Posts Tagged: eBay

What type of market are you operating in?

When we look at investment opportunities, we need to consider the type of market that the potential investment is in. How much room is there for a market leader or leaders? Is it winner-takes-it-all or winner-takes-almost-all? Is there room for multiple potential winners?

Winner takes all

These markets are driven by network effects and only one company will win in the space. Examples of these winners include eBay (auctions), LinkedIn (professional networking), and YouTube (video). When these markets first emerged on the scene, there were dozens, if not hundreds, of companies vying for market share. Yet, only one dominant product survived.

Winner takes almost all

This market trend is happening across the enterprise where adoption is driven by end users, and not dictated from above by IT departments. In this case, a company or tool can emerge as a clear category leader, as word of mouth among satisfied users accelerates adoption across colleagues, departments, and companies. As a result, the tool can grab a large market share in a certain market segment or vertical. Think Mailchimp, Dropbox, Hightail or Unbounce for horizontal solutions or Clio, Jobber or Frontdesk for vertical products (disclosure some of those are portfolio companies). In particular, we see a winner takes almost all dynamic happening in vertical SaaS plays where word of mouth can quickly travel within one industry. For example, lawyers from different firms may work on the same case and spread exposure of favorite tools.

Multiple winners

When markets are not subject to network effects (or there’s minimal network effects/word of mouth), multiple winners can emerge. Today this type of market is mainly in commerce and enterprise IT.

The bottom line

As an entrepreneur, you need to understand what kind of market you are in order to create effective growth and fundraising strategies:

  • Growth strategy: Let’s say you end up being #2 in your market. While second place might be an enviable position for some, it’s essentially worthless in a winner-takes-all market. For this reason, you’ll need to be as aggressive as possible in the first few months after a category emerges to try to lock in the top spot before it’s too late. On the other hand, such an aggressive tactic doesn’t make sense in an e-commerce environment where there can be multiple winners. In this situation, you’re better off adopting a more conservative approach and ensuring you’ve reached product-market fit and nailed unit economics before accelerating.
  • Fundraising strategy: You’ll need to understand your market’s dynamics to know how much money to raise and how quickly. For example, in a winner-takes-all or winner-take-almost-all market, there’s a window to aggressively fundraise while the category is still open. However, once a category leader emerges, it will be hard to attract investors.

Of course, all of this is made even more complicated by the fact that it’s not always clear what the exact category is. For example, do Lyft, Sidecar, Hailo, and Uber all belong to the same transportation category or do they each define their own category? As an entrepreneur or investor, you’ll need to analyze the market and its current players to know how much room (if any) is left.

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The future of online marketplaces: “complex” transactions

The most successful online marketplaces today facilitate relatively simple transactions. There’s eBay and Etsy for buying/selling goods, AirBnB for short-term accommodations, and Uber for local transportation.

While reputation mechanisms (i.e. user reviews) play an important role on these platforms, the price tags involved are typically low enough that customers are ready to deal with strangers over the web. But, it can be a different story when someone is looking to spend $10,000 vs. $100.

There’s an enormous opportunity for marketplaces to emerge that handle high-value, complex transactions. However, to find success, they’ll need to make customers feel comfortable reducing the high-ticket purchase and/or complex deliverable to a few clicks.

Today, we already see marketplaces for more complex transactions… for example booking a location and photographer for your wedding (www.weddingful.com), hiring a web designer to create your next mobile app (www.ooomf.com), or finding short-term rentals for pop-up stores (www.storefront.com).

However, many of these sites currently work more as a lead generation engine than an actual marketplace and / or the platform needs to act as a hands-on broker to facilitate these transactions between participants. To realize the full potential of the opportunity, marketplaces for complex transactions will need to move virtually all of their transactions online by taking care of a few things:

1. Provide more information upfront: If you’re buying a book online, the ISBN and a rough description of the condition is usually enough information for you to feel comfortable making the purchase. But what about booking a wedding photographer? In this case, you’d want to see his/her portfolio, numerous reviews for previous clients, and possibly a write-up of the photographer’s approach and style.

2. Standardize traditionally unique transactions: Professional services companies are increasingly looking to create boxed offerings that include pre-defined scope, pricing, duration, deliverables, results, and other relevant parameters. The “productization of services” helps speed up traditionally lengthy sales cycles, and enables customers to complete complex transactions in a few clicks.

3. Provide more help to the inexperienced buyer: In many cases, buyers will be considering certain purchases for the very first time. In these cases, a marketplace will need to help guide buyers through the decision-making process. For example, oomf offers a project planner/cost calculator to help first-time buyers understand how much it will cost to make an app.

4. Reduce risk: Just like online retailers have found success via free shipping/free return models, transactional marketplaces also need to reduce risk for the buyer – such as by offering full money-back guarantees with purchase.

