Adding a service layer to incumbent industries through discovery and curation

Apr 10, 2013

Table of contents:

What is the model?
What companies are using this model?
What are the key elements for making it work?
How to start your own
Conclusion

An interesting business model that has arisen in the last couple of years is adding a service layer to a traditional industry by augmenting discovery, curation and transactions. The Internet, and in particular smartphone technology, has created opportunities to become an important player in the value chain of slow moving industries. When an industry is slow to pick up on new technology, new companies can enter the industry and become an enabler for a new wave of consumers.

In this post I will be looking at the opportunity, some of the interesting companies who have chosen this model and how you can create this type of company too.

What is the model?

The future is here, it’s just not evenly distributed. There are many industries that are still relatively untouched by modern technology. Online payments, social, mobile, location, big data and real time technology are just some of the new innovations that have come to prominence in the last decade. Yet, it doesn’t take much to find an industry that has not adopted any of these new things.

You’ll probably notice these untouched industries just through your day-to-day browsing of the Internet. Anytime you’ve been greeted with a janky interface, a convoluted process or a nasty design, it’s probably because the technology has not been updated in years.

There are even more opportunities to bring new technology to industries when you consider how much social, mobile and location can make connections between people, events and experiences that were previously impossible. Online payments and the level of trust to make transactions online or through mobile has also come a long way.

Many industries are either just ignoring or are oblivious to how they could be radically improved if they would just adopt this new technology.

This inaction creates opportunities for new companies to build the technology that can revolutionise a tired industry. By embracing new technology and understanding how it can be implemented in a traditional industry, you can either create a huge amount of value for both the consumer and the current players, or better yet, you can change the rules of the game to bypass those who are unwilling to evolve.

What companies are using this model?

There are countless companies in a wide array of industries that have noticed this opportunity. I believe this type of business model works best when there are four key components that fit naturally with the opportunity. I’ll discuss those key components later on in this post, but for now, here are three companies that are already doing interesting things in this space.

Square

Square is such a good example of this opportunity in action that is would be rude to not include it. Square is a mobile payment processing company that allows anyone to accept payments through their smartphone. This has enabled anyone to quickly and easily start taking money from customers without the traditional bureaucracy that was once the case. In the past, taking credit card payments from customers meant you needed to set up bank accounts, buy Point of Sales units and integrate it all together into your current system. Square has made it possible to start taking payments with just a simple card reader that fits into your current device.

The second big move Square made was to make a Point of Sales service for iPad, Square Register. Now traditional brick and mortar establishments can start taking payments. This enabled them to get rid of their old technology and create a seamless experience for their customers.

The third big move Square made was to bake loyalty rewards, discovery and payments right into the application. Square Wallet allows consumers to make payments without getting anything out of their pockets. They can find new places to visit and be rewarded for using the service without having to keep track of coupons or loyalty cards. For businesses, it allows them to track their most important customers and get rich data on the activity of their business.

When Square started out, it seemed like the company was attacking the lethargic payments industry. Finally, it was simple to start accepting payments through the device you already own. Square took all the pain out of dealing with taking payments and they provide everything you need to just get going. However, Square’s real play is to become an integral part of the small business transaction process. Square has positioned itself to become the source of where consumers find and discover new places to go. When Square can drive new and repeat customers to a business, and track the transaction of that customer over time, it has become a critical new player in the traditional technology-less industry of traditional retail.

I’ve previously written about Square and how Loyality apps are dead and why you need to solve the bigger problem.

Square is probably one of the best examples of this business model in action because it has been executed so well over the last couple of years. However, in this post I want to focus on just one niche, the promotion and discovery of music events and the traditional industry of ticketing. Two hot new startups have emerged in this space recently, Jukely and WillCall.

Jukely

Jukely is a “concert concierge” service that curates local music events. Music promotion and ticketing is an industry that has seemingly tried to blocked any new technology from shifting the balance of power away from the monopoly. If you have ever been on a ticket website that can’t handle the pressure of traffic, or you have missed a gig simply because you were unaware of it, you will know what I mean.

Jukely is a company that is looking to change all that with it’s integrated mobile application. Jukely discovers and recommends gigs and concerts in your local area. The application bakes social right in with integration with your social graph on Facebook and Twitter allowing you to see which of your friends are already going to the event. Jukely is working with venues and promoters and so it allows it’s users to purchase tickets with one tap.

Jukely is the perfect example of a company that is seizing on the lack of innovation in an industry. Online ticketing has not changed in years. The process is slow, frustrating and it has not embraced social or mobile at all.

