More and more entrepreneurs and startups are complaining about their businesses being “copied”. While complaining and potentially even suing “copy cats” might be one option, I claim that entrepreneurs and startups should take a pro-active approach towards copy cats and build more competitive companies that survive the attacks of upcoming competitors. Having worked with multiple startups and company builders – companies that are often seen to create copy cats – and having followed the global online startup scene closely over the last few years, I have put together my 5 most effective strategies for startups to prevent copy cats from taking over even if patents or hard to copy technologies don’t exist.

  1. Have a non-obvious idea. Every business venture starts with an idea. Some ideas are very obvious – no matter how innovative or disruptive. The problem with obvious ideas is that as soon as the “original” venture has launched, other entrepreneurs will take notice of the startup, understand the potential of the idea, and consider launching their own ventures modeled around the same idea. Obvious are especially ideas that are B2C focused and don’t require any specific industry understanding to “get” the idea. Take the example of eBay which fulfilled a previously served end-consumer need in a new and meaningful way. eBay’s initial service made it possible for people to sell their pre-used products online – a process that was traditionally done offline in small auction houses or on flea markets. The idea behind eBay was extremely disruptive to the existing structures but at the same time the idea behind eBay was very obvious. That partly explains why eBay faced so many copy cats soon after launch and had to purchase local companies in Latin America and Europe when they wanted to expand. The same is true for Groupon and the same will be true for Lyft. On the flip side, obvious but innovative ideas often lead to quicker markets success and higher valuations, and entrepreneurs often will have to make a choice between the potential for lots of competitors and a smaller market opportunity.
  2. Team up with great people & execute with excellence. If an idea is obvious and there are no patents or hard to copy technologies that prevent competitors from entering the market, execution is key. Basically, an idea is worth nothing if it is not executed well and the wrong people are working on it. A key strength of the company builders I have worked with are its people and the ability to execute fast and with excellence. A strict focus on hiring people from high quality industries like consultancies, investments banks, or leading tech companies, has enabled the leading company builders to expand fast while ensuring excellence in execution. Further, an ever growing pool of transferable skills and knowledge – for instance in online marketing – within company builders helps to execute fast and in high quality, even if the business model is new.
  3. Grow fast & go international early. Speed is critical to fight copy cats. Companies that grow fast and are leading in their categories will attract more venture capital and, hence, have the ability to grow even faster and outperform competition. The best investors often partner with the best companies which creates often an unbeatable team for the followers in the industry. From all global daily deal companies, only Groupon went public and only Groupon has a global reach. Even Google could not do anything so far against Groupon’s success although they launched multiple similar programs or bought Groupon competitors. Groupon was faster than anyone else. Another great example of a company that has an easy to copy business but managed to outperform every copy cat so far is Tinder – a location based dating platform. Tinder didn’t wait for local competitors to establish themselves outside the US but immediately launched in London and other places in Europe and most local competitors did not manage to attract any venture capital and have closed their businesses already. A similar strategy can be seen with Uber and Airbnb.
  4. Differentiate your product & build a brand. Another critical way to make a venture more competitive is to build a differentiated product that goes beyond the basic “idea” and to build a brand that sticks with consumers. For instance, while the basic idea behind Zappos is to sell shoes online, the actual success of Zappos is to a big extend connected to the great customer service that exceeds customer expectations. The benefit of a differentiated product is not only the immediate value it creates for customers, it makes it also harder for competitors to copy the business as more subtle and less obvious factors become more relevant. Closely connected to offering a differentiated product is the need to build a strong brand. Establishing a positive relationship with customers, creating a brand preference, and creating an emotional connection with customers, will make customers stay with a company even if a strong competitor enters the market. A great example for a startup that managed to create a strong brand and prevent copy cats from taking over is Fab.com. Fab.com went beyond being a pure retailer and positioned itself as an interior design expert. This positioning resonated with customers and created a brand preference for Fab that made customers chose Fab despite the existence of competitors.
  5. Create network effects. Last but not least, network effects help to drive stickiness with a specific startup and prevent copy cats from taking over. Another reason why it was so difficult for Tinder competitors to succeed was the very fact that Tinder already had a critical mass of people using the dating service, and while it might look difficult to create global networks effects given the location based idea behind Tinder, it turned out that Tinder users travel so much between San Francisco, New York, London and Berlin, that it was difficult for any local player in Europe to take over. While network effects seem to be obvious in businesses that drive their primary value through connection people e.g. social networks, every startup should think about the creation of network effects. For instance, part of Amazon’s success can be connected to the existence of network effects. A key driver for customers to go on Amazon are the reviews & ratings of products. The more users Amazon has the more reviews & ratings can be written, and the more new users Amazon will attract. At the same time, more users will attract more brands who want to sell on Amazon and want to see more reviews & ratings for their products which in turn will attract even more customers. In essence, every startup should think of how to create network effects – should it be through reviews & ratings, social components, or completely new approaches. Valuable network effects will make it more difficult for copy cats to take over and will drive the success rate of new ventures.

