Lately, I’ve heard a lot of pessimism around the outlook for consumer-facing startups, both from investors and operators. While I remain optimistic that there are still large opportunities that will be buoyed by new technology waves, I can understand the doom and gloom.
The internet has enabled widespread distribution of goods and services, but that distribution power has consolidated in a handful of incumbent aggregators:
- Google — search and email
- Facebook — social
- Amazon — commerce
- Apple — mobile app store
As a result, it has become increasingly difficult to build and sustain independent consumer Web properties. The large aggregators have the consumer eyeballs, so they’re able to charge a distribution “tax.” The consolidation of distribution channels and the tax to access those channels are such dominant trends that, for consumer companies, product decisions should invariably be comingled with the companies’ distribution strategy.
There are rare breeds of businesses that hit product/market fit so squarely on the head that they experience largely organic growth early in the life of the business. These businesses can then bypass the incumbent aggregators, and potentially become a consumer aggregator themselves.
Organic customer acquisition enables a business to bypass the toll roads that incumbent aggregators have erected. It can also enable businesses to build a head start where potentially insurmountable advantages can accumulate in other areas of the business, such as operating leverage, brand, capital markets and talent. Morgan Housel of Collaborative Fund recently did a fantastic job articulating this positive feedback loop:
“Most competitive fields have strong feedback loops: Losers keep losing because no one wants to be associated with losers, and winners keep winning because winning opens doors, and open doors beget more open doors. Amazon is successful in part because it has cheap capital, and it has cheap capital because it’s successful. Sears, on the other hand, has virtually no shot at redemption. In many industries, customers do not want the fifth-best product. Talented employees don’t want the fifth-best employer. They want the best. So winning accrues to just a few. It’s as true for large companies as it is for startups, even if the latter happens faster.”
In a three-part series, we’ll look at successful companies to illuminate the path forward, and explore historical precedents as examples of how to create an early, product-centric, organic growth engine. In Part 1, we’ll explore how to build a structurally cheaper (and hopefully better) service.
Part 1: Cheaper
Consumers have a timeless desire to purchase products and services at lower prices. The explosive combination of better AND cheaper is a formidable recipe. However, cheaper, by itself, can create non-linear organic customer acquisition. This shouldn’t be a surprise. It turns out that cheaper is a great catalyst for word of mouth. Consumers love sounding smart by telling their friends about a new service they discovered that’s cheaper than the alternative.
In many of the examples, the disruptive startups find ways to charge consumers less, shift costs away from marketing and into investments that improve the overall experience for consumers. The value and improved service drive word-of-mouth.
So, what are some models to deliver a cheaper (and potentially better) service?