We still have a long way to go before complex transactions will completely move online, but I’m optimistic that some savvy companies will figure it out. In the meantime, consumer trust in the Web and online transactions will continue to grow. We don’t know who the major players will be, but this will be an interesting space to watch.

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The engagement threshold: transforming one-time customers into repeat business

Are you focused on new sales or bringing in loyal, repeat customers?

Whenever a business is completely dependent on new customers, it’s vulnerable. Not only are customer acquisition costs high, but new customers are just as likely to turn to any new competitor that enters the market.

The better a company is at turning one-time customers into repeat business, the more successful they will be in the long-term. Many startups already understand this, but aren’t quite sure how to make it happen.

For most businesses, there’s often a single point in the customer engagement lifecycle where there’s a higher likelihood that a one-off purchase will turn into a loyal customer. This is what I call reaching the ‘engagement threshold.’

I was first introduced to the concept of an engagement threshold from eBay years ago. The online marketplace had discovered that a first-time buyer who makes a second purchase in another category within two weeks of their initial purchase is 70-80% likely to become a repeat buyer in the future. As a result, eBay focuses considerable energy to re-activate their first-time buyers within those first two weeks.

Likewise, I once heard that new Twitter users need to follow at least 7-8 relevant people before they end up “adopting” the service. That’s why Twitter’s “Who to Follow” feature actively suggests people/accounts you might want to follow and the service is particularly eager to get new users to follow others.

Every product will have its own version of this threshold point when a one-off user becomes a loyal customer. For enterprise software, it’s the moment where the software becomes so useful that it becomes entrenched in the user’s daily workflow.

It’s crucial for startups to understand where this threshold point is for their business and then focus extensive energy and resources on crafting the right user experience at that point in time to guide users across the threshold. When done right, payback will be rapid and there’s nothing more valuable than a lifetime customer.

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4 ways to compete in Amazon’s shadow

If it has a UPC code, Amazon will beat you.  Thanks to a bigger inventory, low prices, convenient return policy, trusty user reviews, and services like Amazon Prime, Amazon is the world’s largest retailer and doesn’t seem to be moving from that position any time soon.

But even in the shadow of Amazon, there are several opportunities for entrepreneurs to make a dent in e-commerce. Here are four ways:

1. Unique product line:

As I recently wrote in TechCrunch, a new generation of web-only brands are bringing their products directly to consumers without the bloat of the traditional retail value chain. Together vertically integrated retailers like Warby ParkerIndochinoStella DotChloe & IsabelFrank & OakEverlaneBonobos and J Hilburn will generate over a billion dollars in revenue in 2012.

By creating their own unique brand and offering products that can’t be found elsewhere, these retailers don’t have to worry about competing head-to-head with Amazon and Amazon prices.

2. Curated shopping experiences:

Like Google, Amazon offers an efficient platform for searching for a specific item. In a GigaOM article, Michael Schreck described Amazon’s platform: “One click and you’re out. Amazon’s anti-shopping model reflects the characteristics of the very people that built it — engineers — who quite frankly are not your typical power shoppers.”

With the rise of the iPad and retina display, there’s a real opportunity for e-commerce companies to build a visually engaging, glossy digital shopping experience that is more like window shopping than typing a product into a search engine and getting a bunch of product results back. Curated shopping experiences like Fab.com encourage consumers to sit back, browse and discover entirely new items – the very things they can’t do on Amazon.

3. “Second season” discounts:

Flash sale sites have become one of the fastest growing segments in e-commerce. Companies like GiltZulily, and One Kings Lane offer steep discounts on products for a limited time, promoting them via urgent emails. Most of the products failed to sell in brick-and-mortar stores the previous season. For shoppers, these sites feel more like a designer’s sample sale – they offer an insider’s price on designer goods if you’re there at the right time and are ready to act fast.

This is a rather mature segment with many verticals already being taken by strong players that are generating several hundreds of millions of dollars in sales. With access to unique inventory being the key success factor, newcomers in this space might face a tough time against those incumbents and their strong purchasing relationships with brands.

4. Marketplaces

Online marketplaces connect buyers and sellers of often unique products, filling a niche that speaks to a particular audience. For example, Etsy offers a channel for aspiring designers and crafters to get distribution. Threadflip offers a more personal version of eBay focused on buying and selling secondhand designer fashion goods. And tindie connects buyers and sellers of DIY electronics. While the chicken-and-egg problem of supply and demand makes marketplaces hard to build, they can scale very quickly once a network effect starts to develop. Due to network effects, marketplaces also create important barriers to entry.

In summary: while Amazon won’t be unseated any time soon and you can’t expect to compete on price, there are billion dollar opportunities waiting in discovery, curation, marketplaces, and vertical integration.

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