Costly Signal Audit
Use quarterly to audit quality investments, when evaluating budget allocation for 'brand' or 'experience' spending, or when uncertain whether quality investments are paying off.
A quarterly framework for identifying which investments function as costly signals versus genuine capability building, and calculating whether they're generating ROI through pricing power, customer selection, or competitive advantage.
When to Use Costly Signal Audit
Use quarterly to audit quality investments, when evaluating budget allocation for 'brand' or 'experience' spending, or when uncertain whether quality investments are paying off.
How to Apply
List Recent Quality Investments
Pull P&L and identify every line item about 'quality,' 'brand,' or 'customer experience' rather than core functionality. Document cost, time period, and justification given.
Outputs
- Investment inventory table
Signal vs. Capability Test
For each investment, run four tests: Visibility (observable before purchase?), Capability improvement (improves performance?), Fake-ability (competitors can replicate cheaply?), Sacrifice required (15%+ of resources?).
Outputs
- Classification for each investment
Calculate Signal-to-Capability Ratio
Categorize investments as: A) Costly Signals (visible + costly to fake + capability improvement), B) Pure Capability (improves but not visible), C) Weak Signals (visible but cheap/fakeable), D) Waste. Calculate percentages.
Questions to Ask
- Costly Signals: ___% (healthy: 30-50%)
- Pure Capability: ___% (healthy: 30-50%)
- Weak Signals: ___% (healthy: 0-15%)
- Waste: ___% (healthy: 0-5%)
Outputs
- Portfolio breakdown percentages
Mechanism Alignment
Match costly signals to appropriate sexual selection mechanism for your market: Developer tools → documentation quality, Design products → aesthetic signals, Network products → collaboration features, Enterprise B2B → certifications, Premium positioning → values alignment.
Questions to Ask
- Are our costly signals aligned with the mechanism that drives selection in our market?
ROI Estimation
For top 3 costly signals, estimate: Customer acquisition impact (conversion influence, attribution), Pricing power (premium enabled), Competitive moat (time for competitors to replicate).
Outputs
- ROI estimates per signal
Rebalance
Increase spending on proven ROI signals aligned with market mechanism. Maintain pure capability investments. Reduce weak signals and misaligned investments. Eliminate waste.
Outputs
- Rebalancing decisions