I am excited to hear if you share my learnings and what your personal experiences are!


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New restaurants always hope to attract enough eyeballs on Internet and mobilize as many trials as possible within a short period of time after opening. But current online restaurants promotion windows, typically Yelp and Groupon, don’t help a lot, though they attract many target customers of restaurants.

Yelp is the biggest restaurant review companies in U.S. People go to a restaurant and try the food, then some of them will give ratings as well as detail reviews to this restaurant, from the taste of the dishes to the environment of the restaurant. With the accumulation of the review numbers, potential customers of a certain restaurant can refer to these reviews and get a whole picture of this restaurant. These reviews effectively help them to make decisions and also help the restaurant to attract more new customers if it received lots of high ratings and good reviews. However, Yelp might be not a good eco-system for new restaurants. Considering Yelp as a restaurant markets, those restaurants with lots of favorite comments and high ratings always attract more eyeball and relatively easier to transfer those eyeballs to real trials. And the more people tried, the more will offer ratings and reviews. This virtuous circle helps those established restaurants to be more and more popular. On the other hand, a new restaurant, because lacking reviews and comments, is hard to attract enough eyeballs and mobilize trials. With very little trial, customers who are going to offer ratings and reviews are few. Therefore, new restaurants are hardly to promote themselves on Yelp. They have no way to outperform the established restaurants or even buried by them on Yelp.

Groupon seems to offer a good marketplace for new restaurants to do promotion deals. With very attractive high discount deals, Groupon tends to motivate its customers to try the deals with very low cost. It makes sense for new restaurants, which want to attract customers as quickly as possible after open, to offer those deals to Groupon. But are the customers attracted by Groupon good customers for the restaurants? Think about who are the people who always use Groupon: people who seek for cheap things rather than people who try new things. The purpose for new restaurants to attract as many customers as possible at the beginning is to build the buzz and build the loyalty after customers’ trial. But Groupon customers only care about the deal, not the restaurant. When they finish a cheap dinner, they are going to seek for another one offered by another new restaurant in Groupon. This makes the promotion spending a waste of money. Meanwhile, it is hard for high-quality new restaurants to distinguish from bad one, or even a negative impact on them, because they might not be able to offer a deal as cheap as those low-quality restaurants.

With that said, there is a business opportunity to build a new website that helps new restaurants to promote. If one can find a way to accumulate many effective reviews very quickly and attract high quality target customers, it will attract high-quality new restaurants and high-quality customers and finally becomes a platform for all new businesses and people who would like to try new services.


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When thinking about the current online marketplace, it’s impossible to ignore Amazon, the e-commerce giant with a $110B market cap. With a history of acquiring smaller, niche e-commerce sites such as Zappos, Soap.com and Diapers.com to further expand its presence across all categories1, Amazon has become the one stop shop for people to buy almost anything, from books to cereal to Halloween costumes. It’s a site that allows one to make price comparisons, browse through its enormous inventory and make payments without even having to take out one’s credit card. As someone who rarely signs up for anything that involves a subscription plan, even I can’t live without Amazon Prime. But my dependency on Amazon scares me a bit – what makes it so compelling to use and is this e-commerce giant here to stay?

