The first principle of Internet financial operations: resources are scarce and users are rational.

The two basic assumptions for the first principles are: resources are scarce and users are rational. This is the starting point of all Internet financial operation strategies.

Elon Musk 's First Principles

"Iron Man" Elon Musk founded Paypal, Tesla and SpaceX, and is considered a cross-field entrepreneurial genius. When introducing his unique way of thinking, he mentioned that he is accustomed to thinking about problems using the first principles .

In a narrow sense, first principles calculation refers to ab initio, that is, without using empirical parameters, only a few experimental data such as electron mass, speed of light, proton and neutron mass, etc. are used to perform quantum calculations to derive the molecular structure and properties of matter. The proposal of the theory of relativity is a typical example of the application of the first principles. Einstein deduced a complex theoretical model based on two simple assumptions about the nature of the universe.

At the operational level, there are two basic principles of first principles:

1. Build on facts and few assumptions, distinguishing between fact and opinion. Starting from the essence of the problem, deduce upwards layer by layer to explore the root cause of the problem.
2. Make bold assumptions and verify them carefully. Use MVP and experiments to quickly validate ideas. Avoid the lazy approach of using analogies to get answers.

Application of the first principles of economics in Internet finance operations

Nowadays, major communities are full of various " dry goods ", "skills" and "models". Some of them are just talk without practical support, and some are limited to specific time and space backgrounds and lack universality. There are also many operations managers who basically "look up" and "look left and right" when designing operations strategies: they listen to their leaders and copy from competitors . After the activity is completed, I cannot judge whether it is effective or not, and I don’t know what method to use next time I encounter similar operational needs.

Here, Uncle Dao tries to use the most basic assumptions and principles of microeconomics to establish a framework of thinking logic for Internet financial operations. After understanding these, you may not be able to directly design awesome operational activities or product strategies based on them, but they can help you provide a basic direction for the design of operational strategies in advance , and provide a basis for value judgment during post-event review and data analysis . At the same time, it also provides the same way of thinking for products, development, and operations, and I believe that the efficiency of overall collaborative output will also be improved.

Because it is a principle-based thing, there may not be very specific operation modes and cases. If you are not interested, you can click the "Back" button in the upper left corner of WeChat to leave the current page.

The core goal of the Internet finance market players: improving efficiency

From an economic perspective, " efficiency" is the most important value judgment criterion for all economic activities . From the definition, efficiency refers to the fact that under given inputs and technologies, economic resources are not wasted, or that economic resources are used to the greatest possible degree of satisfaction. It is also a simplified expression of allocative efficiency. Translated into human language, it is

Efficiency = maximizing the ratio of output to input

It can also be understood this way:

Efficiency ≈ Minimization of resource waste (when achieving a given goal)

or

Efficiency ≈ (with the same input) making the pie bigger

Without considering the lending side, the market players on the wealth management side probably include five categories: regulators, asset parties, platform parties, investors , and wool-collecting parties . Their efficiency goals are roughly as follows:

Analysis of efficiency goals of major players in the Internet finance market

From the above table, we can see that there are two ultimate criteria for judging the success or failure of an Internet finance platform's operating strategy :

• Whether the bottom line is met (talking about reality) : If a company wants to survive and pay its employees, it must increase its return on investment and bring in real money.
• Whether the top line is met (talk about ideal) : By improving user transaction efficiency (higher rate of return? More secure and reliable platform?) and providing value to users, we can continue to expand the user base and occupy a leading position in the market segment - this point ultimately depends on valuation and investment returns.

At the operational level, the operation of the Internet finance platform can break down the work priorities and goals item by item through formula decomposition, for example:

Platform return on investment (ROI) = conversion rate * average revenue per user ( AR PU) / (CAC + COC)

For details, please refer to my previous article "Touching Operational Strategies 02: A Complete Methodology for the Life Cycle Management of Internet Finance Users ". I will not repeat them here.

Of course, there are also cases where efficiency is reduced:

• The wool party came to grab wool, and in order to prevent the waste of operating subsidies, the Internet finance platform increased the difficulty of receiving subsidies and transformed the backend system. These measures occupied the platform's funds and resources, which invisibly made the pie smaller, the platform's investment increased, and investors' profits decreased - ultimately leading to a decrease in the transaction efficiency of the entire system
• Due to the lack of industry self-discipline and norms, regulators have introduced strict policies, increased requirements for platform qualifications, restricted the platform's business scope, and raised the threshold for investors to trade. This is actually a manifestation of reduced market efficiency.

Two basic assumptions for the first principles

Assumption 1: Resources are scarce

User time (refer to the concept of "total national time" proposed by Luo Pang last year), a safe and high-quality platform, short-term high-yield products, a friendly full-process user experience , and investment in operations/products/development are all resources. The price is positive only when resources are scarce; if resources are not scarce, the price is zero.

