Startup: An Insider's Guide to Launching and Running a Business (13 page)

A complicating factor for selling online is what I have come to call the
bozo factor
. In a large enough marketplace (such as the Internet in general, and eBay.com, Amazon.com, and similar marketplaces in particular), if you have a parity product, there is never a shortage of bozos who will knowingly or unknowingly
operate at a loss
and push the prevailing lowest market price on their products below the realistic lowest profitable price. These market participants are often short-duration participants because they will put themselves out of business in short order, due to lack of profit. An example of this, and what I am thinking of in particular, are the numerous and largely anonymous participants selling products on razor-thin (or negative) profit margins on massive trading platforms like Amazon and eBay. A Darwinian die-off never really takes hold because other similar participants are always entering even as older ones go out of business and disappear from the scene. A natural selection scenario with emerging winners is only valid in localized contexts where the entry of new participants is constrained by the finite nature of the supporting population. The Internet is not a constrained or finite population, and new participants
are emerging and disappearing with staggering speed and limitless replacements on their way.

In short, there is never a shortage of bozos, and the markets where they proliferate are made unprofitable for legitimate players because of the bozos’ limitless loss-taking.

With parity products in large enough markets,
somebody somewhere
can always sell cheaper than you. If you are the cheapest today, then somebody else will be cheaper tomorrow. Your competitors may have advantages that make it very difficult if not impossible for you to compete against them. This is a natural (and to economists,
beautiful
) feature of the marketplace, and it’s yet another reason to avoid parity product markets.

The only exception to the rule of avoiding the parity product market altogether is the highly desirable case where you can shatter the parity paradigm in some way.

An illustration of this would be if you could acquire the products
significantly cheaper
than anybody else. An example of this is buying closeout merchandise from retailers, or having an asymmetrical deal with the manufacturer that prices you differently than everyone else in the market. (This is also where counterfeiters appear on the scene. Interested in a $35 Gucci handbag anyone?)

Another way to succeed with parity products is if you can market the products to a group that has
no other options
. An example of this is the concession stand at a movie theater. You have a closed audience with no other options for purchasing a Coke or a candy bar, so you can literally charge five times the normal cost. These parity products are at their most profitable when customers have no other options.

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The Two Approaches to Differentiation

No matter what your business is, your primary job in communication with your customers is to be noticed and to differentiate yourself from their other options. Moreover, you want to sufficiently separate your brand from other options so that
you
are their choice when they go looking for your category of goods or services. Another way of framing this challenge is this: you need to
differentiate yourself with regard to your competitors, and to arrange your communication and strategy around these particular points.

There are two main approaches for differentiating that I have come across so far in my businesses: I call them
positional differentiation
and
structural differentiation
.

Positional Differentiation

This is the classic marketer’s definition of differentiation, where you “build a better mousetrap.” If you are providing a product or service, what is your story? Why is your product or service better, more convenient, better tasting, sexier, or more desirable? Every business should try to build this kind of narrative, and it must be the following:

• Simple to explain
  : Can you explain it in five words or less?
  
• Believable
  : Does it strike the average consumer as true?
  
• Relevant
  : Are the points that you make actually valuable to your target audience?
  

Here are some examples of businesses that use positional differentiation:
¹

• College Painters
  : This company does what many other painting companies do: painting houses. The owners know it is hard to message effectively for abstract differences like materials quality, brush technique, and so on. These guys position themselves as “exceptional college students managing their own business as interns for the summer.” That is a wholesome messaging point that people respond to when choosing who to hire. “Why hire some
  contractor
  when you can get a great paint job for your house and also help put smart, motivated kids through college?” This is positional differentiation on the emotional resonance of a service.
  

__________

¹
These are actual business models at work in Austin, Texas.

• Nature Burger
  : This is an un-fast-food joint that provides burgers and fries like the other guys, but does so with locally produced beef and organic potatoes. The owners make a better product, and they make sure that all of their customers know it. They actually have pictures of the ranchers that they buy from on the walls in the restaurant. When customers are making a decision about what they want to eat (and feed to their kids), they choose Nature Burger because of the environmental and health differences in the product offered. This is positional differentiation on the health attributes and emotional content of product.
  
• The Joint Chiropractic
  : This clinic does not accept insurance, and differentiates itself by a flat $20 fee for all services. It avoids the complications of insurance filing and copays by just charging one set fee. Most visits are walk-in and can be completed in 10 minutes or less. It appeals to busy customers because it is not too expensive, and customers can make a spur-of-the-moment decision to stop by. Less money, less hassle, less time. This is positional differentiation on cost and convenience.
  