The first two words that come to mind to when I think of Amazon are “convenient” and “reliable”. Back in 1999, Amazon invested in warehouse and distribution facilities to enhance its supply chain. With this, Amazon has been able to hold over thousands of products in inventory to guarantee seamless delivery, which has served as their competitive advantage. Amazon’s investment in technology and infrastructure was unrivaled at the time. By investing $800m, Amazon developed a website interface integrated with a recommendation engine, single click payment systems and tracking capabilities to store customer preferences and behaviors. As a result, I can easily browse Amazon to compare my product options, checkout using stored information and expect delivery within 48 hours.

One player in the market we can’t ignore is Groupon – the father of the daily deals business, which forever changed the e-commerce landscape when it first launched in 2008. Although it still provides deals to its customers on a daily basis, it has grown up quite a bit over the past four years. Groupon has expanded its categories such as goods, travel2, and entertainment/shows, some of which can now be purchased and used instantaneously via Groupon Now3. From a marketing standpoint, this company has done a great job tapping into the human psyche. The concept of scarcity prompts the consumer to want the product offering even more, knowing that inventory or time for the deal may run out soon. As a result, these daily deals effectively capture the consumer’s interest and consequently share of wallet. With these deals, consumers are also now being trained to look for discounts everywhere.

Let’s also consider Etsy, an online marketplace launched in 2005 that sells handmade and vintage items. Although playing in fairly niche categories, Etsy has been quite successful so far, raising $40M through funding this past May and being valued at more than $600m4. Part of Etsy’s appeal is that it effectively draws customers in by getting them involved with the process. As an e-commerce platform, Etsy has created a two-sided network of buyers and sellers for handmade and vintage items. By encouraging consumer involvement, Etsy empowers individuals to leverage their own skills and capitalize on a niche market.

It’s a stretch to say that innovative marketplaces like Groupon and Etsy will replace Amazon as the e-commerce king but there is something Amazon can learn from their successes. Amazon is nimble enough to capitalize on these innovations and trends. Maybe a few years from now, while we’re searching for goods on Amazon we’ll see marketing tactics like timed deals and consumer involvement embedded in the user interface. Even now, Amazon is getting into the deal space (e.g., MyHabit) and they’re well equipped to do so by leveraging their information on our spending habits. For now, Amazon is focused on creating a brand for itself outside of the traditional e-commerce marketplace model. With the introduction of Kindle, Cloud Drive and Instant Video, Amazon has placed itself in the ring with major consumer electronics and technology giants like Google, Apple, and Microsoft. The end goal of building such a brand is to make Amazon your one stop shop for all purchasing decisions. But the question becomes whether Amazon will succeed in selling its brand to consumers. Can it dethrone Apple’s hold on music? Netflix’s on video? Will it be a dominant player in the cloud space? Can the kindle compete with the iPad?Amazon faces stiff competition in each of these spaces, which begs the question – has Amazon reached too far beyond its core competency and should it focus on what is does best as the leader of the online marketplace?

Sources:

[1] http://www.businessinsider.com/visualizing-amazons-acquisition-history-2009-7

[2] http://www.tnooz.com/2012/05/15/news/groupon-says-getaways-is-goods-for-the-business/

[3] http://money.cnn.com/2011/06/01/technology/groupon_now_launches/index.htm

[4] http://online.wsj.com/article/SB10001424052702304203604577394231271835046.html

 


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‘Tis the season for social gifting

The holiday season is upon us which means it is gifting season again. That’s why it is no coincidence that Facebook announced its new gift giving service at the end of September, just in time for holiday season gifting. This isn’t Facebook’s first foray into gifting. Many of us can still remember the days when Facebook had gift icons that were either free or $1. Recipients of these icons – hearts and flowers for Valentine’s day, cakes and candles for birthdays, etc.—served no practical purpose and lived virtually on users’ walls. This time around, however, the gifts are real and will be delivered to gift-receivers offline. The presents are mostly less than $50, and they range from sentimental objects like cupcakes and teddy bears to Starbucks gift cards.

