Online marketplaces are transforming every industry

Many of today’s top internet companies are marketplaces. The reason is because the internet drastically reduces the ‘transaction cost’ of marketplaces by making it easy for participants to exchange information. Marketplaces have been around as long as agriculture (when people could specialize and trade). Initially, however, people needed to physically travel to a town square to see the goods, negotiate price, and settle the transaction. As the telephony system evolved, people no longer had to travel and could “call-in” an order, as demonstrated by the chaotic trading pits of traditional stock exchanges. Brokers functioned as aggregators of supply and demand, and helped organize the flow of information and goods between sellers and buyers. However, they were still a cost of inefficient markets (the most extreme representation of this is the existence of gangs in the market for illegal drugs).

Internet enabled trading was the first and most advanced online marketplace. Today, the internet is making markets more efficient in just about every industry. Some marketplaces are bringing greater transparency and trust into the market. Zillow is bringing better information into the real estate market. ZocDoc is bringing transparency into the market for doctors in the same way AirBnB is changing the market for short-term housing rentals. Other marketplaces are displacing middlemen entirely. Beyonce just released her latest album directly on iTunes without the traditional music promotion cycle and sold a record 1 million copies in 6 days. Uber is displacing dispatcher companies and Silk Road is displacing street gangs.

Online marketplaces make markets more efficient in several ways. First, it removes the physical cost of gathering buyers and sellers in the same location. For example, eBay and etsy allow limited edition items to be sold from around the world, when previously you had to hunt for them in antique shops and flea markets. Second, it makes it easier to display relevant information (prices, reviews, product/service characteristics, etc.) and also update that information in real time. For example, Uber helps bring transparency to the location and pricing of cabs while ZocDoc brings transparency to the quality and availability of healthcare professionals. Third, by amassing large scale (due to the first effect), these marketplaces are massive in scale, thus providing greater liquidity, more accurate pricing, and less idle resources (e.g. inventory, unused capacity). For example, oDesk helps to better utilize the resources of programmers and designers, while Uber reduces the amount of time cabs wait and search for customers. Lastly, with the advent of social networks, online marketplaces help to establish trust among market participants that did not exist before. For example, AirBnB establishes buyers’ connection to sellers’ through Facebook mutual friends, which established trust and opened up many previously idle apartment spaces for rent.

Stay tuned for my next post regarding the structure of successful online marketplaces…

It’s not about the hammer and nail, it’s about the hole in the wall

A few weeks ago, my marketing strategy professor outlined the differences between ‘mature’ and ‘emerging’ industries, and the different approaches a company needs to take in each situation. He claims that in ‘emerging’ industries, the focus is on product development because you are able to shape still nascent customer preferences, while in ‘mature’ industries, the focus is on customer service and product modifications to suit different customer preferences (e.g. shampoo varieties).

I fundamentally disagree with that segmentation. I believe that no matter how ‘mature’ your industry is (e.g. shampoo), you need to constantly innovate on new products. No matter how nascent your industry is (e.g. 3D printing), you need to deliver a superb customer experience and discover their deep needs (see previous blog post). I believe this misguided segmentation comes from defining your industry based on the product you are producing rather than the customer problem you are solving and the unique value you are providing. It’s not about the hammer and nail, it’s about the hole in the wall.

A company with a ‘mature’ product needs to be constantly paranoid about whether they are meeting the needs of customers significantly better than any other alternative.  They should not just narrowly define their competitor set as companies with similar products, but instead as all alternatives (including free ones) customers have to meet their needs. For example, Coca Cola is a refreshment product and counts all beverages (including tap water) as competitors, not just cola drinks. When you define your market based on a customer need, you will find that needs are changing quickly. A global market, enabled by communications technologies that allow ideas to spread more quickly, creates more fragmented customer segments with faster evolution in tastes. At the same time, low cost of technology and a tightly integrated global supply chain, allows companies to develop new products and enter new markets more quickly. Thus, if ‘mature’ companies don’t keep up with their competitors’ (including new entrants) pace of innovation, they will be the next Blackberry.

A company with an ‘emerging’ product also needs to focus on excellent service from day one. You are not just selling a product, you’re helping customers solve a problem, and that’s a combination of winning product and service. For example, Zappos was not just an online apparel store; they focused on solving the customer problem of ‘convenient and pleasant’ apparel shopping online. Zappos won over customers by providing hassle free returns, and responsive, personal, and friendly customer service. Zappos probably could have gotten away with shoddier service and still sell shoes initially, but their customers would be less likely to come back and refer friends, and they would have had to spend much more on promotions and marketing.