Structural Differentiation

Structural differentiation is useful when your product or service is very much like the other options in the market, and/or the difficulty of communicating the unique selling points of your product (if there are any) is high. An alternative to pinning down customers one by one and explaining why you are better is to study your market and its consumer behavior to find a way to make it inevitable that you will get customers by the
structure
of your activity: where you place yourself and your messaging. Compared to positional differentiation, this is a very practical option when the market is so crowded that any complex or
nuanced messaging will be impractical and ineffective. Here are some hypothetical examples of businesses using structural differentiation:

• Joe’s Pizza
  : Joe makes good pizza, but he doesn’t make the best pizza in the world, and he doesn’t even advertise, because he bought the rights to locate his stores at several airports in his area. His business is asymmetrical compared to the competition in that he is the only choice for his target audience at a particular point in time. Customers are locked into whatever eating choices are available once they are through the airport security line and waiting for their flights. If they are at the airport and want pizza, then they are a Joe’s customer. Quality, price, and other differ-entiators mean less in this scenario than they would in an open market (although they do help). Being the only option is a good example of structural differentiation.
  
• Online Real Estate Search
  : In building an online business that competes in this crowded marketplace, we implemented a visually distinct brand, but realized over time that this would not be what would make or break our success. The quality of the brand experience did not impact our reach to users (although it certainly impacted the conversion rates of users once they came to the site). Our differentiator in customer acquisition was to “always be there” when shoppers needed to find a place to live. What that meant for us was that, more often than not, when they would go to Google and type in a search, we would be an option on the results page.
  

  We built high-quality content and executed a complex search engine–optimization and search engine–marketing strategy to satisfy that objective of “always being there.” We did well because we were very frequently there on the screen when any of the 80 million apartment shoppers in the United States decided they needed to find a new place to live. Of those searchers, it came to pass that millions of them per month came to our site. This was not because of our brand position, but because of how we structured the placement and type of messages guiding them to us. Finding a way to be omnipresent as an option for the customer is a powerful example of structural differentiation.
  

• MegaMart
  : The MegaMart chain of warehouse stores decides to make a house brand of soda. It just puts “MegaMart Cola” on the label and doesn’t particularly worry about trumpeting the product quality or taste. The product is then displayed prominently on the end caps of MegaMart’s soda aisles. While MegaMart may choose to put some messaging behind the quality of the product, it doesn’t need to differentiate product characteristics; it can use the status of
  house brand
  to get customers by default (so long as the product is somewhere near the quality of the alternatives). This is a case structural differentiation combined with positional differentiation: the product is simply always there, and it can be priced cheaper than the alternatives due to the higher margin.
  

Takeaway:
You will benefit by looking for both structural and positional differentiation in your business. Take advantage of both if you can, and expect that one or the other will be dominant in what actually brings in business for you.

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Know Your Customer

Knowing the market is critical. It also means knowing your competition and knowing your customer.

At one startup where I was the chief strategist, and in charge of the marketing team, I put together a tangible model of our target customer. We gathered statistics about our web site users that provided us demographics on age, ethnicity, gender, education, and so on. From this data, we determined that the single largest demographic group was Hispanic and African-American women between the ages of 24 and 32. I asked my creative team to make a life-size full-color cutout of “our customer.” This female figure was then placed on a glass room divider near our break room. Several engineers reported feeling a bit jumpy while they were getting their coffee because it felt like they were being watched! We named her Valerie and surrounded her with squares of paper taped to the wall that each had an important bit of market research written on it.

So, what was the point of this? I wanted my team members to “Remember who our customer is.” Each member of the team makes decisions every day that can be meaningfully informed by “Remembering who our customer is.” When designing an interface for our web site: “Remember who the customer is.” When deciding what kind of content we want to research and put on our web site, it’s the same: “Remember who the customer is.” When deciding whether to buy advertising in a baseball stadium or a women’s magazine: “Remember who the customer is.”

By creating an impactful visual aid, planting it in the middle of our work environment, and driving home a mantra-like repetition on the subject of knowing the customer, we created an effective tool for informing decisions made by our employees at every level of the company.

When You Have Multiple Customers

Related to this question of knowing your customer, it is common to have more than one customer to consider. When looking for an acquisition for our web real estate business, I would often refer to our task as “satisfying the three customers.” We had multiple customers which could have conflicting
needs in terms of how we messaged our site, spent money on advertising, and managed our business. Here are the three customers, a tangled web:

• Shoppers
  : These were folks looking for a place to live. They need information, and efficient 1-2-3 shopping.
  
• Advertisers
  : These were property management customers who were our advertisers. They needed to feel they were getting value for their advertising dollar. We would often find ourselves forced to make changes to the site which actually diminished the performance of the ads, but made the paying customers feel like they were getting their money’s worth. This included things like writing “premium ad” above their search result listings. Shoppers click on these less, but it is easier for management customers to verify that they are getting what they paid for.
  
• Acquisition partners
  : These were our competitors in the market that could possibly be enticed to acquire us. This audience would be looking for a complementary brand to add to their portfolio, so we would differentiate our look, feel, and messaging aggressively even if we felt that shoppers and management customers would not respond as well. At certain periods of time, when our top priority was getting acquired, this customer’s needs would win in any design or messaging debates within the team.
  

We needed all three of these groups, and each would rise to primary importance at different times during different periods of our growth. Recognition of these distinct customers and their individual needs was critical for us.