While this concept isn't new—Apple said they would open up their NFC antenna back in January 2024—it's gained significant momentum recently.

The potential applications unlocked by this decision are vast, but none stand to benefit more than the challenger banks vying for the coveted "financial super app" status. In this article, I’m exploring why implementing an in-app digiatal wallet is a must for challenger banks aiming to become the go to money app.

As always, I'd love to hear your thoughts. Drop me a reply!

Benjamin

P.S. Interested in learning how you can deploy your own in-app NFC payment wallet? Reach out

Earlier this year, I wrote about the rise of financial super apps and the feature convergence happening within fintech. In the article, I argue that over the last ~5 years, feature after feature fintech apps became increasingly homogenous, to the point of all having a very similar set of features, differentiated only by their brands and fees.

And yet, even though certain fintechs like Revolut are seemingly close to providing every feature one could possibly dream of, it seems that something is lacking. For some reason, the collective consciousness doesn’t label these fintechs as financial super apps but just “neobanks”. That’s like calling a Ferrari a “pretty fast car”.

Now, I don’t claim to know the collective psyche. I live in a Fintech bubble where we geek out over payment innovations and debate whether account-to-account payments will become mainstream.

That being said, I often look at behavior of those around me and look at the hard, cold stats — and here’s the thing:

While neobanks are inching their way into becoming the primary accounts for more people (Revolut, for example, is up 67% in primary account usage in 2023), they haven’t yet reached that magic tipping point malgré their already impressive set of features. There’s still something missing.

Well, that missing piece of the puzzle has just been unlocked.

I’ll explain, but first let me catch you up on an important regulatory decision by the European Commission.

Short Recap of Apple vs. EU

In June 2020, the European Commission opened an anti-trust investigation to assess whether Apple Pay violated EU competition rules. In short, the EU Commission was worried that Apple refusing third-parties access to the iPhone’s NFC payment capabilities was violating competition laws. At the time, Apple Pay was a user’s only option if they wanted to initiate a contactless transaction from their iPhone.

Long story short, following the proceedings, Apple proposed to open their NFC antenna to third parties for in-app, contactless payment transactions in January of 2024. The Commission accepted Apple’s proposition, final commitments were drafted, and the proceedings closed in July 2024.

What’s the Big Deal?

Why is this big news? Well, within the fintech industry (and more specifically the payments industry), this news made waves as it meant developers would be able to build their own apps that compete with Apple Pay.

And why would they want to do that, you ask? Well, because Apple Pay isn’t just expensive—it’s extremely expensive. Every time you tap your iPhone to pay, Apple’s charging your bank a fee. And for big banks, that fee adds up to millions—yes, millions—of dollars.

So, Apple opening up their NFC antenna means fintechs and large issuers can now build their own in-app payment experiences and save a lot of cash in the process. Plus, they can take control of the entire payment experience, which is a key ingredient in the recipe for a financial super app.

But What About Android?

Astute readers might be thinking, “Wait a minute, what about Android?” Good catch. The European Commission’s ruling only affects Apple, because, on Android, third-party access to NFC for contactless payments has been available for a while.

But here’s the thing: It hasn’t really taken off. Why? Because Google Wallet and Samsung Wallet don’t charge issuers a fee like Apple does. So if you’re a bank, why pay extra to implement an NFC payment application when Google and Samsung are giving you the basics for free? The only thing you have to pay is the initial development and future maintenance. Plus, why would you pay to develop a key feature that only affects a subset of your clientele?

Fair questions.

Some issuers have found answers to these questions since they’ve already launched successful in-app NFC payment capabilities exclusively on Android, but the answer has clearly never been generalized.

Some issuers have ventured into Android-exclusive in-app payments, but the uptake has been lukewarm at best. For most, the math simply doesn’t add up. However, Apple’s case is unique. By bypassing Apple’s fees and gaining full control over the payment experience, fintechs now have an exceptional opportunity to create a unified payment experience across both iOS and Android, ensuring a consistent brand image and making the entire effort financially rewarding.

The Opportunity to Become the First Financial Super App in Europe

Neobanks rose to popularity as they completed upended the banking industry, promising a fast and seamless banking experience, rather than a clunky and bureaucratic trawl to open a bank account.

However, their scope (logically) always stayed around banking. After innovating in banking, they moved to investing, FX, credit, etc. Piece-by-piece, they offered everything a bank does, except with a faster and more intuitive experience.

However, doing everything a bank but in a smoother, more agreeable manner isn’t enough to become a financial super app. In my opinion, fintechs that want to become a financial super app, i.e. the “go to” money app, need to become a person’s entire money system.

