The Internet and Differentiation
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The internet changed everything. It opened lines of communication that never existed prior. It helped relationships form that may not have formed otherwise. It has allowed Permanent Equity to connect with investors, companies, intermediaries, and 'scouts' like never before. But this is all obvious.
What isn't quite as obvious is how quickly the internet revealed the need for (and sometimes the lack of) differentiation for a company's service or product. In the internet era, the cost of search and comparison in terms of time, effort, and money declined towards zero. Let's explore what this means for businesses.
What do direct-to-consumer companies and WeWork have in common? Many of these companies made the mistake of believing that a physical goods or services (retail, real estate) business model + the internet = technology company (with the attendant growth and valuations). DTC companies took the traditional retail model and transitioned it online and voila! - branded ecommerce. WeWork took an old model of subleasing office space, combined it with an online presence and presto! – physical network effects.
But these novel ideas were quickly exposed as indefensible in the competitive landscape of the internet as competitors crept into the marketplace. For example, there are currently over 175 direct-to-consumer companies in the mattress space alone. In WeWork's space, various competitors such as Knotel, Spaces, Industrious, and Regus all competed for the same short-term office users.
Before the internet, knowledge of competitive products and services traveled much more slowly – word of mouth, newspapers, mailers. But with the dawn of the internet and ecommerce, comparing similar products, services, and companies became instantaneous. The cost of search declined precipitously towards zero, meaning consumers became much more aware of the benefits of competitive products and services as well as their costs.
M.M.LaFleur, a direct-to-consumer company specializing in women’s corporate and professional attire, seemingly succeeded where others had failed. With $70M of revenue in 2018 (although unconfirmed profits), it seems that M.M.LaFleur may be on its way to brand status. Why?
They solved real problems for women –
they solved the ‘I have nothing to wear and no time to decide’ problem in a way that
didn’t break the bank and
looked professional without
revealing too much, fitting too tightly, and allowing comfortable movement.
And yet, in the age of the internet, even M.M. LaFleur must continue to solve their customers problems and build trust in their products or risk becoming a commodity in a sea of competitors. The NPR story below is well worth a listen for an in depth look at the company.
For businesses to effectively compete in the age of the internet, they must solve real consumer problems in a differentiated manner. Your business must answer four questions:
- What are you offering that your competitors aren’t?
- What can you do that competitors can’t?
- What relationships do you have that others don’t?
- What parts of your product or service allow you to maintain your pricing or underprice your competitors in sustainable ways?
Understanding how your business stacks up against competitors in the age of the internet is becoming more important as the cost of comparison and the cost of starting an online business declines over time.
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