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.

Reblog this post [with Zemanta]

9 Comments »

  1. Eric – this is the kind of insight I try to give other entrepreneurs all the time. Of course, you say it much more eloquently than I do. I’m going to forward this around!

    Comment by womlinda — October 15, 2008 @ 12:35 pm

  2. PS – I miss Bruce Greenwald!

    Comment by womlinda — October 15, 2008 @ 12:36 pm

  3. You may have even convinced me with this cogent blog, even though I have been used as a somewhat negative example!

    Comment by Judy Wiesen — October 15, 2008 @ 2:37 pm

  4. Fully agree! Actually switching costs – whether directly or indirectly via customer captivity – is the most common barrier to entry used by companies across all sectors. It is usually underestimated by competitors launching a substitute product. But it is also underestimated by investors and entrepreneurs looking for a sustainable competitive advantage for a new product. The easiest switching cost is indeed habits and its “power” is (among other things) a function of “convenience”, “usage addictivity”, “emotional attachment” of the customer to the product. It works with restaurants & bars, consumer goods, internet services, etc. However, habits are not sufficient to give a long term sustainable competitive advantage.

    Comment by Wallen's — October 16, 2008 @ 4:36 am

  5. For the record, I completely agree with you that switching costs are higher than people think.

    My problem is with the other way of interpretation: If your Mother on AOL Email has a high switching cost why is it that everybody thinks that MySpace and Facebook are ‘fads’ and have high user churn (they don’t by the way). Social Networking has in some cases higher consumer lock-in once users start to create all sorts of different activities.

    Comment by Niki Scevak — October 16, 2008 @ 6:12 am

  6. Great topic.

    Wallen- Agreed. Habits are certainly hard to break, but as that habit provides you with a growing ‘tangible’ asset, the costs skyrocket. While using AOL was a habit, it is the address itself that became harder to give up by the day. This parallels changing a phone number more than a typical web application.

    Niki- I agree with your assessment as well. The tangible asset tied to social network users are their growing list of friends. The longer it exists, the more friends you have. The more you have, the less you want to lose them. Time is on their side now.

    and Judy- My mom still uses AOL too.

    -jl

    Comment by Jeffrey Lewis — October 16, 2008 @ 1:34 pm

  7. Great post. My dad is like this. He loves TV but I can’t get him to get DVR because he doesn’t want to deal with a new program guide.

    Comment by Dave — October 16, 2008 @ 5:00 pm

  8. Good thoughts Eric and good food for thought. It seems to me that today the world is much more complicated because of the acceleration. The acceleration creates big gap between early adopters and late majority, making it difficult to tailor service to both.

    If you come out something target mainstream, early adopters will dismiss it as primitive. The other way around does not work either because stuff for early adopters would be too sophisticated for mainstream. So the challenge of swaying users from old sort of services is quite big.

    It seems to me that the key thing about today’s strategy is being quick, agile and responsive to the market signal. Never think that you have it wrapped up, even if you are as hot as Facebook in 2007.

    Alex

    Comment by Alex Iskold — October 16, 2008 @ 10:23 pm

  9. Damn Eric, good post. Glad we were smart enough to hire you.

    Comment by Stuart Ellman — October 19, 2008 @ 9:54 am


RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Create a free website or blog at WordPress.com.

%d bloggers like this: