[A version of this article appeared on YourStory last week.]
One of the tenets that stock market investors live by is diversification. As their advice goes – if you invest in several (uncorrelated) stocks, you reduce the risk of a sharp fall in one stock damaging your income significantly. An extension of this argument is that traders should maintain a mix of low-risk and high-risk assets in their portfolio; even if the risk materializes and your high-risk assets blow up, you still have some income. This is called the ‘barbell strategy’.
This is a very useful concept in stock investing. But can we take advantage of this in other businesses?
Before we try and answer this question, let’s understand the ‘barbell’ concept a little better.
The reason this investment strategy is called a ‘barbell’ is that all your investment goes to the two extremes of low risk-low return and high risk-high return, much like the weight of a barbell is concentrated at its ends.
Thus, you deliberately plant your feet at both ends – low risk and high risk; low payoff and high payoff; short-term and long-term.
Sounds like a great investing idea – limit your potential losses, even while pursuing high-risk investments. But, you may ask, how does this help those of us not in the financial sector? If you’re not a trader, how can you take advantage of diversification in general, much less a ‘barbell’?
There are several different avenues of business where a barbell approach can help cover downsides, and allow you to test new channels of growth.
1. Startup Marketing: There are several different channels through which you can market your product (Traction, an excellent book on the subject, lists 19!). But not all of them are equal – channels like TV advertising, SEO, and viral growth have a high ceiling on saturation (i.e., you can acquire millions of users through these channels), while others (PR, social media, community emailing, etc.) are far less scalable. But there’s a flipside – the former ‘moonshots’ are also more expensive, far more risky, and take longer to optimize.
When you’re selling a new product, you should definitely explore some of the moonshots – if any of them work, they can make your company’s destiny. But you should also invest in the more near-term, less-scalable channels, to ‘keep the wheels turning’ with a small flow of users. This also gives you time to perfect your product and plug the leaks in your user acquisition funnel, so that when one of your moonshot experiments suddenly delivers a deluge of users, you are able to effectively retain them.
2, Short vs. long-term value propositions: Sometimes, startups also need to bet on a combination of short and long term opportunities. Your product vision may be very ambitious, but you often can’t offer that proposition from day one. In fact, the more ambitious your vision, the longer it will take to start delivering it. So, if you want to survive long enough to achieve your dream, you need to sell something else till that happens.
A great example of this is Zomato – they started as a pure-play information source on restaurants around you. Gradually, as the user base grew, they began overlaying restaurant promotions. Now, they’ve just started an even more lucrative food delivery service. And I bet they’ll add other services soon – allowing you to book a table, pay for your meal through the app, etc. (I predicted this in an early March blog post, maybe 10-15 days before they started the food delivery service :P).
3. Multiple product lines: More mature businesses also employ the barbell strategy. They often have one-two cash cow product lines, which they can milk till the cows come home (I had to take the metaphor to its conclusion, didn’t I?). This gives them the freedom to invest in potential breakthrough products – many of these will fail, but a few will succeed and make up for all the losses and more.
Think of skincare brands – they all have some stable products like fairness creams and face washes, and periodically introduce more cutting edge products (e.g., anti-aging elixirs) to test the market.
4. Your own entrepreneurial career: The above examples are at a company level. But even individuals can employ a barbell strategy. For example, I have a startup, and have been working on a couple of products for 2 years now. At the same time, I also do some freelance consulting, and am about to run a taxi on Uber / Ola. Not only does this small but steady income give me the staying power to explore more opportunities at my startup, it also gives me a reserve to tap into, should any of my experiments work and I want to step on the gas. You may say I’m hedging. I don’t disagree, but I’ve found this safety net invaluable – I can apply myself to my venture in the best frame of mind, without worrying about a fast-falling bank balance.
Thus, you can employ the barbell strategy in several different situations, to reduce your risk even as you take on high-risk opportunities. And that, ladies and gentlemen, is how you can have your cake and eat it too!
I’d love to hear what you think of the barbell concept. Can you think of any other applications? Comment here, drop me a line at firstname.lastname@example.org, or tweet at jithamithra.
6-9 months ago, when everyone was posting lists of the top 10 books they read, I was unfortunately busy with work. And then, when I wanted to post my own list, it was much too late to do so – people had moved on to sharing Upworthy articles instead.
Nevertheless, what’s far more useful is to talk about the top things I learnt from books – the ideas, insights, stories that changed how I think about life and work. After all, that’s why you read books – to improve yourself in some way – isn’t it? Well, at least all books apart from the Twilight series.
So, here are the 5 ideas that transformed how I think about life and work, and the books I read them in. Rather than describing these ideas in detail, I’ll also share links to articles that offer a short version. But I would definitely recommend you read the book themselves too!
An understanding of psychology is, in my view, an essential skill for anyone whose daily life involves interactions with other people to get stuff done. The human mind is not only not rational, it is also irrational in a few consistent and repeatable ways. Understanding these cognitive biases and fallacies that we suffer from can go a long way in helping you get what you want in interactions with people.
[Tweet “The human mind is not only not rational, it is also irrational in consistent and repeatable ways.”]
One of the key concepts I’ve come across in this area is that the human mind is really two distinct personalities – let’s call them System 1 and System 2. System 1 is the more automatic, quick-and-dirty, heuristic based, lazy thinker – get to an answer quickly by applying habits and patterns, often at a subliminal level. System 2, on the other hand, applies more careful, overt deliberation to any problem, coming to a solution in a more considered manner.