Personal Money Systems

Personal money system is a term I just made up, but bear with me — it makes sense. I define a personal money system as the complete set of tools and services people regularly use to store money and make payments. Most people’s money systems are a patchwork of different providers that look, at a high-level, something like this:

Let’s break it down:

Physical Money System

On one side of one’s personal money system, you have the physical manner in which you pay and store money, aka a physical wallet. Even though everyone likes to point to the increasing usage of digital wallets, the truth of the matter is that almost everyone still has a physical wallet (or cardholder) for the simple and good reason that not everything can be digitized (yet). So long as I can’t have my ID, driver’s license, insurance card, public transportation pass and payment card in my digital wallet, I will have to carry my physical wallet.

Plus, physical payment cards remain an important element of one’s personal money system. It’s the only physical connection you have to your money (cash aside) and doesn’t require that your phone be charged and working.

Plus, many people (myself included) still rely on physical cards for certain purchases. When I had to shell out 400€ for a new fridge, I paid with my physical card. Whatever their logic, everyone can point to certain type of payments, or payments above a certain threshold, for which they prefer to use a physical card vs. a digital wallet.

Also, paying with a metal card is sleek as hell.

Digital Money System

On the other side of the equation, you have the rest of the system you use to pay and store money: bank accounts (store money and pay), investment accounts (long-term store of money), and digital wallets (payment method). All three of these elements are entirely digital.

Chief among this system is the bank account. I won't labor on the point, but it’s indispensable in today’s day and age. Unsurprisingly, seamlessly providing an easy-to-use bank account is what digital banks do best.

Then, you have investment accounts. Most people have some sort of an investment account, whether it’s a stock broker account, a pension fund, a line of credit for a real estate investment, etc. Offering investment accounts has been fintechs’ expansion path over the last couple years. After all, if you hold a user’s money, it makes sense to help them deploy that capital (and collect fees along the way).

Finally, we have the digital wallet. The only element that isn’t yet provided for by an institutional bank or a fintech, I believe it’s the missing link for a bank or a fintech to have the potential to become a person’s entire money system. As of today, digital wallets enable users to store virtual payment cards as well as some other cards and passes (boarding passes, select transportation cards, IDs in select places, and more).

Physical + Digital Money System = Your Financial Life

Together, these elements make up your entire financial life — or at least the tools you regularly use to manage it. So if one app could centralize all these elements — bank accounts, investment accounts, digital wallet — would it become your go-to money app?

I’m betting yes.

The first successful financial super app will be the one who centralizes one’s digital money system within one app.

Imagine your entire digital money system: your bank accounts, your investment accounts and your digital wallet all centralized in one app. In just a few clicks within the app you can send money to your friends, pay with your phone, invest in stocks, get a loan, all within a few taps, all within the same app. Double-click the side of your iPhone, and the app’s digital wallet pops up, ready to go. Unless you have a specific reason to reach for your physical card, this app becomes your financial life.

This app would quickly become your “go to” money app, i.e. a financial super app.

And it doesn’t stop there. With the relevant approvals, Apple’s latest announcement signalled to developpers that digital wallets could even include closed loop transit, car keys, home keys, corporate badge access, merchant loyalty programs and even event tickets.

What if your financial app also hosted the digital wallet you use to check-in to work everyday, open your car, or obtain coupons at the grocery store?

In that case, this app wouldn’t just be your go-to money app—it’d be the most important app on your phone, period.

But taking a step back for a moment, the ability to include a digital wallet in-app may seem to you like a far reality. Fair enough. And yet, I can assure you that there companies working on this implementing in-app NFC payments as we speak.

However, I should mention that just offering an in-app NFC payment experience is not enough. As per my explanation, the first successful financial super app will be the one who centralizes a user’s entire digital money system. While NFC has been the missing key, it also supposes that all the other systems (investment accounts, bank accounts) and their accompanying features and (send money, FX, P2P, etc.) are available.

What if I don’t have a digital wallet?

I assumed most people's personal money systems include a digital wallet. However, this isn't always true. For example, my sister doesn't trust Apple Wallet enough to add her card to it. Consequently, she doesn't use any digital wallet and likely never will.

For those with different money systems, the principle remains: the first financial super app will be the one that controls most of an individual's personal money system. The absence of a digital wallet in some people's systems simply means that certain apps are already financial super apps for this group. However, if they avoid digital wallets due to trust issues, it's unlikely they'd trust a single platform with their entire financial life.

Indeed, offering every imaginable feature related to one's financial life doesn't guarantee an app's success or adoption. There are many reasons why challenger banks haven't yet won over everyone's primary accounts, chief among them being the lack of trust people have in challenger banks compared to traditional banks.