Jukely on the other hand has embraced all of these new possibilities by starting from a clean slate. Without the legacy of existing systems or processes, Jukely can create a service that is made for 2013 and is not stuck 10 years in the past.

WillCall

WillCall is a very similar company as Jukely. It’s interesting to see how two emerging companies can attack the same opportunity at the same time.

WillCall curates selected events that are happening in your area. With social integration, you can see who of your friends are attending the event and who is undecided. And much like Jukely, you can purchase tickets to the event straight from the app.

As you can see from Jukely and WillCall, the opportunity to create a better discovery and payment process for live music and events is something that has been waiting to be revolutionised. The inspiration for both of these companies has clearly originated from how terrible the current situation is.

What are the key elements for making it work?

So from the examples above, you should be able to recognise the consistent themes that make these services so compelling.

The way I see it, the opportunity has two main components and two additional components which can naturally fit in with certain industries.

Curation

Curation is the important first component because this is something that is almost universally neglected by traditional companies. In just about every industry there are too many choices and too much going on for the average person to ingest. When there is so much noise, it can be difficult to get any value from the signal.

Curation is typically neglected by traditional companies because up until recently it was pretty hard to do. Now that it’s easier to track usage, location and related interest from a social graph, each individual user of a system should have an experience that is uniquely tailored to them.

By curating results, you enable your users to discover new interests and things that appeal to them. When results are better matched to the individual user, repeat usage will significantly increase.

Transactions

The second critical component of this model is the opportunity to process transactions naturally within the experience. As I mentioned above, we’ve come a long way in the last decade when it comes to taking payments and processing transactions. Both Apple and Android operating systems allow you to take payments natively through the app, and companies like Stripe have removed all of the headache from accepting payments through your website or online application.

Transactions are important because not only do they enable the service to become a natural utility, but they also create a very obvious business model. When you are dealing with transactions it’s very easy to become profitable. From taking a cut per transaction, to affiliate fees or driving new sales, there are many possible answers to “but how will this make money?”.

Transactions are really an integral part of this business model. You want your revenues to increase naturally with your usage. Growing attention without revenue can be a risky game. By baking transactions natively into the model, you can be profitable from day one.

And finally, the two additional components that make this opportunity so compelling are Social and Mobile. Both Social and Mobile only really fit into certain industries and opportunities, but when they do, they usually offer the consumer a significantly better experience.

Social and Mobile are probably two components of a traditional company’s strategy that they are yet to get around to. When you see an opportunity where the current players are not taking advantage of Social and Mobile it’s usually a good thing to integrate them deeply in your product and gain an even bigger advantage.

Social is important because it allows you to create a better more connected service. When a user can open a product for the first time and be greeted with faces of people they know and familiar recommendations, you have a much greater chance that you will make a good first impression. Social also allows you to seize the opportunity to grow virally.

Mobile is a big opportunity because mobile usage is quickly outgrowing desktop usage. If your product can be freed from the shackles of a desktop, it’s probably best that you do so. In not too many years, more people will probably own a mobile device than a computer. Smartphones also open up a number of interesting new opportunities. Smartphones can obviously be taken all over, not just the home or office and they are location aware with an ever-present internet connection. Smartphones also have sensors, telephony and a camera that can be utilised to create a better experience that is currently being offered by the incumbents of many industries.

How to start your own

So how to do you get started building this type of company? I think there is a huge amount of opportunity for startups to wedge themselves into incumbent industries by adding a service layer through curation and discovery. Depending on the industry, you probably don’t need permission to get started and you can become a strong force without ever having to work with the incumbents.

If I was going to start this type of company today, I would focus on the following 5 things:

1. Let the opportunity find you

My first piece of advice would be, let the opportunity find you. When Jack Dorsey tells the story of why he started Square, he recounts his friend who couldn’t take a payment from a customer because he couldn’t process a credit card. I’m guessing the founders of both Jukely and WillCall have also had similar frustrations with event discovery and the social and transactional nature of going to music gigs.

I think it’s incredibly difficult to try to solve a problem in an industry if you are not already entrenched in it. Trying to solve other people’s problems is so difficult because you end up with a solution that nobody wants. There are certain industries where it might seem desirable to be a part of, but it takes years of experience to fully understand the nuances of why things don’t work and what needs to be done to fix them.

Don’t look for this kind of opportunity, let it find you. The next time you have a frustrating experience, start to think about how your knowledge of mobile, social and the connected power of networks could make this situation significantly better. When you start to become aware of what frustrates you, but you are able to blend your knowledge and experience in adjacent areas, you start to be able to clearly see how things could be better.