At any time, you’re thinking in one of these two modes. For example, when you’re doing math, you’re carefully thinking of the problem and solution – that’s System 2 in operation. When you’re tying your shoelaces, you’re usually not thinking about the loops and knots actively – you just do it. That’s an example of a System 1 task.
Now, at most times, the mind defaults to System 1 – which tries to recognize and apply patterns without thinking too much. And the result is that it can get tricked in fairly predictable ways – what we call cognitive biases. Two examples of these are anchoring (where an initial number suggested to you often influences your answers to a numerical question) and availability bias (you tend to overestimate the probability of an event if you can remember examples – this sometimes results in people paying more for earthquake insurance than insurance for natural calamities – even though the latter includes earthquakes!). Won’t go into detail on these biases here – you can read the articles I’ve linked to, and the book. But I’ll blog about them soon too!
Another interesting implication of the dominance of System 1 is that you can trick your brain into certain emotions. For example, you know that when you’re happy, you tend to smile. But did you know that this can work in reverse – that you can trick your brain into happiness, by simply smiling? This was a ridiculously amazing insight for me – to know that causality works both ways, and I can control my emotions. I’m a ‘moist robot’, in Scott Adams’ words.
When I was in business school, I read Fooled by Randomness, by Nassim Taleb. At that point, I thought it was the best book I had ever read – so many brilliant ideas, one after the other. I read it again recently, and while I’m a little less effusive, it’s definitely worth a read – it’s long-winded and unnecessarily complicated in parts, and the language is often self-absorbed – but if you can look beyond that, the insights will hit you at an unrelenting pace.
But the most important insight for me – in that it almost exclusively governs my world view since I read it – is that of making skewed bets. The world is innately random – your success depends far more on your luck than on your ability. At first glance, this seems to encourage laziness. Why work hard when your destiny doesn’t depend on it? But looking deeper, the implication is that you should try and expose yourself to ‘positive’ luck as far as possible, while limiting the impact of ‘negative’ luck. In simpler terms, expose yourself to very high upside, while limiting your downside as far as possible.
This is called making a skewed bet – where if you win, the gains are a windfall; but if you lose, you don’t lose that much. A lot like financial options or a startup – if you make it, you make it. And if you fail, then your losses are limited – the cost of the option, 1 year of salary, etc. Of course, the probability of a loss may be 90%. But if you make 10 skewed bets, then you’ll make a windfall gain on 1 of them – and that may be more than enough.
Another important way to keep yourself open to good luck is by simply staying on the field. Thomas Edison got the light bulb right on his 1000th attempt – and that happened only because he kept trying different things, and didn’t give up after 999. To surf a ‘killer wave’, you need to first be in the sea, navigating the 100 tepid waves before.
[Tweet “To surf a ‘killer wave’, you need to first be in the sea, navigating the 100 tepid waves before.”]
Taking the previous point further – success, then, seems to be a process rather than a brilliant idea, inch-perfect execution or just good luck. Try a lot of different things, observe, learn, and iterate. So that you slowly, over time, collect all the right materials for the magnifying glass of luck to ignite. You do all the right things and keep improving, so that when Lady Luck knocks, you’re ready.
Success is therefore a system (take several skewed, high-reward/low-cost risks), rather than a goal (I want to get rich). Now that’s at a macro-level, but this makes sense even at the micro-level – rather than adopting a goal of doubling your user base and throwing money at it, take a systematic approach of trying different things, observing, and then betting the farm on the 2-3 marketing techniques that work.
Scott Adams (of Dilbert fame) carefully charts out this approach in his book.
Book:How to fail at almost everything & still win big. I would venture that this is one of the best and most actionable books I’ve read. But read at your own peril – as they say, one should be careful when taking life and business advice from a cartoonist.
Further Reading:Goals vs. Systems – a short blog post applying this concept to life in general.
4. Power Laws, or why working hard is not enough – Zero to One
I’ve already blogged about this here, but it’s worth reiterating. Today’s business world is not a normal distribution, with most people distributed around average payoffs. Rather, it’s an exponential distribution – very few companies will make most of the money to be made. Therefore, success depends far, far more on what you do, than on how you do it.
In a power law distribution, very few sample points account for a majority of the population’s value.
The power law will permeate all your decisions (e.g., one marketing hack will drive 90% of your traction, one product feature will drive 90% of repeat users, etc.). Won’t go into more detail here – definitely read the post!
[Tweet “Success depends far, far more on what you do, than on how you do it.”]
The previous three concepts have all been around the idea of work and success. This one is different, and is a tool that I’ve found quite useful in jump-starting creative thinking about problems.
Let’s say you’re trying to think of a startup idea in a given space. You could look at what users do now, what they buy, how they consume, etc., and try to find areas where you can add value. Or, you can look at how the industry will inevitably evolve in the future and see how you can accelerate that.
The author calls this concept an ‘attractor state’ – given industry trends today, what do you see as the logical next frontier over the next 10-20 years? And how can you participate in that, rather than making incremental changes to the status quo? To paraphrase Wayne Gretzky, the ice hockey legend – don’t skate to where the puck is, but to where it will be.
