Successful businesses both Create and Capture value, Can you?

A year ago,  Casey Winters then data analytics guru at Grub Hub, shared the data analytic tools that Grub Hub found contributed value to improving long buy-cycle results.  His list of dominant vendors who then weren’t cutting it made me wonder what tools he found most useful now.  Casey  has since moved on to Pinterest, to further the message its CEO recently sent about its power to create beauty and creativity not merely provide social bookmarking. Double congratulations seemed to be the right tone for my note for landing the job and completing his Chicago Booth MBA.  I wondered whether Casey credits his experience at Grub Hub or his analytic experience coupled with his concurrent studies at Chicago Booth to his greater understanding and usage of predictive analytics?  Before asking, I found myself distracted by content in Casey’s tweet stream, especially a story he found akin to GrubHub’s experience–a start-up that had launched in 30 cities in 6 months.

Casey reminded me what value exactly analysis delivers.  Sure, telling stories grabs headlines and has a way of rippling to the very combination of people responsible for business growth.  I’m not just talking investors, but sexy company stories draw employees and on the web, links make it easy for customers to find you too.  Increasingly the value created in the data streams seemed to be secondary to the primary business operations.  Google in sharing the under the hood analytics understands the mutual value creation venture and so do a great many others in the tool creation business.  But that’s just the beginning. Value may be created but unless you capture it then your business won’t last very long.  At least that’s what a number of successful investors track.

Patterns

Sure, start-up fever seems to infect everyone today.  We love stories about founders who go from nothing to something based on their own grit and determination.  Sound familiar?  This quintessential bootstrapping myth  fuels American’s reverence for business. The reincarnation of Horatio Alger stories as rags to riches tales, applaud individuals who by their own hand pull themselves up. In fact, the origins of the term boot-strapping comes from the idea that regardless of one’s background, you too can create a livelihood and viable business from scratch. Adora Cheung’s startup  recently named San Francisco startup of the year story follows this pattern.

Of personal interest, are the patterns that emerge from both Adora’s story and that of Casey Winter.  Both of them developed an expertise acquiring online users and retaining them, a key growth driver for any business. I suggest that they not only understand how to create value, but their skills bring critical value.  What advantage does a web-based business at least for now, have over on premise businesses? The ability to focus on the behavior of the end users, find patterns and then build profiles that allow them to tweak the site to improve not the data analysis capture but convert the information into tangible financial benefits.

“They’re focused on optimizing everything,” said [Michael] Hirschland, adding that its systems allow it to be far more data-driven than its peers. It’s already using data to predict where best to expand beyond city centers, into the suburbs.

 

Admittedly, simple businesses make it easier to focus on the few moving parts at once and understand what works.  Long buy-cycles tend to show more complex business decisions, where the co-dependencies may lie beyond the control of the user your connections allow you to observe.  Both Casey and Adora honed their experience analyzing  businesses appealing to  simple users direct needs. This no doubt helped them increase the contribution value of their analysis, make insights easier to uncover and use them to move their businesses to greater advantage by exploiting opportunities beyond simplifying their users’ on site journey.As they accumulated additional perspectives of happy online users and recommended tweaks to improve the ease of their site’s use they took a slight turn.

human advantageNaturally we compare and contrast personal and experiences, and no doubt Casey and Adora compare and contrasted their personal site experiences to wider systems of experience.  They exercised these skills to leverage the value created by their analysis and tools and explore using them to optimize offline services.  These associative connections remain outside the realm of predictive algorithms and require human know-how.  This level of strategic thinking allows a business to scale and in their case replicate  in multiple locations quickly.

The analytics know-how does more than create value, it offers the advantage that comes from capturing the value too.

The value chain break down

Let’s face it,our brains are wired to find short cuts.  Anything that saves us from thinking about a routine action allows us time and energy for other things.  A mobile app spares us from having to remember the URL, or type it accurately into our smart phones and access the information we want quickly.  Why should we have to think about basic things when there’s an app that captures the necessary information and simplifies if not eliminate s the guesswork for a host of activities.  That’s what GrubHub did and that’s what Homejoy does online, though it might want to merge with  HouseCall.

Simply put, the reason businesses must be online, happens to be why everyone realized the value Facebook or Twitter offered–a connected, concentrated user community.  Decades ago, businesses opened in the mall for the same reason, be where your customers will find you.  Search engines remain important but increasingly they take second place to an established phone app.  Each tool creates value but they capture value very differently. Snaring customers may be the first step, but mobile apps done well allow you to keep them–one of the fundamental drivers of growth.

Websites when linked to effective traffic directing vehicles has been the principles fueling and giving new life to direct marketing analytic firms for a long time.  Today, successful analysis of logistics matters.  What steps a business takes to simplify real world experiences certainly creates value, but the trick again is to capture it.  A host of online tools exist to make it a snap for users to find, pay for and track the delivery of  what they need.

