Five Years Too Late

October 15, 2008

You Can Lead a Horse to Water…

Filed under: Startups, venture capital — Tags: , , , , , , , — fiveyearstoolate @ 11:24 am

Eric Wiesen

When talking to companies, frequently consumer-facing companies, I often have a version of the following short conversation below:

Me: So the product looks really great – how are you going to convince consumers to switch to you from [old, hidebound web 1.0 service or manual process]?

Founder: Well, that old [site/product/service] is terrible! Ours has better functionality, is more reliable and look how pretty the rounded corners are (ok, I made that last one up). People will see how much better our product is and users will flock to us. Word of mouth will be inherently viral.

This is a dangerous place to be with your business, and if you’re talking to me or most of my colleagues you’re going to get a lot of push back on this line of reasoning.

Let’s step back. When I was in business school I was fortunate enough to have taken a strategy class from Bruce Greenwald. Professor Greenwald has a powerfully descriptive and predictive framework for considering the competitive positioning of a given company (although I am still working through how to best apply his precepts to early-stage businesses). The framework essentially posits that while there are many different strategic forces acting on a company (including Porter’s five, for the MBAs and business geeks out there), the one that matters far more than anything else are barriers to entry. And if you break down Greenwald’s view of barriers to entry, he looks to one of several sources.
1. Proprietary Technology
2. Economies of Scale
3. Customer Captivity

The first two are pretty well-known in the technology world. Many of the first several generations of successful companies were built by developing technology that others couldn’t match and couldn’t legally copy. There are plenty of examples on the web and elsewhere of companies that have built scale advantage (Ebay, Amazon). And the best companies will have all three (Google).

But I want to talk here about an aspect customer captivity and a how it potentially impacts early stage companies. Professor Greenwald argues (and I agree) that customers (particularly consumers, although businesses as well in limited circumstances) can become captive through sheer habit. There are other, more obvious forms of customer captivity (technology lock-in, ongoing investment, loyalty programs, etc…) but these aren’t present in, say, a consumer-facing web service. And so it seems pretty easy to lure customers away with a better product. And to some extent this logic is rationale, in that if you have chosen to compete against companies without these more obvious forms of customer captivity, you’ve done your business a favor.

But it’s a mistake to think you’re out of the woods just because switching costs are low. In fact, the unseen switching costs of customer habit can be dauntingly high. By way of example I’ll use (as I often do) my mother. My mother uses AOL. My dad got the whole family AOL accounts in 1995. I never used mine because I already had a university account and my younger brothers eventually ditched theirs as well. Even Dad ultimately switched. But Mom is still chugging away on AOL. My brother (who spent almost four years at Google) tried endlessly to convince her to switch to the more elegant, functional and reliable gmail. No dice. She’s used to AOL. And so she stays.

I bring this up because it demonstrates some powerful captive behavior. Email is an impure example because the archives and persistence of a long-standing email address provide additional sources of captivity besides habit. Think about someone you might know who still uses the travel site they started using in 1997. Or the mapping site they started using in 2000. Better alternatives have arisen since then, yet people frequently “just stay with what they know”.

This has powerful implications both offensively and defensively for your web business. Offensively it means that you can’t simply rely on “if you build it, he will come” product superiority. Customer habit is such that EVEN IF users can be convinced with marketing to check out your terrific new product, your war is far from won, because some large percentage of them will say some variant of, “Yeah that’s cool. But I’m fine with what I have”. Your marketing battle with this customer has just begun. On the defensive side, it is useful to think about instrumenting your product or service to encourage customer captivity. And while that sounds nefarious, it doesn’t have to be – building habit and addictive experience is powerful medicine, and by building customer habit you are generating captivity explicitly by delivering value to your customers.

Build something that users want to use every day and by the time someone comes out with something a little shinier, you will have the benefit of customer habit. Today, though, you need to work on how to overcome it.

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