This is a slightly nebulous concept, so let me provide an example. Let’s say I want to create an offering in the payments space. One option is to join the crowded current market, and provide a mobile wallet solution, a payment gateway, etc. Another way is to think of where the industry will be in 10-20 years – its attractor state. I’m not a payments expert, but seeing how it has evolved over time (barter -> gold -> paper money -> credit cards -> mobile wallets), there’s a clear trend towards individualization. The reasons mobile wallets are a great innovation is that everyone carries a mobile today, and they don’t share mobiles – it is a unique identifier of a person. Taking this individualization further, the next wave of advancement has to be biometrics – where unique characteristics of your person (iris, voice patterns, fingerprints, etc.) are your identifier, based on which transactions can be completed from your account. You don’t need to whip out your phone or credit card – just staring at a tiny lens is enough to connect to your payment account.
How does this help an entrepreneur? With this end-game in view, entrepreneurs can think about how they can add (and capture) disproportionate value in the long-term – the products and services they can start building today, to accelerate the attractor state. In the case of payments, it could be future biometric sensors, systems for collating massive customer data, POS terminals for accepting payments, etc. – each of these possibilities could be game-changing.
[Tweet “”Don’t skate to where the puck is, but to where it will be.” – Wayne Gretzky”]
Won’t go into much more detail here – but I’ll write a blog post or two on this concept soon. I find it an incredibly powerful way to improve your creativity when thinking about problems and solutions.
Book:Good strategy Bad Strategy. Apart from a discussion of attractor states, this book also has a great discussion of chain linked strategy and focus as a source of competitive leverage. I’ve blogged about this here.
Further Reading: Will write a detailed post on this soon!
These are the five concepts from books that changed my world-view. It may be asking too much to hope that they fundamentally alter your thinking too, but I hope you find these perspectives and books interesting. Do comment!
I stayed at a Taj Hotels property in Delhi last week, for a conference. And I was blown away by the customer service there. Thinking back to my days as a business consultant, I stayed at several hotels across the price spectrum while traveling. But Taj hotels – whether Gateway, Vivanta or the higher-end ones – were always head and shoulders above the next best ones. Why, even when I’m just visiting a Taj for a meeting, the customer service there is superior to other hotels that I may actually be staying at.
But this post is not about why Taj is the best hotel. It’s about why it’s the best company, across sectors – how it embodies customer delight like no other company.
Over the years, I’ve interacted with a bunch of companies that excel at customer service. Amazon, for one, always has me marveling at how wonderfully well it treats its customers. Whether the big stuff (the ridiculously good deals that it offers with Prime and the Kindle) or the small (you don’t have to call Amazon if you have any issues; rather, they call you), Amazon has got your back. Many of Amazon’s customer service decisions fly in the face of its bottom line, but they are guaranteed to make customers happy – and Amazon always trades off in favor of its customers. It’s not for nothing that its stated vision is “to become the Earth’s most customer centric company”
But whether Amazon or Zappos (which introduced the “Try different shoes, and send back the ones you don’t like” model), excellent customer service feels ‘processified’. So, over time, these become expected and fail to surprise you anymore. So, while you would become a loyal customer of Amazon (I am), you’d not necessarily become an advocate (I wouldn’t write a blog post solely extolling its virtues). This is excellent customer service no doubt, but it’s not customer delight.
With Taj hotels, on the other hand, customer delight is present in every interaction with guests. The staff – whether in housekeeping, at the restaurants, or room service – all perform random acts of kindness that leave you surprised. So, rather than a customer service process, a customer service culture shines through. When I was preparing for this post, I could remember at least 10 examples of how their customer service left me spellbound. I won’t share all 10 (I wanted to write a short post for a change), but here are a few:
An ex-colleague of mine broke his suitcase trolley while in Nairobi on a project. He tried everywhere, but couldn’t get it fixed – the standard advice was “Buy a new suitcase”. After two weeks of lugging it around on one wheel, he had become inured to the inconvenience. But the moment he entered the Taj Palace in Delhi, the bellman came up to him and said “Can I get that fixed for you?” This was over 4 years ago, but he still uses that example to highlight the ‘jugaad’ innovation approach in India. I think, though, that the lesson is far deeper – he would not have received the same response at every other hotel.
During my most recent visit, the waiter at breakfast remembered that I had ordered a dosa on the first day and brought it to my table himself the next day. I marveled to myself for a bit about how, among a multitude of guests, he remembered what I wanted. But when I started eating, I realized that he had also remembered what chutney I hadn’t touched the previous time – it was missing from my plate! I was quite spellbound at the detail-orientedness that goes into their customer service (and remember, they don’t have big data algorithms churning at the back!). And this is not necessarily designed to show every customer they care – if I wasn’t similarly detail-oriented, I may not have noticed. This is not lip service customer care – they genuinely want guests to feel comfortable.
From the previous example, you may have guessed I have OCD. But the hotel housekeeping staff didn’t know that. Yet, when I returned to my hotel room after a conference session, I noticed that they had velcro-ed all the stray charging wires I had left hanging from plug-points. A great convenience, but one many guests are liable to not notice. But ones that do are guaranteed to be pleasantly surprised at how customer delight permeates every single interface with the Taj’s staff.
This stellar customer service is not restricted to the hotel’s guests. I had a meeting at a Vivanta once, and I was an hour early. I ordered coffee at the hotel’s restaurant, and was quite a prima donna about it – I asked them to bring it to the lobby (quite a distance away), as there were no free plug points at the restaurant and I wanted to charge my laptop. Not only did they cheerfully comply, they were equally cheerful in saying that it’s on the house when I asked for the cheque an hour later.
A common theme across these examples is the element of surprise. And I think it’s essential. This tiny overlap of excellent customer service and complete unexpectedness is what really creates customer delight.
[Tweet “The overlap of excellent customer service and complete surprise is what creates customer delight.”]