From this we can deduce the law of diminishing marginal returns. If all resources could be increased in equal proportion, there would be no diminishing marginal returns—but this situation does not exist in the real world. Therefore, users need to weigh and choose.

For operations, the basic thinking path is:

• Users' decision-making and operation time is limited. For most ordinary people, investment and financial management is just a relatively small need in life; for most netizens, the time spent on investment and financial management ranks behind social networking , news, music, videos, and games . Non-mainstream demand and shorter processing time, this is the market we are facing.
• In the long run, "the safety and quality of the platform" and "the short-term high returns of the product" are two mutually exclusive concepts. In order to achieve safety and quality, it is necessary to increase spending on risk control, system investment, brand building, etc., which will ultimately lead to a relative decrease in user benefits. Therefore, try not to promote these two concepts at the same time, otherwise users will most likely think you are a liar, and you will have to deal with a lot of mess in the future.
• A friendly experience has no direct relationship with efficient user growth ; these are two different things. User growth comes from meeting core needs, coupled with appropriate channel construction and operation strategies. Unless it affects a certain link in the user transaction closed loop, most of the time the so-called user experience can be crushed.

Assumption 2: Users are rational

Within the scope of control, users always try to maximize their own interests.

For users of Internet finance, the benefits are clear: liquidity, returns, and security.

• Liquidity : Yu'ebao, subscription and redemption are T+0, equity funds are credited T+1
• Security : Promoting security is to improve user decision-making efficiency
• Returns : including product type configuration (fixed-term/current), duration configuration (fixed-term products of different maturities), etc. What is particularly important to note here is that the platform's unilateral concessions (experience money, interest rate coupons, sharing plus income) seem to increase user benefits and improve user efficiency, but for the entire transaction chain, it is actually transferring money from the left pocket to the right pocket, which does not help much in improving the efficiency of the entire market. If the platform wants to grow healthily, it must fundamentally improve its ability to acquire high-quality assets and, on this basis, carry out good user operations .

Operational logic deduction based on resource scarcity assumption

Scenario 1: People face trade-offs

When people form societies, they face all sorts of different trade-offs. The classic choice is between "guns and butter," when a society spends more on defending its coastline from foreign invasion (guns) and less on consumer goods that improve domestic living standards (butter). Equally important in modern society is the trade-off between a clean environment and high income levels. Recognizing that people face trade-offs does not in itself tell us what decisions people will or should make. However, recognizing the trade-offs in life is important because people can only make good decisions if they understand the choices they face (from Baidu).

For operations, it is important to know:

• What are your typical user characteristics?
• How do they choose a financial management platform?
• How do you make trading decisions when you see different products on the platform?
• How do they think and choose when faced with different operating methods?

Deduction 2: The cost of something is what you give up to get it (opportunity cost)

The opportunity cost of a thing is what you give up to get it. When making any decision, the decision maker should be aware of the opportunity costs that accompany each possible option.

For users' investment behavior, they give up the liquidity of funds and other value-added opportunities (real estate, equity, etc.) and bear the risk of the platform running away in order to invest.

For operations, you must think clearly about:

• Why do users give up a certain degree of liquidity to invest?
• Why do users abandon traditional financial institutions and come to mutual finance platforms for financial management?
• Why do users abandon other platforms and come to your platform?

Based on the logic of these two deductions, let’s look at the case of Ping An One Wallet:

When the "Fixed Deposit" product was first launched, the hope was to provide users with a product that was comparable to bank fixed deposits, emphasizing security and downplaying its financial management attributes. Later, during several qualitative surveys, we found that when users actually used the product, it was a completely different story:

Therefore, later on, the previously independent One Wallet Current Account (including Ping An Huiying) and One Wallet Fixed Deposit were integrated together to form “ Sui Xing Cuan ”.

YiWallet-Suixingsou product interface

Logical deduction of user behavior based on the assumption of rational people

Deduction 1: Rational people consider marginal quantity (marginal cost)

"Marginal quantity" refers to the change in an economic variable under certain influencing factors. Economists use the term marginal change to describe small incremental adjustments to an existing plan of action. Marginal changes are adjustments around the edges of what you are doing. By thinking in terms of margins, individuals and businesses will make better decisions. Moreover, a rational decision maker will only take an action if the marginal benefit of the action is greater than the marginal cost (from Baidu).

Thinking entry point:

• Continuously improve users' marginal benefits through innovations in trading systems, product operation models, docking scenarios, etc.
• There is an objective upper limit to the marginal benefit increase. For this type of users, it means that you can retain this part of users no matter what method you use. 