Conclusion & Next Steps

All in all, I think the possibility by third parties to leverage an iPhone’s NFC antenna for contactless payments is the piece of the puzzle that’s been missing for fintechs to build a financial super app. It was piece of people’s personal money systems that was always out of reach for fintechs. With this piece now in play, I expect that within the next 1 to 3 years, we will see some large fintechs launch with their own in-app digital wallets.

Plus, they have a good reason to do so: they can save millions on fees, control the payment experience and become even more dominant.

However, bear in mind that just launching a digital wallet isn’t enough to be a financial super app. It’s one piece of a 1,000 puzzle. You also need to include FX, investments, loans, P2P payments, wire transfers, budgeting, and all of the other features used daily. Plus, in no way does becoming a financial super app guarantee its success.

If you are interesting in discussing NFC in-app payments, or if you’re interested learning how you can launch your own in-app NFC contactless payment experience, reach out by replying to this e-mail or sending me a message on LinkedIn. The company I work for, Thales, is the leader provider of the necessary technology to launch in-app payment wallet on iOS and Android.

The reason for this was because Microsoft Azure, their cloud division, fell short of expectations with “only” quarterly growth 29% compared to expectations of around 31%. It was the first time since 2022 that Microsoft has failed to meet or beat expectations for the cloud segment.

Beyond the fact that Wall Street has seemingly become anesthetized to extremely strong, double-digit quarter-over-quarter growth that would make most other Fortune 500 companies blush, the real news behind Microsoft’s earnings was deep within Microsoft’s cash flow statement.

The company’s capital expenditure (CapEx) soared by 79% from a year earlier to reach an astonishing $14 billion in the last quarter alone. Over the past year, Microsoft has poured $44.4 billion in CapEx, with almost all of it going to AI. To put this number in perspective, that’s roughly the amount Elon Musk overpaid paid for Twitter, or if you prefer a military metaphor, almost 700 F-16 jets.

However, ludicrous investments in AI are not unique to Microsoft. In fact, Amazon, Meta, Microsoft and Google have all been pumping billions of dollars into AI.

The 4 tech giants alone will spend a combined $200 billion this year on AI-related CapEx, mostly data centers, chips, cooling systems and building materials. To put that number in perspective, $200 billion is twice what the USA spends on Homeland Security, twice the yearly budget of Ireland, or 4x the yearly budget of the French army.

Whatever way you spin it, it’s an enormous amount of money.

The question is why. Why are these cloud providers plowing hundreds of billions into AI CapEx and should they be ?

The Inevitability of AI Investment: A Game Theory Perspective

Consider for a moment that you are at the helm of one of two major cloud providers in a world where AI is set to revolutionize the industry. However, put the case that in order to succeed in AI and win market share/increase revenues, you needed to invest a lot of money into AI.

Do you invest?

Of course you do.

Think it through: if you invest and your competitor abstains, you gain market share, revenues soar, and your stock goes up. As the CEO, your equity in the company means you get to pick out a new penthouse with a view of Central Park.

However, if you abstain and your competitor goes all in on AI, you lose market share, your stock tanks and you’re suddenly calling your parents to see if your old room is still available.

On the flip side, if both you and your competitor invest, sure, you might drive up costs, but hey, Wall Street loves a good AI story so your stock might still rise. However, if neither of you invests, well, nothing changes… No bonus for you.

If you map out the situation with game theory, you find that you land in a situation where both players are doing the best they can (i.e. earning the highest profit) given what all the other firms in the market are doing. No player can gain an advantage by changing their own strategy, thus creating a Nash Equilibrium. The catch? This particular equilibrium could lead to companies overbuilding and overspending in a category that perhaps doesn’t warrant such levels of investment.

Here’s what that looks like in a game theory matrix, with the Nash Equilibrium circled in red:

Now, if you’re thinking this is just a fancy way to say, “Everyone’s investing in AI,” you’re not wrong. But here’s the twist: this isn’t just theory. It’s the reality of today’s cloud oligopoly.

Amazon, Microsoft, and Google—together holding 67% of the market—are locked in this high-stakes Nash Equilibrium. Changing course would mean surrendering market share and profits to the other. So, as per the theory, it seems the only option is to keep throwing billions at AI, even if it means overshooting the mark.

Beware of Over-investing

Back in the 90s, telecom companies thought they’d struck gold with the internet. Eveyrone realized the tremendous potential of the internet and telecom companies invested significant amounts to lay the infrastructure for the internet. The companies believed individuals would be willing to pay high prices to go online, and as a result, CapEx investments surged by 350% and they laid 600km of cable.