Another critical element of customer delight is service recovery. Anyone can smile pleasantly at genial and benign customers. But how do you rescue a negative situation – a disgruntled customer, an overturned wine glass, a missing booking, etc. – in a way that transforms the irate customer into a loyal one? Sure, you can create many customer-friendly policies like a free dessert or a large discount to defuse such situations, but to truly delight even the most agitated nay-sayer, you need to go above and beyond. These extreme cases are what distinguish merely excellent customer service companies from ones that delight customers.
And the Taj staff came through in what is perhaps the most extreme case of all – the 26/11 attack in Mumbai, when terrorists laid seige to the Taj Mahal Palace hotel at Gateway of India. Numerous employees, in different parts of the hotel, were instrumental in shepherding the guests to safety – all of them made sure that guests came through unscathed. They were the last men out. And in some cases, they did not get out.
[Tweet “Extreme cases are what distinguish merely excellent customer service from true customer delight.”]
The Taj has thus created a culture – not a mission, not a process – of customer service. And unlike a mission statement “We exist for and because of our customers” that’s only read out sonorously at company meetings, this has trickled down to the lowest level employees across departments – employees are empowered to make customers happy, even if it means extra costs.
This willingness of Taj’s employees to go beyond their remit – in both traditional and extreme situations – is how great customer service stories are made.
I can’t afford to stay at the Taj whenever I travel, but it’s one hotel I look forward to visiting, even if just for a meeting. Do you guys have any other examples of such companies – where you look forward to just interacting with them? Would love to hear about them – do comment below / mail me at email@example.com / tweet at @jithamithra. And yes, do subscribe – I post roughly once a week, on startups, business models, consumer behavior, etc.
PS. I’ve just started a newsletter called The Startup Weekly with Abhishek Agarwal, a close friend, curating the most interesting articles, case studies, etc. for startups that we come across every week. It would be a good addition to your inbox. Sign up here – the second issue goes out this Saturday! And here’s a link to the first issue, in case you need some more convincing!
We constantly read about companies that have created barriers to entry – through technology, intellectual property, large-scale manufacturing, or sometimes even by throwing a ton of money at a problem. For startups, this barrier to entry is a constant refrain, especially in conversations with potential investors – “What’s your barrier to entry? What asset are you building that’s hard to replicate?”. And this is a hard question with no easy answers, especially for a young company that’s not building a high-tech, proprietary product – a bigger competitor with deeper pockets could appear at the ramparts anytime, and replicate exactly what you’re doing.
But what if just focus on a particular user segment could help you develop a competitive advantage? What if expending all efforts to serve a particular market niche or user segment could help you unearth a resilient barrier to entry?
I read a book called ‘Good Strategy Bad Strategy’ last year and was struck by how insightful it was. I’ve revisited my notes from the book at least twice now, each time capturing a new nuance. It’s a must read for students of strategy, advisors on strategy, and practitioners. Having been all three (in that order, oddly enough), this is right up my alley.
The book had many great ideas on sources of power for companies – what gives a company lasting supremacy in its market. One idea that stayed with me was of single-minded focus – how focus on a particular type of user can be a sustainable source of power or competitive advantage. How would this work? Let’s dig in – this feels like another 1800 word post.
Any company’s business model has 9 different parts, as below:
The author, Richard Rumelt, points out that to focus on a specific user segment, you need to make coordinated changes across multiple or all parts of your business model. Thus, your final offering to the customer is a sum of many moving parts that have all been finely configured – a sum that, as the cliché goes, is more than its parts. Applying such focus takes incredible coordination of policies, which, along with their interlocking and overlapping effects, can then confer unassailable advantages and make you a hard act to follow.
I know this seems very philosophical (a little like bad strategic advice!), so let’s look at a few examples to illustrate this better:
Rumelt uses the example of IKEA to illustrate this concept. IKEA is a furniture retailer that sells ready-to-assemble furniture. It targets do-it-yourself or DIY users, who love the feeling of putting something together. It has been hugely successful across multiple countries, but 70 years since its founding, no credible competitor has appeared or lasted. That’s sustainable competitive advantage!
IKEA has no secret sauce in terms of patented technologies for furniture, greater marketing strength, etc. The source of IKEA’s lasting advantage is, instead, the coordination between the different elements of its business model to serve its target segment. For a competitor to challenge IKEA, they don’t just have to sell ready-to-assemble furniture – they’ll have to change their whole business model.
They’ll have to design new types of furniture;
They’ll have to start carrying larger inventory;
They’ll have to create their own, branded stores; and
They’ll have to change their selling models.
Thus, copying IKEA is not a simple matter. IKEA’s policies are so different from the norm in the furniture industry that any competitor would have to replicate ALL of them to meaningfully compete for the same user segment. Adopting one or two of these policies and implementing them, even perfectly, would be useless – it would add huge expenses without providing any real competition.
Apple is another example. Over the years, Apple has targeted its products at premium customers who want a superior experience – well-designed products that just work. They’re not interested in the most technologically advanced products with the most bells and whistles – they want products that do their job simply and well. Oh, and there’s snob value too.
Apple has made several interdependent decisions to target this group:
Complete ownership of the product: Take the iPhone. Unlike its closest competitor, Android, Apple controls the entire product – the OS, the hardware, user interface, etc. This allows it to deliver a very coordinated and quality user experience.
Complete ownership of computer ecosystem: Moreover, Apple coordinates the experience across all its products. The Apple ecosystem can satisfy all your computing needs – desktop, laptop, tablet, phone and music player. All of these products follow the same design language, and work together seamlessly – they sync with each other very easily, without any need to fiddle with system settings.
