Wednesday, February 3, 2016

business growth drivers

What drives business growth?

If you're in any business, any industry, or even choosing one to be in, it makes sense to think through this to see the impact of your choice on your future... particularly so if you have already taken steps to future-proof your skill-set to give you freedom to explore multiple possible evolutions in the path forward.

A model like Porter's five forces is often quite useful in performing these kinds of analyses, but as with everything else, your analysis is based on the best information you have when you build your model, and as either the world changes and more information comes to light, or as you uncover more information about your domain of interest through your own study or research, it makes sense to revisit your assumptions.

In this post we look at some common business models prevalent today and study business growth drivers in each case.

Example: "Platform services"

This is an example of a service where network effects play a major role in driving growth. Take for example an Internet video hosting service. You need to achieve critical mass both in terms of people viewing content as well as with those generating the content being viewed i.e. you are building up a platform. When you have more content, you attract people with different tastes to come in to view it, and as more people view the content, you have more people who want to generate the content (who want the viewers' eyeballs), and you get a "virtuous cycle". Once you have critical mass, growth picks up suddenly, then takes off.

Similar arguments hold for other such services - new credit-card launch (merchants and users), new social media platform (users - content consumers, and users - content generators), Internet marketplaces (merchants and customers).  Key to growth in each of these cases is achieving critical mass as a first entrant, before competitors can grow. Once you have a lock, further growth should be easy, and your company will grow to be a behemoth... if you don't make costly mis-steps.

So what helps growth here?
  1. critical mass - lots of people like your service, and lots more are joining every day, on both sides of the platform - both the content creators and the consumers
  2. sticky service - people like your service, and it is not easy for competitors to build something comparable
  3. high switching costs - if people "join" the service together with their friends, and contribute content to the platform or form relationships on the platform, they will be less willing to leave as individuals, losing the network they have built there
  4. "protected" innovation - if you have patents on new technology that makes your service attractive, differentiates it from anything else available when it is first launched, and is hard for competitors to replicate, you have time to build your "moat" which will raise switching costs over time. That, and the investment (see (6) on monetization below) to keep the business at the leading edge contribute to faster growth
  5. barriers to entry - ideally you want a situation where you can enter new business domains at low cost (say as a first mover) but where, as time progresses, barriers to entry rise exponentially for competitors who want to clone your success from doing the same.
  6. easy and early monetization - many of the examples cited (e.g. video hosting, social media) in support of this model utilize advertising to pay the bills. Others charge users outright (e.g. credit card companies charge users an annual fee, and merchants a processing fee per transaction for the convenience). Yet others use differentiated pricing for different levels of service (e.g. reduced delivery charges) or force higher discounts on sellers for access to a high-volume sales platform.
Once a business is entrenched, it is quite difficult for a competitor to unseat it from its top position. So what would you do if say you wanted to create a social network application and get it to be as successful as Facebook?
  1. First, you have to give people a reason to switch. Is there something compelling you can offer, that users both want badly, cannot get from Facebook (e.g. you own patents on the technology), while giving them all the features they are already accustomed to? Alternatively, find "pain points" on the existing service, then build your platform to specifically address those, then advertise these differences every chance you get.
  2. Second, you have to give them the means to move from the platform they are currently on to your platform, seamlessly. How would you do this? If user content on the social media platform belongs to the user, not the platform provider, you can provide the user with tools to move her content to your platform, while simultaneously emailing or contacting her network on the old platform about the move. The tools would of course tout your new platform's differentiated capabilities to the user's network. If you can pull down some small fraction of the user's network with each switch, you can slowly work forward towards critical mass in your user population. It goes without saying that the tool we speak of should work completely seamlessly and without any hitches if we want users to switch.
  3. Third, you want to capture as much of the new subscriber market as you can. People not already on the existing leading platform, but wanting to join. And those who joined the existing platform but are disenchanted with it.
  4. And finally, you want to identify high impact users - these are the ones that are most connected on the existing platform - and get them to switch, offering whatever incentives you can. Of course, as a competitor you do not have access to any user's connectivity graph, but networks like LinkedIn for instance routinely indicate the number of connections or friends a person has, and this helps identify users that are a. better connected, and b. more active on the existing platform, and these are valuable to get to switch. If the platform has service (e.g. games etc) providers, use the same approach to get them to sign on to your platform inclusively at first, then exclusively as you gain mind-share.
  5. Also, use whatever opportunities present themselves to push your agenda. A network failure on the old service with lots of complaints on service inaccessibility? Advertise heavily so people think of your service then. Flaunt early adopters' testimonials and the differentiated nature of your offering every chance you get. Create a buzz. Get noticed. Win market-share.
While difficult, the above is by no means impossible. Facebook did this to a now almost forgotten MySpace. But to be fair, MySpace never captured the popular imagination in its heyday as Facebook does today, so the shift now might be more difficult than previously.

Now let's look at a slightly different business model.

Example: Internet Search

Here the business drivers are quite different. The market is characterized by:
  1. several direct substitutes - google, bing, duck duck go, come to mind at once
  2. low switching costs - all a dissatisfied user has to do is click another link
  3. high barriers to entry - sure, writing a search engine is not that difficult, but writing a competitive one that can take on the big boys on their home turf is strictly non-trivial
  4. easy interoperability - all search features common to various engines are table-stakes. 100% interoperability in terms of being able to search for various kinds of pages or "toolbar API" capabilities are expected.
  5. established underlying standards - some searches run better in "home" browsers than in others (e.g. bing in IE). Sometimes one might even argue that the search engine pegged by default into a browser's download settings has an advantage out of the gate, though savvy users will of course change these settings to best choose their tastes.  
  6. expectations of feature parity - also covered under (4) above. And when the expected nice features one is used to are not available, this causes people to switch. e.g. google identifies and tags pdf documents as pdfs. The quality of search results is arguably better. There is a side panel with a summary story of your search terms. All these things keep users coming back.
  7. strong patent moats for innovation - the search wars are won or lost on algorithms these days. What machine learning techniques underpin one search engine vs another, making one better or worse? Does the engine unobtrusively store your search history and use that to set a context for your future searches?
  8. scope for some meaningful differentiation - how do you monetize it? ad-revenue? automated reverse dutch auction bidding for keywords? Something else? Is your technology patented? A cash cow can not only take care of your search business, but also fund your other innovation.
  9. grab those eyeballs on all possible screens: feel PC screens are saturated with your users? move to mobile. integrate their search experience across screens. let users bookmark searches, ... the list goes on.
So how do you position yourself to succeed? The marketplace here is littered with the carcasses of even some erstwhile successful firms. Alta Vista, Inktomi/ Hotbot, Yahoo!, the list goes on. Once again today there is a single strong firm in the lead, but that position has been held before by others that have since become obsolete. So what makes one firm more able to entrench itself and grow, while earlier leaders wither away?

One could argue that the above factors coupled with constant innovation and large smart indexing of the ever expanding Internet is key.