One very broad category of companies are what I’d call consumer transactional businesses. These are companies that offer consumers a product or service (or both) that they are paid for (as opposed to consumer audience businesses that are monetized through advertising).
Most consumer transactional businesses offer some combination of three value propositions.
1. Better. The product or service is better than what else is out there. For example, a Four Seasons is the same as a Marriott hotel, just better.
2. Cheaper. Same or similar quality for a lot cheaper.
3. More Convenient. This is a specific version of better that is less about product quality and much more about saving time and hassle.
Most successful startup companies are very strong in one or two of these attributes relative to the existing alternatives. Some companies have all three. Uber is the trifecta. The ride experience is better in an UberX than a taxi, uberX is cheaper than a taxi, and on demand mobile booking, payments, etc make it way more convenient.
Most companies aren’t really all three, they are some subset. One interesting observation I’ve had that plays into my investment decisions is that of the three benefits, the strongest is convenience, the second is cheaper, the weakest is better.
Why Better Is Tough
Funny enough, I find that going after better kind of sucks. The bar is just so high. In order to beat a large company with an established presence, you have to be 10X better as a startup, and it’s hard to be 10X better, especially if it’s on the same dimension that the incumbent cares about. This rhymes with Clay Christensen’s theory of disruptive innovation. When targeting the traditional dimensions of what makes a product better, incumbents tend to have a big advantage. For example, there is no way anyone can beat Gillette at creating a better razor. No chance. Zero. Not even close. It would cost way too much money and way too many years of R&D and new patents to be able to create a razor that shaves more effectively.
The only way for a startup to win at “better” is to try to find a market niche that is significantly underserved by the traditional definition of “better”. Again, with the razor example, Bevel has done this by targeting people of color, for whom the closeness of the shave isn’t necessarily the most important dimension of quality. The challenge is that a lot of founders think that they are doing a judo move and offering a product or service that is disruptively better, but they don’t quite hit the mark.
Why Convenience is Better
Convenience tends to be an area where incumbents struggle, especially when convenience is tied to new forms of distribution. Incumbents are where they are because they have scale through the existing large modes of distribution (eg: physical retail). As a result however, these companies don’t control a lot of the dimensions of what convenience might mean for a customer. Back to the shaving example, Gillette sells razors through CVS, Target, and Costco, which has opened up the opportunity for a company like Dollar Shave Club (and Harry’s and others) to provide greater convenience through subscription commerce.
Blue Apron similarly beats alternatives because of convenience riding on top of new distribution. Blue Apron I’d argue isn’t really “better” since you can buy products of similar quality at a grocery store and you can find comparable recipes online. It’s not really cheaper. But it’s way more convenient that doing menu planning, driving to a grocery store, buying the right amounts, prepping the food, etc etc. And they are able to do this by circumventing traditional distribution taking advantage of the internet.
Our consumer portfolio has largely been focused around convenience. Companies like Paintzen, Renoviso, Bridj, Scratch, and others are squarely focused on this dimension over others.
What About Cheaper?
Cheaper is a wonderful value proposition. But for a startup to offer jaw-dropping value, the company needs to be fundamentally changing the game. To be successful selling “cheaper” I think one of two things needs to happen. Either you need some structural cost advantage that others can’t match, or you need to be generating revenue in a very different way that subsidizes your lower product margins. Marketplace businesses are the classic example of this because they disintermediate the supply chain and offer a more free exchange of products between buyers and sellers. Half.com is a great early example of this as is Etsy, which actually generates almost half of its revenue from “seller services” as opposed to marketplace revenue. Sharing economy businesses show promise here as well because they offer a different cost structure by taking advantage of under-utilized assets.
However, as the internet has matured, I find that very few startups are able to offer “cheaper” in a sustainable way. Flash sales companies were momentarily able to offer this, as were daily deal companies. But both models have struggled because of the cost of continually finding and merchandising bargain inventory, and the diminishing value of the types of customers they tended to attract. Homejoy had a largely value-driven value proposition, but didn’t have a cost structure to support itself. I think this will prove true of many on-demand economy companies, unfortunately.
There are some markets that I find behave in a very different way. These are markets where the broad market is very price sensitive, but the high end market is relatively price insensitive. In economics terms, these are businesses with a very kinked demand curve, with the curve being nearly vertical at high price points, but very modestly sloped at mid and low price points.
An example of this is the market for wine. Generally speaking, the cheaper the product, the greater than demand. But among the very wealthy, the more expensive the wine, the more desirable. Actually, this may be a case where at the higher price points, the demand curve actually slopes upwards not downwards. The high-end wine market in China behaves like this.
I also find that unfortunately, the direct-to-consumer education market tends to behave this way. The market for education products that are more convenient and almost as good isn’t that great. But there is a big market for products that are better and more expensive. If you think about some of the most promising education companies or recent exits, 2U, GA, or even old-school companies like Kumon, they are all selling their product or service at a premium, to a small segment of the market that has unsatiable demand for anything at any price they can afford. If you are in this kind of market, then better can win. But usually, these are markets where proving superiority is very difficult and existing leaders have huge brands to the point that the brand are almost more of the value than the actual product.
So as a founder, my recommendation is to focus your efforts on identifying opportunities to leverage emerging distribution channels to create greater convenience for your customers. If in the process you can offer a product or service that is also cheaper and better, then more power to you. But unless you are in an unusual market like the ones described in the last section, know that building a company on the premise of “better” is a very very tough path to pursue. You will probably need near perfect execution, some sort of product or technological breakthrough, great market timing, and a lot of luck. Kind of like Tesla.