In fact, Facebook is not alone in the new world of social gifting. Several well-funded startups have already emerged in the space. A few of the more popular ones are:

Wrapp: Considered the pioneer in social gifting, Stockholm-based Wrapp, backed by LinkedIn’s Reid Hoffman, allows you to buy gifts cards for your Facebook friends. Your friends can redeem gift cards online or in stores with the Wrapp mobile app just by showing their phones – in fact, Wrapp’s gifts are only redeemable offline via smartphones. Your friends can display their gifts on their Facebook walls and add value to the virtual gift card when funds run out. While convenient for users, Wrapp is also convenient for merchants who do not have to pay until the gift card is redeemed and can target the exact type of consumer they want, not to mention receive free endorsements when people post their gifts to Facebook. Wrapp already boasts partnerships with retailers such as Sephora, Gap, H&M, Levis, Zappos, Office Depot, and many more.

Boomerang: If any of the above reminds you of Groupon, meet Boomerang, which launched in Chicago this July with $1mm backing. Similar to Wrapp, Boomerang leverages Facebook’s social graph to give gifts, but with a local twist and service focus (not surprising considering Boomerang is backed by Lightbank, Groupon cofounder Brad Keywell’s venture fund). Unlike Wrapp, which gives gift recipients gift cards to purchase physical products at big name retailers, Boomerang’s gifts are service and experience-oriented (again, think Groupon). It uses recipients’ Facebook data and geo-location to recommend a list of events such as a dinner for two at a popular local restaurant, or couples’ massage at a spa, or outdoor pursuits like rock-climbing and sailing. Like Wrapp, recipients can share their gifts on their Facebook walls, enabling local businesses to receive free endorsements. Boomerang also offers free gifts, such as a free drink with a meal, that you can post on a friend’s wall along with your “happy birthday” note, because local merchants see value in the word of mouth marketing via Facebook.

Others:  There are other similar types of social gifting players. Walmart introduced its own gift giving app last year called Shopycat. There is also Gyft, backed by Google Venture, which is working with over 100 retailers including Amazon. Yet another one called Treaters allows you to give a latte from Starbucks, or a cupcake from Crumbs. Facebook acquired Karma last year before launching its own social gifting app. And finally, still very new on the more local end of the spectrum is Plumfare, which allows you to gift food items on actual menus at local restaurants.

Back to Facebook. Some have coined Facebook’s move into social commerce as “F-commerce”. With Facebook entering the $100 billion gift card market, is it trying to play in the backyard of e-commerce giant Amazon? It could be, but what I intrigues me more is whether social gifting is going to be the next craze in the world of social commerce, much like group-buying was the hottest trend just three years ago. From the surface, social commerce through gift cards seems to be much more merchant friendly than Groupon’s group discount model, but then again, Groupon’s value proposition for merchants was good enough for it to turn into the Forbes’ “Fastest Growing Company Ever” in 2010 – that is until the huge wave of group buying sites saturated the market and many users turned out to be savvy deal seekers instead of loyal customers. For now, Facebook’s attempt to diversify its revenue streams through this latest move is at least a sign that social gifting is a trend to be watched this holiday season and beyond.

Apps:

https://www.facebook.com/about/gifts

https://www.wrapp.com/us

https://rang.com/

http://www.gyft.com/

https://treater.com/

http://plumfare.com/

Sources:

http://venturebeat.com/2012/04/29/wrapp-us-launch/

http://www.fastcompany.com/1844225/boomerang-brings-your-friends-social-gifting-game-million-dollars-lightbank-cash

http://thenextweb.com/insider/2012/08/21/treater-launches-social-mobile-gifting-service-raises-2-5m-seed-funding/

http://allthingsd.com/20120731/boomerang-pivoting-away-from-gtrot-to-launch-a-social-gifting-service/

http://www.mediapost.com/publications/article/184428/this-holiday-will-giving-get-social.html

http://www.wired.com/business/2012/09/facebook-gift-store/

http://socialcommercetoday.com/facebook-ad-and-gifts-exchange-two-things-facebook-has-gotten-right/


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During a discussion today about online discount for restaurants, we had an interesting debate about Groupon. After some interesting exchanges about how Daily-Deals sites a la Groupon actually were detrimental to merchants, I was surprised to see only a small minority of us thought Groupon’s time had come to an end. The purpose of this post is twofold: to provide a point of view about why Daily-deals site as we know them should disappear and suggest a reframing of the offering that would lead to a more sustainable model.

