

Business don't exist to make money, says Gaurav Sodhi. They exist to solve problems.

Businesses exist to solve problems. If they are good at that, monetary rewards follow but money is really just the feedback mechanism – the scorecard – that lets managers know how well the company is doing at fulfilling its function. It’s not why they exist.

The lesson has been particularly instructive for recent IPO, iSelect. The company is an online aggregator that allows customers to search and compare different health insurance products. Once selected and bought, the insurer pays a fee and a trailing commission to iSelect. This is no doubt a useful service, one that probably deserves to make some money. But is it enough to justify a business worth $400m? Does iSelect pass the problem solving test?

iSelect exists to lower search costs. It links buyers and sellers, a very useful function when search costs are high. Carsales, and realestate.com are examples of services that drastically cut search costs for buyers and sellers. Each business has been a raging success because search costs for cars and houses are high.

That isn’t the case for insurers. Most of the time, a policy comes delivered to your door with a price; all you’re asked to do is pay it. If you want to shop around, the government offers a free comparison site with more detail than iSelect, and all insurers will offer a price within a few minutes. Search costs are already very low. The value that iSelect can potentially extract from reducing them further is limited. iSelect thus fails one of the most basic tests in business. If customers don’t get much value from it, investors are unlikely to either.

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