2. Pick a niche

Once you have found a frustration that can be solved by integrating a service layer of curation and discovery, you need to focus on one particular niche to get started. Perhaps you already have a very specific niche that you want to focus on. For example, both Jukely and WillCall are focusing on young people in major cities who regularly go to music events.

But to really make this in to a big opportunity, you need to not only be able to focus on one specific niche and how it can be vertically integrated into the industry, but also how the same model can be applied horizontally to other adjacent industries.

It’s not hard to imagine that the same model for curation and discovery and the transactional opportunity for selling tickets and the integration of social can be applied to many other vertical industries such as sporting events, musicals or festivals.

I’ve written previously on how the key to startup success is attacking the nice.

When you are first starting the journey of building your startup, you will have no money, no connections and no one will know who you are. Trying to solve a problem that is too big, or trying to attack incumbents head on is a sure fire way to complete failure. Instead you need to establish yourself on a beachhead within a very tight niche. Only after you become the undisputed leader within this niche can be start to think of expanding into adjacent niches. This theory is covered extensively in Geoffrey A. Moore’s Crossing the chasm.

So hopefully you have discovered a problem that can be solved first with one specific niche, but also more broadly across an incumbent industry.

3. Find a transactional model

The next important component to look for in my opinion is some kind of transactional model. In the examples I’ve given in this post, each has a strong emphasis on enabling users with a seamless transaction process experience. This not only improves the experience of your user, but it also creates a clear opportunity for a business model.

Ideally, you will want to be able to grow revenues as you scale usage. Growing an engaged audience through attention is a popular online business model, but monetizing that attention is a big swing. On the other hand, by enabling transactions from day one, you create the opportunity to scale revenue as the company grows.

I think there needs to be more to the business model in this opportunity than just transactions. If you look at Square for example, the profit it is able to generate from processing transaction is really quite small. The bigger opportunity for Square is the overall Square Wallet experience, and so you can take this as a good example of how you should build a multitiered business model that is more defensible than simply processing transactions.

4. Build without permission

In Clayton M. Christensen’s The Innovators Dilemma, disruption is where startups are able to beat established industry leaders by focusing on the low end of the market and working upwards. By first offering a product that only meets the needs of a specific market segment, the startup is able to quickly work it’s way up to take on the incumbents as the product improves.

When you are introducing new technology to an industry, it is likely that the established market leaders will see you as a threat. Fortunately your business will be far too small for them to care about, and so they will probably just leave you alone until it is too late.

Whilst business development deals will likely significantly increase your early traction and distribution, I would focus on by-passing the incumbents and build and end-to-end system without their permission.

For example, TicketMaster is probably aware of both Jukely and WillCall, but even the combined revenue of both of these startups is not going to make a dent in the behemoth’s revenue. TicketMaster is not going to create a low end competitor to Jukely and WillCall until their revenue is an order of magnitude bigger, and by that point it will be too late. Both Jukely and WillCall are wise to connect consumers with music promotors and venues and completely by-pass TicketMaster altogether.

Look for opportunities where you can build your company without the permission of anyone else. Industry business development deals can seem like attractive opportunities at first, but they don’t always work out to be that way. A business development deal will only work if both parties are gaining from the deal. In the early life of a startup, it’s unlikely that you can offer an established company much value.

Instead focus on what you can build on your own that can enable the opportunity. When you can build a defensible foundation, you will have much more leverage in the future.

5. Build without technology

If you are not technical, but you have an opportunity you want to pursue it can seem like you have a barrier from stopping you from getting started. You might want to seek out a technical person to partner with, but really this isn’t a good way to approach the problem.

This opportunity is more about building a brand and a network around solving the problem. I don’t think being a technological leader is really going to make a significant impact on your rate of success.

Try to build as much of your Minimal Viable Product that you can by yourself. For example, WordPress has a huge open marketplace of plugins and themes that can make building an MVP really easily. Also, don’t think that every part of the product needs to be built straight away. A lot of it you can just do manually to begin with. The design and execution of your product is not the most important thing to at the start, it is all about proving that this is a problem worth solving.

Conclusion

Adding a service layer to an established industry through curation and discovery is an exciting opportunity. Many industries have not embraced new technology for a long time and so there are huge gaps in these industries for new startups to wedge themselves in.

I feel like there is a whole new generation of people growing up who expect everything to behave in a certain way. If a modern company has not embraced technological change, they feel stodgy and behind the times.

Building this type of company allows you to create a business that is defensible and scalable. One of the most important aspects of creating a company is the moat that you build around yourself. When you create value from curation and discovery, you build natural network effects and an engaged audience.

The next time you find yourself in a frustrating situation, or you notice that an industry has not embraced new technology, try to imagine how your problem could be solved and what value you could create for people just like you.