See also Paradox of Choice under Biases

Popularized by psychologist Bary Schwartz, the paradox of choice is simply the idea that having many options can cause consumers stress and problematize decision-making.

If you haven’t already, I highly recommend listening to Schwartz’s Ted Talk (here) and reading his book, Paradox of Choice (e-book link here).

We experience Paradox of Choice problems every day as consumers. It is deciding which condiments to get at Chipotle or a new pair of socks. Having endless options seems freeing, but it forces us to use precious brain reserves for even the most trivial purchases.

For example, Mark Zuckerberg wears the same outfit to escape the Paradox of Choice.

Helping customers solve the Paradox of Choice is a valuable and highly profitable endeavor. Companies do this through a few mechanisms like brand name trust, curated algorithms, and scarcity.

Let’s break each of these down.

Brand name trust is a simple concept. Customers find a brand they’ve bought before and enjoyed, so, by default, they tend to trust similar products from the same brand. Mercedez-Benz is a great example. The Mercedes- Benz brand is associated with luxury and quality. Customers know what they’re buying when they see the brand name.

Scarcity is different yet equally powerful. Scarcity-based companies provide only a few products, and that’s it. Examples of Scarcity companies include Direct-To-Consumer brands like Harry’s or All Birds. Both companies basically offer one product, yet both have experienced tremendous revenue and customer growth.

Curation Algorithms are the final category and one that sits in our current portfolio. Curated Algorithms use machine learning (ML), artificial intelligence (AI), or human teams to make product recommendations. The best part is that the curation constantly improves to show the customer what they want when they want it, thanks to the self-reinforcing data feedback loop.

Westwing AG (WEW) is a perfect example of this model. WEW helps customers discover unique and fashionable home/decor furniture items through a personalized online shopping experience. Think of it like a digital shopping magazine personally curated for every individual.

In other words, the more a customer shops with WEW, the more personalized the shopping experience. It’s this increased personalization that reduces the Paradox of Choice problem. Instead of choosing between 50-100 lamp variations, WEW customers choose between their personally curated 3-5 items.

Westwing’s model works. 85% of its customers use the app over 100 times per year. All thanks to reducing that Paradox problem.

Another example of Curation Algorithms is Adore Beauty Group (ABY.ASX). Like WEW, ABY personally curates make-up and beauty products to its 700K+ active customers. ABY offers over 11,000 products on its online store and a dedicated beauty service team to help customers find what’s best for them.

As Australia’s leading pureplay beauty e-commerce company, ABY can leverage its customer data to provide more targeted (i.e., curated) items to its customers. The company can then create its own-brand items to replace third-party goods at incrementally higher margins.

Suppose there’s a central thesis underlying the myriad examples of Paradox of Choice businesses. In that case, it’s this: Paradox of Choice businesses help customers make better and quicker decisions on things they don’t really want to think about.

Customers, in one way or another, like being told what to wear or what to buy. It’s the reason companies like HelloFresh (HFG), and Stitch Fix are highly successful. HelloFresh eliminates the question “what will we have for dinner?” while Stitch Fix solves for “What outfit should I buy next?”