Branded retail stores with a luxury experience
Marketing mainly to premium customers who don’t mind spending more – this not only raises product revenue, but also increases the long tail of revenue from app store downloads, music downloads via iTunes, etc.
The reason Apple’s position in the market is unassailable is that a competitor can’t just copy one or two things to start selling to the same group of customers. The competitor would have to copy everything, a formidable task even for very nimble companies. And copying sequentially won’t work – you can’t begin to deliver the Apple or IKEA value proposition without copying everything from the outset, in a coordinated manner. Which is why, even though Android and its partner OEMs have copied a lot of product design elements from Apple (in fact, the first Samsung Galaxy S was an iPhone in all but name), they haven’t been able to displace Apple from its position as the proprietor of all things cool.
Thus, the business models of IKEA and Apple are like a chain – multiple independent elements interlock to engineer a truly durable value proposition. As for a competitor, the flipside of a chain-linked model applies – your proposition is only as strong as your weakest link. Focusing on strengthening just one or two aspects of your model won’t increase your ability to compete even one bit – you need to strengthen everything, all at once.
Let’s try and apply this mental model of a chain to a few other sectors. Are there other companies as well, which have used focused, chain-linked business models to derive competitive advantage?
3. Wal-mart: In the 60s and 70s, Sears and Kmart dominated retail. But they mainly served large towns or cities that could ‘support’ a large retailer. Wal-mart changed the game by creating large-format stores away from cities, allowing enormous spaces at lower costs. It positioned itself as a ‘discounter’, something other players avoided like the plague. And it was able to make money while offering deep discounts, through several interlocking innovations:
Extremely wide product portfolio with deep discounts on some products, cross-subsidized by other high-margin products
Cutting-edge technology to track customer purchase behavior, and tailor portfolio accordingly
Agile supply chain, keeping its stores well-stocked with the right products very efficiently
Thus, several innovations, all focused on offering products at the lowest prices, gave Wal-mart lasting competitive advantage. By 2002, Wal-mart was the largest retailer in the world, and Kmart was bankrupt.
4. Dell: If you wanted to buy a desktop in the US in the 80s or 90s, your only options were to either buy a standard configuration through a retailer, or buy individual PC components to customize the machine yourself. Unless you built the PC yourself, you did not get much choice in the product or configuration you wanted. Dell saw an opportunity to change this by offering customized configurations, and thereby targeting the more technologically adept consumer.
Dell took a number of hard decisions to make this happen. It created an easy to use online / phone interface for users to configure computers of their choice. It delivered this promise through a mass customizing production process, and built a direct-to-customer distribution channel. None of these decisions were easy to replicate even singly, much less in lockstep. The result – a lucrative business model that stood unchallenged during the PC boom of the 90s.
OK, these are standard business school case studies. Let’s look at a few newer companies.
5. Innocent: The British healthy drinks / smoothies player has built a strong position in its home market. Innocent offers health-oriented users very fresh fruit-based drinks – their promise is, zero preservatives, only natural fruit. Offering this focused proposition means a number of business model decisions – sourcing the best fruits only, producing for short shelf life, faster cold chain logistics to get the product to retailer shelves very quickly, and so on. All separate decisions, coordinated to deliver user value. Competitors have found it very hard to replicate this – Pepsico, after years of trying to compete in this market, finally bought a smaller competitor to gain a toehold.
6. Zara: Zara has carved itself a preeminent position in the ‘fresh fashion’ space. Zara’s stores are always stocked with the latest trends – Zara gets clothes from design to outlets in 10-15 days flat. And it has done this by tailoring multiple parts of its operating model to accentuate this speed:
Much larger design team than other apparel brands – its 200 designers ensure a steady flow of new designs, taking advantage of the latest trends and feedback from customers.
While most apparel brands manufacture in China, Zara manufactures in Europe close to its main markets – this gives it a head-start of at least 1.5-2 months.
Short production runs, with limited quantities – Zara doesn’t run more than one production cycle for most of its products. If a particularly striking outfit runs out at its stores, that’s it. You won’t see it again. From a user’s point of view, this drives a purchase decision faster. If you plan to come back tomorrow to buy a dress, it may not be there.
Putting these aspects together, other brands find it very difficult to catch up with Zara – all of these are major business model revamps that are difficult to pull off, whether alone or in coordination with each other.
These and several other successful companies show that focus and coordination can create a massive barrier to entry and lasting competitive advantage, keeping challengers at bay for years to come. It’s a telling reminder to businesses – you don’t need cutting-edge technology or a massive fund-raise, just good old-fashioned customer service will do!
What do you think? Are there any other consequences – positive or negative – of focusing your business model on a specific user segment? Would love to hear from you – mail me at firstname.lastname@example.org, tweet at @jithamithra, or comment here on this blog. And do subscribe here – I post roughly once a week, on startups, business models, consumer behavior, etc.
PS. I’ve just started a newsletter called The Startup Weekly with Abhishek Agarwal, a close friend, curating the most interesting articles, case studies, etc. for startups that we come across every week. Would be a good addition to your inbox (so much for conquering it). Sign up here – first issue goes out this Saturday!
What comes first, the chicken or the egg? An idle question on which children (and sometimes adults) can spend hours shooting the breeze. The question is, however, not so innocuous when it comes to businesses.