1. THE GROUPON PROMISE

Let’s set the stage for analyzing the Groupon effect on services businesses such as restaurants. But let’s be clear on the value proposition of Groupon: for consumers it is the promise to benefit from a ‘deal’ (meaning a typical 50%) of some product or service; for merchants it is the promise of increased traffic and increased repeat business stemming from this new traffic. Let’s focus on the restaurant businesses that will serve as a reference for ‘services businesses’ in this post. These businesses are characterized by high fixed-costs (rent, staff) and, as a consequence, relatively low variable costs (food for restaurants). The rationale in a Groupon offering is that restaurants incur a certain level of ‘structural’ vacancy that could be put to good use by ‘sponsoring’ meals and thereby filling up the vacant table.

There are some underlying assumptions for the Groupon model to make economic sense for restaurant.

First, this offer assumes that restaurants offering such promotion have established a price level and recurring customer base that allow them to be profitable given their ‘usual’ vacancy rate, therefore the lower gains realized on sponsored meals will only be directed towards increased profit (not amortization of Fixed Costs)

Second, the offer assumes that sponsored meals will complement and not replace existing base of full-price meals served

Third, the offer assumes that price is a barrier to consumption / trial at the restaurant

Fourth, the offer suggests that once a customer has tried a restaurant via a deal, she is likely to transform into a full-paying regular customer, therefore lowering the ‘structural’ vacancy rate of the participating restaurantt in the medium term

2. THE FAILURE OF THE CURRENT MODEL

Now we share some of the theoretical promise, let’s see the likely consequences of the generalization of Groupon deals.

The first consequence of participating in a Groupon offer is to focus the attention of customers on price which is only part of a restaurant’s value proposition, turning this service into some kind of commodity. This bias inherently selects customers who are price-seekers and are therefore less-likely to convert into regular full-price customers.

The second consequence is a destruction of some of the perceived value of the participating business. The Internet allows for large scale diffusion of information. The Groupon deal equates to telling the world restaurants can live with charging a lower price than the one on the menu.  The immediate consequence is a perception by customers that paying the listed price is being taken for a fool. After all, if you are able to offer 50% discounts on the meals you serve, why should patrons ever pay more than that? Although these economics might work for one specific restaurant, the Internet ‘taints’ the perception for all Internet users and puts price pressure on potentially all restaurants.

The third consequence is a lost and/or damaged relationship with patrons. As it is unlikely a restaurant owner will extend a 50% discount to a non-Groupon holder, patrons are now incentivized to go through the Daily Deal site to find their next place to eat. Now that patrons go through Groupon to find a restaurant, the restaurant owner has lost the ability to promote other features that make his restaurant special and is condemned to be benchmarked on price or discount value only. Being intermediated, the restaurant owner has to follow the Groupon rules to stand out rather than play on his restaurants’ strengths. How much discount a view over Central Park costs? How much discount is good service worth?

3. A NEW DEAL FOR GROUPON

As discussed in the previous section, the Groupon model carries tremendous risk for the restaurant industry and any “experience-based” sector in which discrimination should not be based solely on price. Now, I believe there is value in offering deals but, to be sustainable, these should be reframed.

The solution I envision is going the “high road” for discounts vs. going “low road”. By that I mean, the deal should allow increased benefits at a standard price vs. standard benefits at discounted price.

What if Groupon did not offer you a lower price but instead an exceptional experience? Let’s take an Argentinian restaurant, known for serving delicious meats (average meal price of $40). Current Groupon offering –Option 1– would let you go there and have a standard meal for $20. The reframed offering –Option 2– could be: for $40 you get to choose a selection of meats and are recommended wine pairings. I believe takers of Option 2 would prove truly beneficial for the restaurant owner: these customers are not primarily driven by price (but experience) and the offer lets the restaurant demonstrate the best it can offer which is more likely to convert these customers into repeat customers.

Such approach I believe would allow Groupon to deliver on its true value proposition to offer customers a great experience at a discount while preventing merchants to extend pffers that destroy value.


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