Developing Your Startup Scalable Advantage

Nothing is more important in a startup than having the capacity to acquire new customers, easily. A startup must grow because without growth, the alternative is bankruptcy. So, over the last few years, we have seen companies introduce new roles like Head of Growth, and Vice President of Growth. In a network effect business, the most important product is “many users” because the more the users, the more useful the product becomes.

Facebook understood this at the early phase of its business when it appointed Chamath Palihapitiya to lead its user growth unit. Simply, the goal was to add as many users as possible. There is a reason for that: for all the features in Facebook, without users, Facebook offers only marginal value, to users. Understanding that construct in a digital business is very important. It cuts across fintech, insuretech, social media and indeed anything that happens on the web from the consumer angle.

But knowing that growth is important is certainly obvious, for every founder. The challenge is executing the growth strategy. Companies like Google and Facebook which can acquire customers at ease, even at low or zero costs, have huge scalable advantages. It means they can scale without much burdens, financially.

When a startup has a huge scalable advantage, it becomes very exciting to investors. Also, its valuation moves up because the path to huge returns is very clear. Such companies have defined trajectories for success because there is nothing that is more impactful in a digital business than growing customers, at scale, and then doing so easily at low cost.

In a perfect internet market, as I have noted many times, the marginal cost for a digital product tends to zero. Companies like Google and Facebook that get close to this zero cost find huge success. Others like Groupon and Blue Apron that may require incurring costs to add new users or serve them, cannot see big valuations. (Groupon employs many people to meet and market merchants on its mass discounting business, disguised as an ecommerce operation).  While Groupon is limited by the physics of locations, Facebook does not have such burdens since the latter can add users easily. While it seems that Groupon has users as the main customers, the supplier base is more strategic for its business. So, I think it has to do more to handle the supplier (the real users, in my opinion) before the consumer facing side can do well. Facebook deals with publishers but the publishers largely come to it, and not the other way round. Facebook product is very appealing even without publishers, unlike Groupon, which must first perfect the suppliers’ side before value can be created for the typical consumers.

Pricing is very important and making customers to feel like winners is very important. If you know how to do that, you will have a great product launch. That is why understanding your customer matters. If you do not understand them, you will be leaving money on the table. If your business is selling digital products, the best strategy is value-based pricing since cost-based model does not make a lot of sense: in a perfect market, the marginal cost of a digital product, under most scenarios, is zero. I am confident you will not give out the product for free, unless your business model is freemium, since theoretically the price should be zero.

Another illustration is using Blue Apron, the digital company that sells meal-kit. For Blue Apron to add new users, it must have business presence in that country and also have the capacity to serve the customers, physically. Facebook and Google rarely have to worry for such. We were using Google Search in Nigeria before Google came to Nigeria. Simply, users go to Google and Facebook. Blue Apron does not have a good scalable advantage, compared to Google and Facebook.

Your Scalable Advantage

Your digital startup cannot grow if you do not have a scalable advantage. You must have a means to add new users at a cost model that tends towards zero. In essence, if the market has been perfect (it is not, and nothing is), you must serve customers at zero prices, on the web. But you do not do that since you need to make profit to exist as a business. That is why you have a cost on your apps or you extract tax via advertising.

If your startup has that scalable advantage, the next level is to defend the flanks. That means, you have to think how others can come and attack the advantages that you enjoy. Initially, MySpace, the social media company, had a huge advantage but it did not defend its flanks when it made it nearly impossible for third-parties to build apps and plugins on MySpace. Facebook introduced a way for companies to connect Facebook and their web apps, opening a new feature that moves many users away from MySpace. Of course, there were many other reasons, but this was one of them. The largely open architecture of Facebook that helps others to make plugins to interact with its ecosystem was critical to companies. Companies did not just want to be in MySpace. They also wanted to interact with the users who were following them. MySpace did not support such apps, then.

One of the main things you must do in your startup is to understand your cost model. Most times, entrepreneurs do not spend efforts to know how much it is costing them to acquire customers. Also, it is also important to know how much it costs to retain the customers as well as to serve them.

The business strategy does not end in acquiring customers. I have seen websites spend money to build traffic, and within months the customers disappear. There is nothing more valuable than having great products that delight customers. That is the main rule for customer acquisition and retention: provide value to the customers.

Playing The Advantage in Africa

Running a business in Africa is naturally hard because of infrastructure. Yet, for the fact that many things are broken provides an opportunity to demonstrate value to customers. Personally, I always ask people to ensure they stay away from businesses the ICT utilities like Google and Facebook are involved, unless you can find a pipeline to integrate in what they do. For example, you can have a digital marketing business that feeds on Google. But running your own advertising network may not make a lot of sense in the age of Google and Facebook.

Google, Twitter, Facebook and other big firms in their categories enjoy immense scalable advantages which are largely unbounded. But in some specific areas, they have weaknesses in Africa. For example, Google may not know much about healthcare owning to the unique nature of the business where medical data are not public. Also, agriculture is there and Google may not offer the best value since the data it needs are not available online for it to enjoy its usual aggregation advantage. You can take advantage of the data asymmetry in many sectors in the continent and build a real business. That Google makes it services free does not mean that you have to make yours free. Sure, I understand the challenge in monetizing digital products. 

In this piece, I explain why it is very hard to monetize digital products in Nigeria and indeed Africa. The core reason is that in a perfect market, the marginal cost of producing digital product is zero. This implies that its pricing will inevitably go to zero. This is the heart of the freemium model where you get many things free, which is possible because of the aggregation construct, where companies provide those digital products and then create an ecosystem to sell adverts. They benefit more than the suppliers by providing the platforms. As noted in the plot, great companies deliver the $0 marginal price even at high value, making it challenging for anyone that carries a non-zero marginal cost to compete, exacerbated if the product is even not top-grade.

All Together

In military, they talk of closing the flanks to avoid the enemies from gaining advantage. In an internet-based business, the best defense is really acquiring customers at the cheapest cost possible. By the nature of the web, this cost should be zero, marginally. But it does not have to be for you to find glory in your firm. Pursue a business model that gives you a clear scalable advantage that brings a fusion of growth at low cost, removing the limitations posed by physics of location, unlock-able via new investments. Ecommerce business in Africa does not have a high scalable advantage because new customers require expanded logistics. You need a business that can scale, at low cost, even with the flanks well protected for attacks by competitors. When you discover and execute such, valuations go high because the trajectory to success is visible to all stakeholders.

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