Some of the most exciting ventures today have a unique characteristic – they’re multi-sided businesses. What’s a multi-sided business? It’s one which connects two or more distinct user groups that provide each other with benefits. Think of Uber – it connects cab drivers and passengers, who benefit each other. E-commerce marketplaces are also examples – they connect buyers with sellers.
Such companies, once established, have a high barrier to entry. While that’s wonderful, it also means that they’re incredibly hard to build. Users on one side of the business model find the platform useful only if the other side also exists. For example, people buy video game consoles only if there are games they can play. And game designers make games for a console only if there are enough people who own it. The proverbial chicken and egg problem. How do one solve this impasse?
I face this problem too, in the product that I’m building – connecting advertisers with consumers (launch coming soon – watch this space!). How does one break the deadlock between the two sides? Unlike the philosophical question of which comes first, here the only right answer seems to be both!
There are four ways in which successful multi-sided platforms have overcome this stalemate.
Slow and steady: Build the two sides together in lockstep
Jumpstart: Get one side up quickly, and then build the other
Fake it till you make it: Build one side gradually with a makeshift offering, and then bring in the other
Bait & switch: Start with a single-sided value proposition to build one side, and then introduce the multi-sided offering
1. Slow and steady
In such a model, your offering needs to be valuable to your very first customers on both sides. One way to achieve this is to start small – very small – at a level where it is possible to get both sides onto the platform and provide the necessary cross-network effects. Focusing on a single city, area or even a neighborhood first can help you prove the model to both sides. Once that happens, you can expand gradually, building the two sides in lockstep one neighborhood at a time.
This is what Uber did in San Francisco – getting the model going in one city, and then applying it to other cities one by one. Going small could also mean focusing on one specific customer or product segment before expanding to others. Amazon, and more recently Flipkart, started with selling just books, building a user base and brand recall before expanding to other products.
Tinder, the dating / swiping app, built initial traction in a very creative manner. In its early months, the marketing lead toured several college campuses. At each campus, she first convinced the girls to download the app. After that, when she showed the app to the male fraternities, they quickly jumped on, seeing the number of girls they knew on the app.
Growing both sides of the business slowly in sync is great, but what if you want to speed up growth? Speed is often critical initially – given the high barrier to competing in this space, multiple people with the same idea would try and hustle into pole position. Maybe you don’t need to have both sides up and running from the get-go?
There are many ways one can quickly get one side of the value proposition up, and then build the other gradually.
a. Partner with someone who already has a large user base
One way to break this stalemate is to opportunistically partner with someone who already has a large user base on one side of the platform. This could be another product with mass acceptance in your target user base, or someone who has strong existing relationships that could be leveraged. Once one side is thus engineered into being, you can then build the other.
Google hacked its way to an initial user base using partnerships. It partnered with Netscape to become its default search engine in the late 90s, and also tied up with Yahoo! to power searches on that platform.
b. Make it easy, low-cost and low-risk for one side to come on board
At the same time, you need to make it as easy as possible for one side to say ‘yes’. Drivers are much more open to trying Uber when all they need to do is accept a phone from Uber and keep it on. It’s simple, and it’s low-risk – there’s plenty of upside if any ride requests come on the app, but there’s no downside at all!
Belly, a loyalty program for small businesses, did the same. It gave retailers a very low-risk, easy to install and low-friction loyalty solution. Once a critical mass of retailers had it, localized network effects began to take shape – customers and other retailers, noticing this in some shops, started demanding it of others.
c. Subsidize initial adoption for one side
A subsidy or ‘free’ offer always helps give the initial nudge. This is what video console companies like Xbox or Sony PlayStation do. The console is sold at a subsidized rate to users, and the company takes royalty on the flurry of games that follow. Uber subsidizes both users and cabs initially, to speed up adoption.
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3. Fake it till you make it
Sometimes, it’s difficult to obtain one side of the model quickly enough. In this case, you have to build one side gradually with a makeshift offering, and then get the other.
a. Be the counterparty till the real counterparty appears
Most large e-commerce marketplaces started with an inventory led model, where they stocked products themselves. Once user base was built, they found it easier to make the shift to the more lucrative marketplace model, connecting product suppliers to buyers.
b. Use existing systems or services
Sometimes, you don’t need to build the entire solution for all sides of your platform – winging one side of the platform is an option, at least until you demonstrate user traction. I’ve heard the story, possibly apocryphal, of how the Flipkart founders would actually go buy books from stores to fulfill their initial orders. Look for a repetitive, non-scalable way to fulfil one end of the bargain initially, rather than investing in building service infrastructure, supplier base, etc. for a model that is yet unproven – not only is the latter risky, it also delays your product’s launch.
4. Bait & switch
A very nifty way to build a multi-sided platform is to first offer a single-sided service, that doesn’t need a counterparty. Once a user base is built, you can layer on the multi-sided service. Sounds complicated?
a. Build a user base on one side with a focused (different) offering, then introduce the second side
Square is a payments solution for small businesses in the US. It’s really cool – a small chip-sized device that plugs into a mobile’s headphone slot and allows you to start accepting credit card payments. At least this is what it was initially. Once it built a sufficient scale of retailers, it added a second business model. Today, Square also runs a discounting app offering consumers great deals at its partner retailers, card-less transactions, etc.
LinkedIn also did something similar. It started as a pure play network for professionals. Today, a huge user base allows it to be much more – it now offers unique solutions to recruiters, job seekers, and professionals.
b. Start as an information portal
Another way to do this is to start as an information portal for one side of the platform, offering users a directory of information about the other side. Zomato started as a pure-play information source on restaurants in your neighborhood. Gradually, as user base grew, they started overlaying restaurant promotions. I bet they’ll add other services soon – allowing you to book a table, pay after your meal through the app, etc.