Deduction 2: Users respond to incentives

Because people make decisions by comparing costs and benefits, their behavior changes when costs or benefits change. That is, people respond to incentives. However, policies sometimes have effects that are not obvious in advance. When analyzing any policy, we should consider not only the direct effects but also the indirect effects that occur through incentives. If policies change incentives, it will cause people to change their behavior (from Baidu).

Thinking entry point:

• Users respond to price. The supply curve rises as the price increases, and the demand curve falls as the price increases. In the design of operational strategies, "price" can be reflected in the number of times a user needs to share in a user sharing and profit-adding activity, whether the user is a novice in a "newbie exclusive product" activity, and the user's level in certain "VIP exclusive product" activities.
• Users respond to competition. Under the pressure of competition, users are more inclined to take aggressive actions. For example, many financial management platforms’ income rankings, invited friend rankings, etc., are all based on this logic.
• Users respond to contracts and institutional rules.

For this one , we can get the following enlightenment:

• When operating a landing page, do not have too strong "confirmation" or "authorization" requirements, otherwise it may scare away users.
• Users will study the various systems and rules of the platform to ensure the integrity and consistency of the operating rules.
• Consider applications with both positive and negative reactions. If you push sharing to earn more, users will tend to share; if you remind them that the coupon is about to expire, users will tend to use it as soon as possible.

Based on the logic of these two deductions, let’s look at two cases of Ali Zhaocaibao and Yangmao Party:

1. Ali Zhaocaibao

The following is quoted from media reports :

"In addition to investing in Zhaocaibao's products, part of my assets are invested in Hong Kong stocks and overseas stock markets," said Yuan Leiming (general manager of Zhaocaibao), who does not regret missing out on this year's bull market, "because I can buy funds and universal insurance, which have very good returns and can be cashed out on the Zhaocaibao platform. So overall, my returns are not worse than those of this bull market."

For example, Yuan Leiming bought 10,000 yuan of Xinhua guaranteed return fund "Ali No. 1" on Zhaocaibao in April last year. His profit is now over 5,000 yuan, but Yuan Leiming has cashed out 9,500 yuan. In fact, he only spent 500 yuan to get a profit of 5,000 yuan.

Cash realization is a function launched by Zhaocaibao to promote the liquidity of fixed-term wealth management products. That is, customers use the principal-guaranteed fixed-term wealth management products purchased on Zhaocaibao as collateral to borrow money from other individuals. The interest rate and time are determined by the customers themselves. The lower the interest rate, the more difficult and time-consuming it will be to cash out.

"Cash realization is actually a leverage function, not just the creation of liquidity. Cash realization is equivalent to borrowing money from others. I borrowed 9,500 yuan, and the interest is only 500 yuan, which means that I actually only spent 500 yuan to obtain a profit of 5,000 yuan, with a yield of more than 1,000%." ​​Yuan Leiming said that the interest rate for cash realization follows the market, usually more than 6% annualized, which is much lower than the cost of margin trading or stock allocation.

Yuan Leiming does not recommend that ordinary customers cash out, "because it is difficult to understand. It is too complicated for ordinary customers to refinance through asset pledges, and they are not interested in adding leverage. Cashing out is actually adding leverage. Currently, there are nearly four million customers on the Zhaocaibao platform, and less than 10% of them have used the cashing out function."

From 21st Century Business Herald, May 27, 2015, "From 0 to 100 billion in one year, Yuan Leiming of Zhaocaibao: Don't touch P2P between strangers"

After the monetization rules of Zhaocaibao came out, Zhihu, Baidu Knows, and many QQ groups and communities of wool-gathering parties have been studying it and proposing their own arbitrage plans.

2. Wool Party Official Account

After Lufax launched a cashback campaign for Linghuobao, a WeChat public account of a wool party provided its readers with a wool-grabbing strategy:

Wool-pulling strategy

Key points of this article:

1. There are two basic principles of first principles: based on facts and a small number of assumptions, work upward layer by layer to explore the root of the problem; make bold assumptions and carefully verify them
2. The core goal of the Internet finance market players is to improve efficiency
3. Two basic assumptions for the first principles: resources are scarce and users are rational
4. The operational logic based on the assumption of resource scarcity: people face trade-offs, and the cost of something is what you give up to get it (opportunity cost)
5. Logical deduction of user behavior based on the rational person assumption: rational people consider marginal quantity (marginal cost), and users respond to incentives

Questions for consideration:

1. Are the "magic numbers", AARRR models , and coupon strategies that we usually use analogies from other types of products, or are they based on analysis of user data on this platform?
2. Before accepting a theory or method, have you clarified its implicit assumptions?
3. How do irregular P2P platforms use economic principles to design scams?

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