Prasad and I have been blogging about cloud computing and how it has sparked a massive round of new web services innovation. The advantages of using cloud computing for a startup’s backend are obvious; Prasad has touched on them before: low capital outlays; no long term contracts; Scale up and down on a whim; high availability, security and reliability, etc. However, if it is easier for your startup to enter a market due to cloud computing, then it is also easier for others. One way I’ve seen startups attempt to build barriers to entry/competitive differentiation is by using the data created by customers as a weapon.
Customer created data can be a great way to increase stickiness. Online banking portals use this very technique when they suggest that you sign up for their online bill pay. Banks realize that customers are much less likely to switch providers if they have to re-key and re-enter all of their service providers account numbers. In the same way, I’ve met with several great startups that are using data uploaded or created by customers as a means of keeping those very same customers from leaving the service. Additionally, if there is a network effect based on the information put into the startup’s system, then this barrier to exit increases in potency as the startup gains users. If the system gets better the more a customer uses it then the customer’s data can also be leveraged into making the experience better.
Venture capitalists can accept the idea of a barrier to exit driven by customer data. However, this leads to the obvious question: how will the startup gain users? For some reason, a number of technology companies that I’ve connected with recently can’t articulate a go to market strategy beyond “if you build it they will come.” Most VCs are probably looking for a bit more vision than that. The marketing discussion represents a way to really convince the VC that you’ve got intimate marketplace knowledge – you know where your customer are and you know how to speak to them.
September 20th, 2008 at 2:42 am
I think that the concept of using data to prevent exit is very clever but does not have anything to do with a distribution strategy.
If a service can hit a critical mass, and have a large number of people interacting on a given site, as any startup must do in order to be successful, then they can easily request more data as a means to creating barrier to entry for any competition.
However, I’m not sure that it necessarily leads to the question of how a startup is to gain users. That question is answered in startup 101, the remedial course. This is the first question you have to answer, otherwise you pack up your things and go home -whereas using data to prevent exit and build barriers to entry is covered in building a company 302: executing a stranglehold.
This is a move played at a later stage in the game. A move the googles, facebooks, and bank of america’s can play. Not a move that is even worthwhile for web2.0startup-of-the-week to begin considering.
September 20th, 2008 at 8:17 am
“if you build it, they will come”
Well you built this post – now the EC’ers might come… lets see.
Congrats on a fine blog which is approximately four foot over my head
September 20th, 2008 at 8:31 am
Interesting article. I like the idea of creating stickiness by using customer created data.
Also the idea of using such data to personalize the interaction is very good.
Google has used these ideas brilliantly. For any startup it is very good to keep these points in mind.
September 20th, 2008 at 10:11 am
Agreed, the marketing discussion can and should provide vital points for convincing your VCs.
September 20th, 2008 at 12:13 pm
I do not think there is any possible barrier to entry in the WEB 2.0 area, other than finding between $ 50K and $ 150K to develop the initial platform.
I also agree with you that most WEB 2.0 companies believe that once they will have created enough traction, it will be easy for them to monetize their user base. Experience shows it is far from being obvious.
If I look at our customers who are in this space, the successful ones are the ones who have developed an aggressive advertizing approach that they deployed from inception, even with a limited user base. It seems to work surprisingly well for them.
My 2 cents.
Remi
September 20th, 2008 at 1:29 pm
Thanks for the information! We are looking at putting a Website to our blog and you site has some good information for us!
Your FL furiends,
September 20th, 2008 at 5:07 pm
“ours is better” is another excuse I hear from the “me too” generation of web services. Better in what sense? When comparing apples to apples, the better does not always hit the user in the face. In the 15 seconds you have to win the user over with your “better” widget, it had better be a distinct advantage – else you have no chance. This is the barrier to entry many places like Digg have.
September 22nd, 2008 at 6:00 am
it took reading the comments to actually figure out what you were talking about. This article is not for the uninitiated that’s for sure.
I’m also unsure as to what value it truly has beyond the cute cartoon.
It told me nothing, gave me no direction and prompted little curiosity on my part as to what you’re trying to accomplish.
Come down from your cloud.
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September 22nd, 2008 at 11:36 am
Sorry for the slow response to all of the comments. Had some internet issues this weekend… fought with Comcast Internet and I lost.
Graham – I agree with the need to have the marketing be part of the core initial strategy, but you’d be surprised at how many entrepreneurs are almost 100% focused on what they will look like once they get big, and not at all thinking about HOW they will get big.
Remi – I understand your position, but I do disagree. I believe (perhaps too optimistically, but still…) that it is possible to build a real barrier to entry in the Web 2.0 space. Only time will tell, though. Regarding your comments on advertising, I believe that there are many other revenue models that will prove to be superior. I like subscription models, virtual good models and lead generation models, just to name a few. That being said, advertising is a very easy to get some early revenue for most Web 2.0 businesses. Of course, any of these models need scale to be venture capital worthy, which gets back to the earlier issue of how a service attracts users.
Eric – YES! Better doesn’t always win… Again, user acquisition is pretty darn key.
Margaret – Sorry it wasn’t clear, I’ll try harder next time.
-Healy