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These are the four different approaches that companies have used to resolve their chicken and egg deadlocks. What do you think? Have you faced chicken and egg situations of your own? Would love to hear from you – mail me at email@example.com, tweet at @jithamithra, or comment here on this blog. And do subscribe here – I post roughly once a week, on startups, business models, consumer behavior, etc.
PS. In the actual chicken and egg problem, the egg comes first (there’s absolutely no doubt about that).
Roughly a year ago, Facebook bought Whatsapp for $19Bn. When I heard, my first reaction (as it was for many others) was, “What!!! 19 billion? 380 million per employee. And they don’t even have a proper business model!”. And this was after Evan Spiegel of Snapchat (poster-boy of the business model-less) refused a $3Bn offer from Facebook. Today, their search for the elusive business model just begun, Snapchat is also planning a raise at a $19Bn valuation, and Spiegel looks like a visionary. What’s happening here? Is a business model expendable?
Amid the spate of headlines screaming bubble, I read a couple of articles by Andrew Chen on how the business model is not the main bottleneck for a startup at all. It’s the audience. As Andrew says, the biggest risk, regardless of your monetization model, is whether you can get millions of users or not. This sounds like a corollary of the power law – whether you succeed will depend far more on the size of your audience than on what you sell. If you have the users, you can find the money. So go build that audience instead.
[Tweet “The biggest risk isn’t your business model. It’s whether you can get millions of users or not.”]
Wait, are we saying you do not need a business model at all? Of course not – you do need to make money. But the point is that it’s not your critical constraint. Build a product that enough users want, and there are any number of off-the-shelf business models you can tag on to it.
Take Facebook – even a year after its IPO, people were concerned it didn’t have a solid business model. Today, Facebook is hitting annual revenue of over $12Bn not due to any innovative business model, but driven by its user base and growth alone. Maybe I’m belaboring this a bit, but especially for a consumer startup, it’s often far more valuable to focus on growing user base from 100K to 2 million, than to try and optimize revenue per customer.
OK, this is all talk – every business can’t use the same models that Facebook does. What are all these off-the-shelf business models we’re blabbering about? Well, I looked around online, but couldn’t find a comprehensive list. So I chose the next best option – I built it myself. I’ve listed 25 business model patterns below, that you can plug onto your business.
But first, you need an audience. And for that, you need a value proposition. Let’s say that you’re a platform where users come for widgets – these widgets could be physical objects (e.g., furniture, books, etc.), or digital ones (photos, updates from friends, online services, etc.).
This entrepreneur has bigger problems than his business model.
Now, if the widgets have direct monetary value, the business model options are fairly straightforward:
1. Manufacture and sell directly to customers 2. Outsource manufacturing, and sell directly to customers 3. Manufacture and list on other marketplaces 4. Become a marketplace and collect brokerage
But I’m guessing that if the widgets have physical value, then the business model wouldn’t be as big a question. Amazon India and Flipkart don’t take much ‘brokerage’ today on their e-commerce marketplaces in India, but their belief is that they can in the future.
It becomes more interesting when the product that your audience comes to you for may not be a physical one with direct value – how do you make money then?
Ever since Google revolutionized search by putting ads next to search results, advertising has become a default monetization approach. And let’s not forget that the newspaper industry has revolved around ads since forever. The digital advertising industry today has matured considerably, offering several options to tag onto your product / service.
5. Ad networks: Ad networks collect an inventory of ad content from advertisers. You can tie up with one as a publisher, and the network will then start showing banner ads, pop-ups, etc. on your platform. For every ad seen or clicked on, you collect. A lot of mobile apps today, especially games, use this as an earning model. There are over 200 ad networks around the world today, that you can partner with – Google AdSense, Tribal Fusion, InMobi, etc.
6. Affiliate networks: Fundamentally similar to an ad network, but here the focus is more on driving actual sales. You showcase product ads on your website, and you get a percentage of any sale originating from a click here. Some companies do only affiliate sales – check out Cashkaro.com, for instance. Anyone can become an affiliate to one of the large e-commerce players, or join an affiliate network – just search for ‘Affiliate network’ on Google, and a bunch of them show up.
7. Promoted Content: Ads that look native to your website / app, rather than banners. This is the Facebook model – where your news feed also contains a few ads in the same format. Twitter does the same with Promoted Tweets, and Snapchat Discover is also a variant of this. Some of the smaller apps also do something similar – QuizUp, from time to time, has Quizzes on upcoming movies – these are likely promoted.
8. Sponsored Content: Sometimes, your regular content can also be sponsored. This is the model sometimes followed by digital magazines / newsletters – an issue may be sponsored by a particular company, and free to the user.
Now, let’s get into slightly more complicated advertising solutions:
9. Offer Wall: Sometimes, rather than showing banner ads (which can be distracting), mobile games allow you to gain virtual assets (say a missile launcher in a first-person shooter game) by watching a few ads, downloading promoted apps, etc. For each ad you interact with, the game gets paid by the advertiser, and you get that missile launcher! This is called an Offer Wall – Tapjoy is one of the biggest providers of this service.
10. Retargeting: What users do on your site can be valuable to advertisers, even if they don’t actually advertise on your site. For example, the kinds of pictures you pin on Pinterest could be valuable information for an e-commerce player – they can then offer you the right deals when you visit them. You could help make that connection by integrating with a retargeting solution like Adroll or Perfect Audience.