Getting out of your house and talking to customers

The worst thing a product manager or CEO can do is to build features and products that people don’t care about or even worse, hate. It’s bad financially, it’s bad for your product’s brand, and it’s bad for the morale of your team. So how does this happen? I think one of the biggest mistakes people make is to build products without first understanding their customers. We love to dream up of big ideas (we all think we’re visionaries). We love to analyze all sorts of data. We love identifying industry trends (techcrunch all day every day) and think of ways to beat competitors (we are ___ but with ____). But we cringe in fear at the idea of going out into the field and talking to customers.

We are scared because it’s more comfortable to sit in front of our computers and pitch our ideas to our friends and colleagues. Talking to strangers may be inherently nerve racking for some of us, but the real reasons people avoid customers is because they fear rejection and complexity.  They don’t want to have their ideas shot down by a dose of reality. They don’t want to deal with the complexities that come along with customers surfacing nuanced issues.

We need to get out there and talk to customers. Last weekend, my team and I went out and spoke with local merchants as part of our research for a local commerce product we were working on. Through just 10 merchant interviews, we collected a wealth of insights on the processes used by merchants, how they spend their time, where they have the biggest pain points, what motivates them, what technologies they use, and what financial and physical constraints they face. What we learned took us in a completely different direction, but one that we think will lead to features that will delight customers.

The statement that “if you had asked people in 1850 what better transportation they would want, they would have asked for a faster horse” is a true one, but it is often misused. I hear people say this as an excuse not to talk to customers. The real issue is that when talking to customers, it’s important not to ask them directly about their preferences regarding different features. They may not tell you the truth out of politeness or they may have a hard time imagining something that doesn’t exist. Instead, focus on open ended questions about their behavior, motivations, frustrations, and what delights them. From those answers, you can then infer what their preferences would be for the features you have in mind. If you asked the right questions, it would be obvious that customers in the 1850s had problems with having to rest their horse, having to care for the horse, just to get from point A to point B in a fast, economical way. You would have found out that a car priced at $X would alleviate the problems they had with horses AND save them money over time.

Now get off your computer and go talk to customers!

The importance of written thought

As water cooler conversations turn to Twitter’s impending IPO, many have asked the question – is long form writing dead? With our compressed attention spans and busy schedules, it seems as if people don’t have time to read and write longer forms of content. According to Pew’s study, fewer people read books today than they did in 1978. It’s hard to measure whether people are truly interacting less with long-form writing, but I personally believe that long form writing will not disappear as a way to communicate complex ideas.

As an intern many summers ago at BCG, I sat down with George Stalk, the management guru, and asked him what his advice would be for someone starting their career. He told me, “Read and absorb as much as you can. Then when your thoughts settle and you make sense of them, write it down and that will help you identify patterns that describe the world“. Outside of George, most people at BCG, communicated primarily through short emails and succinct bullets on slides. In the world of consulting, if your idea cannot fit nicely on a slide, it doesn’t exist. When I interned at Amazon this summer, I had to make a large adjustment from writing slides to writing a 6 page paper. At Amazon, all major decisions are made by creating, distributing, and discussing a 6 page paper, single spaced, plus exhibits. Having experienced both styles of communication, I think while slides are good for discussing high level strategic direction, writing is king when it comes to detailed thought for concrete decision making.

The pitfalls of PowerPoint are well known. It glosses over details, creates misinterpretation from abbreviated language, and allows the quality of the oral presentation to overpower deep thought. Yet most businesses continue to use PowerPoint as prolifically as they use trendy buzzwords, another bad business communication habit. I think it’s because PowerPoint is engaging and helps get you quick wins. It’s visual and easy to digest format allows you to quickly get comprehension and agreement on high level concepts and principles. Writing long form on the other head is a pain for both the reader and the writer. It’s a pain because the details are hard to crystallize. It’s a bigger risk for the writer to lay out the details of their idea or opinion and open it to critique than putting the high level thought into a bullet. It takes more commitment from the reader to comprehend and think through the complexities that lie in the details of an idea.

Good writing needs to be well structured, clear, precise, and tell an engaging narrative. A good business idea needs the same exact tenants. Thus, by forcing yourself to practice good writing, you naturally identify gaps in your idea, and are forced to address them. Because in writing, there are no fancy visuals to hide behind, and no charismatic speech. It’s just your ideas, laid bare for the world to see. I think it’s good practice for anyone with a business idea to try and put the details on paper and share it with people.

Some great resources for reading long-form writing are ‘Pocket’ (helps you save articles for later reading offline), Longform and Medium (both collections of recommended long-form articles).