There’s evidence that Jeff Bezos understood this from the beginning and increasingly stock analysts ascribe greater value to Amazon’s combined capabilities over its narrow profit margins.

Today, Amazon  offers its users one stop search, payment and delivery platforms. The early versions of online e-commerce focused on one aspect of business, displacing if not eliminating the middle man by competing on price that squeezed  the markup between wholesale and retail. Amazon’s  logistics expertise and value capture to date make it a significant threat but will this advantage sufficiently keep them winning over other retailers?

The array of sensors residing in smartphones no longer tip the advantage to online service providers.  These changes impact how everyone in the ecosystem accesses the data, and gets meaningful information from the various readings, like Geo-location, gyroscope, accelerometer, or even the magnetic flux. In the near term,  smaller service business like Grubhub, Pinterest and HomeJoy are deriving benefit from mastering logistics.

For each business the advantages go beyond match making and into literal service management for both consumers and suppliers/providers.  That’s the beauty behind HomeJoy.com.  Consumers  find qualified, cheaper house-cleaning services, and the cleaners benefit from vastly improved wages, simplified scheduling help and timely payments.  If that’s not logistics than I don’t know what else to call it.

None of these were businesses that followed the simple pattern representation of “If you build it they will come.”  The article details can fill you in and tell the story better. so, do take a look:

Summary

What’s the key to creating and capturing value? Here are three suggestions.
1. Mine the Gaps
It’s not about whether your business plan happens to online or on premises.  Can you find gaps between value created and its full capture, aka system level inefficiencies?  I urge clients to look for areas where one or more parties in a transaction leave money on the table.  In the case of HomeJoy, Adora and her brother didn’t seek to create a cleaning service, they merely reflected on their own experiences and applied their knowledge of logistics to realize that the home cleaning service business suffered from inefficiencies they could exploit.
The Gap:  Established cleaning companies were prohibitively expensive.  At the other end of the home cleaning market classified or posted ads for cleaners  were unknown entities.  Users face a choice between paying prices that prohibit frequent purchase of “qualified cleaners, ”  or hiring unknown, self-qualified cleaners at more affordable prices, with little or no recourse if the service proves unsatisfying.
The system level inefficiencies suggested that if they could resolve these issues, they could easily scale the business to become an established cleaning company.  No HomeJoy was doing nothing to disrupt the market, they merely used their ability to mine and funnel the knowledge within the system for greater efficiency.
2. Chicken or egg
What you don’t know makes it harder to understand where to start.  Both Casey and Adora and even Jeff Bezos leveraged what others know, but couldn’t put to work for their own benefit. The know-how necessary for success generally exceeds what’s available in a book or published article.  Few successes come to us from merely reading it, we need to try it out and integrate it with what our experiences have already informed us.  Instead find ways to learn directly from your competition, study from the inside as much as possible. (Of course this can be very challenging to do, as Adora can attest).
Surprise, this same chicken and egg problem often makes it hard for  other players in the system.  For example, consumers often need help finding what they want, and suppliers need help finding customers.  That’s why  focus groups often falls short.  The insights may be sufficient to get you past your current obstacle but won’t necessarily offer you competitive advantages that come when you challenge and improve opportunities at the higher systemic level.  You will learn more about the issue, but the difference between success and failure comes from really finding where the untapped value lies.  In these cases the business benefited from focusing on logistics and using analytic tools that weren’t only monitoring and tracking observable patterns. .
3.  Give to Get
  Many start-ups start by thinking they will give something away for free, but you can’t give away your service and then turn around and ask for payment later.  In the case of HomeJoy they used simple old-school growth hacking tricks–printed flyers and compelling copy wasn’t hard but unless people read them they would have no customers.  So they used the advantage of satisfying an immediate need within a concentrated geography to get their message out. They passed out free water with their flyers and sure enough they built their initial customer base and then their site analytics and the web tools to help these customers share with their friends their satisfaction and grow their business.
4. Research, research, research
Matching software may be the basic kernel of value for which many real services or products depend on the web to help coördinate or connect them to their users located anywhere.  Throw in a rating system  for the service/product and now the site itself creates value, right?  But a host of very established sites such as yelp address these needs and yet both Homejoy and Grubhub are growing and co-exist with the search engines and rating sites.
The razor-thin operating margins underly the basic business models for all of these online businesses, whether you are talking about Amazon, Grubhub or Homejoy.  Created value alone won’t keep them afloat.  Each and every one of these businesses must capture that value and they did it by replicating the model. For Grubhub and Homejoy they quickly expanded to multiple markets.  Amazon used their integrated book sales systems to sell other long shelf-life products, then their excess server capacity to offer retailers online commerce  and increasingly are moving into perishables.
If you are incorporating analytics in your business, at what level of the system are you applying the insights you learn? Investing in strategic thinking can go a long way to sustain your business and insure you capture the value you create. 
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s