11. Special Offers: You can also run exclusive offers from time to time for your users, in collaboration with advertisers – e.g., a special discount code that they can use in shopping. Often, this can be designed in a way where you get a cut for every user that converts.
12. Special Campaigns: Similar to the previous solution, you can also run special campaigns for advertisers to drive engagement. “Do you love Coke Zero? Upload a video telling us why, to win an exciting hamper!”
13. Behavioral Analytics: Observing how users engage with your platform and with other users on it can be very helpful in understanding their behavior. And this behavioral understanding could be very useful to corporates. Sharing this data with them could be a good way to monetize. Now, this is not really advertising, but it’s similar in that a separate entity pays you for your users and their actions.
B. Charge the User
The other option is to charge the user herself. Of course, setting an upfront fee for usage could scare away a lot of users, and hence the need for more creative solutions.
Some of the business model patterns that exist here are:
14. Rent / Subscription: A simple monthly subscription fee for use of the service – users are more likely to convert for this, as it’s a smaller amount than buying the software outright. This is a primary model in SaaS solutions, but it’s also used by others. World of Warcraft, the hugely popular multiplayer online game, charges $14.99 per month for usage.
15. On-Demand / Pay as you go: The opposite of the Subscription model is the On-Demand one – users pay only when they actually use a service. Cab services like Uber and Ola are great examples of this – you pay only when you use the service.
16. Bait & Hook: The bait and hook model involves having a low entry barrier for users, with regular, high ongoing charges. Printers and razors popularized this model, with relatively low-cost devices and high cartridge costs. But this is something we see among newer companies as well – US telecom players sell mobile handsets at a loss but have expensive paid plans with lock-in periods. Video game consoles are similar – cheap consoles, costly games.
17. Retainer + Usage: Another model to reduce upfront costs (and increase adoption) is to charge a low retainer for accessing the product / service, and then pay-as-you-go, depending on the amount you use. This is halfway between subscription and on-demand, and hence potentially less attractive to users than either.
Freemium business models
Freemium business models, where some consumers use the product for free and others pay a premium and cross-subsidize them, have gained a lot of traction over the years. There are several examples of the freemium pattern:
18. XX no. of uses free: Many services allow you to use them a certain no. of times per month for free, beyond which you need to pay. For example, the Financial Times website allows you to read 3 articles a month for free, after which you need to pay a subscription fee. Tinder is experimenting with this – it is considering limiting free users to only 100 swipes a day, with an option to upgrade to Tinder Plus. Some of us will now need to find something else to do at lunch unless we’re ready to pay.
19. XX no. of users free: An app that involves collaboration could limit the no. of people collaborating on the free plan. For example, an office chatting app could limit the number of colleagues you can add on one account to five. Todoist, the task manager that I use, allows you to add only 5 people to a project in the free version.
20. Limited scope for free users: Services sometimes limit scope of use for a free user, and you need to upgrade to do more. Taking the example of Todoist again (I love the tool, btw!) – the free version allows you to list and complete tasks and projects, but you need to pay if you want to label tasks, write comments, etc. Similarly, many content websites allow you to see the latest reports for free, but you have to become a paid member to access their archives. LinkedIn also uses this freemium model to great effect – they have different premium plans for job seekers, recruiters, and so on.
21. In-app purchases / virtual goods: This is popular among mobile games. Reduce the entry barrier by keeping it free, and allow users to purchase virtual goods within the app. If you’ve played Angry Birds, you’ll remember the Mighty Eagle. In a particularly difficult level, you can buy the Mighty Eagle (only $0.99) to kill all the well-sequestered pigs. And the stickers that you can buy on WeChat or Viber are also examples of in-app purchases.
22. Trial period: A variation on freemium is to allow consumers to use your product for free for 1 month, and then start paying. Most online software tools offer this – in fact, even if they are freemium and have a paid plan, they offer a trial period on the paid plan. The trick here is to use this first month to really sell your product and convince the user that she can’t live without it. A good onboarding process, assuming your product really adds value, can work wonders.
If you’re deploying a freemium model, you should initially assume that only 0.5%-1% of your users will convert.
Offering other services
Sometimes, you can offer other products / services to your customers to earn revenue.
23. Value added services: Offer users tools or services to help them better use your core offering, which remains free / inexpensive. For example, a photo-sharing software could offer certain paid filters that you can apply to your photos before sharing. Similar to the many paid Instagram filters that exist for iOS and Android today.
24. Diversified services: Sometimes, companies also offer completely unrelated services to their user base. WeChat has gradually added a myriad services to what one thought was a messaging app – mobile games, peer-to-peer payments, e-commerce, you name it.
25. Events: An offering which has a community built around it can also monetize by running events or get-togethers. And if the company can procure advertising / sponsorship for the event, that’s an additional revenue stream. VCCircle, a content company in India focusing on startups and investing, runs a large number of information / networking events that its subscribers and others can attend for a fee.
Thus, there are several business models that you can use, provided (and this is the million dollar question repeated for the millionth time) you have a large enough audience. Can’t find one that fits your offering in this list? Don’t fret – continue to build your product and user base. As long as you add value, you’ll eventually find a way to share part of it.
What do you think – is a business model a commodity yet? Would love to hear your thoughts. And if you want more information on any of these – how they work, how you can integrate them, tools you can use, etc. – do comment here / email me at firstname.lastname@example.org / tweet at @jithamithra. And yes, do subscribe to this blog – I post roughly once a week on startups, consumer behavior, books, etc.