The only problem was that sure, people wanted the internet, but they wanted it for free.

Fast forward to today, and the tech giants today seem to be repeating history, betting big on AI under the assumption that the willingness to pay exists (sounds like the narrative during the crypto boom: “the use case hasn’t been found yet but we’re building the infrastructure”).

Yet, according to The Information, OpenAI’s recent struggles is a stark reminder that not everyone’s willing to pay for AI. The company lost $540 million last year, on just $30 million in revenue. Not exactly a goldmine.

There’s also the risk is that AI models could become a commodity. As open-source models become “good enough” for a large majority of use cases, it will be increasingly difficult for AI providers to offer differentiated models with a strong value-add versus open-source models. The more market share the open-source models win, the more difficult it will become for the big-name models to justify their costs.

And let’s not forget the law of diminishing returns. Sure, investing in computing power enables the tech giants to train bigger models. But nobody should assume that models are proportional to the amount of money thrown at them — or their size. Case in point, MistralAI is succeeding because their AI models are smaller, less costly to run, and more accurate. Plus, the size of the models are inherently limited by the amount of data available. Most of the general-purpose AI models available today have already been trained on the appropriate, human-generated data, and AI-generated data just doesn’t cut it — research shows that AI models collapse when trained on recursively generated (artificial) data.

In the end, the cloud giants find themselves locked in a high-stakes game where the rules demand relentless investment in AI CapEx. Yet, as history has taught us, the allure of cutting-edge technology often leads to overspending. The risks of overbuilding and overspending loom large, and the echoes of the 1990s telecom bubble serve as a cautionary tale. As AI evolves and the arms race intensifies, the question remains: Will these investments yield the transformative returns they promise, or will the top cloud providers find themselves stuck in a web of diminishing returns? Only time will tell, but in this game, the stakes have never been higher.

My hypothesis revolved around Meta leveraging Jio, an Indian telecommunications company they invested $5.7B into, to propel Whatsapp into a multifaceted entity encompassing payments, communication and content — a western WeChat competitor, if you will1.

Spoiler: I was wrong.

Super apps à la WeChat never took off in Europe or the U.S, or anywhere else outside of Asia for that matter.

A lot of very thoughtful people have written about why super apps don’t work in the U.S., why they don’t work in the West, why they won’t work at all, or even why Elon Musk’s attempt at a super app will never work.

While there are no super apps outside of Asia, there are actually plenty of financial super apps. For a while now, consumer finance apps have been developing new capabilities and have slowly evolved to offer to become the financial super (or the “go to” money app), and in doing so, have all morphed into the same app.

The Financial Super App

Have you ever noticed that your financial apps now almost all offer a card, a way to invest (stocks or crypto, or both), a budgeting tool/spending reports, FX, a way to pay friends, etc.?

Although there are myriad of different financial apps available, over the last ~5 years, the features of the consumer Fintech apps in Europe and the US have increasingly converged. In short, they’ve all merged to become financial super apps.

Let me explain.

Feature Convergence in Consumer Fintech Apps

When I was in college, Venmo was becoming popular. At the time, it was nothing more than a digital wallet used to send money to friends. It solved a core problem (quickly sending money to friends) and distinguished itself through its ease-of-use and social network aspect.

At the same time, in France, Lydia was quickly rising as a popular app for payments between friends.

Today, both of these companies offer physical cards, both offer virtual cards, both have some sort of short-term credit offer, both have business accounts with associated features, etc. You’d be hard pressed to find core differences between these two apps (Lydia’s logo even looks like an upside-down Venmo logo… or perhaps it’s the other way around?).

However, this trend doesn’t just apply to peer-to-peer payment apps. Regardless of whether the app started as an investing platform like Robinhood, a payments platform such as Venmo/Lydia, a FX app like Wise, or even a traditional bank like Société Générale (SG) or Bank of America, consumer apps today share a very similar set of features, if not the same (see below).

Why Consumer Fintech Apps are Converging

I noticed this phenomenon with my own app stack and started wondering why this was happening.

Now, I hear you coming from a mile away: “these apps are just copying each other” or “Ben, this is just an example of users demanding the same set of features”.

Yes… and no.

I believe that the observable convergence of features within consumer fintech apps comes from 2 sources: a shared user base who is demanding a similar set of features, and a profit-driven top management.

Shared User Base

While I am sure that the Venn diagram of shared users across mobile banking apps, FX apps, P2P payment apps, and others is quite significant, I don’t believe that it is the shared user base that is the primary reason Fintechs are developping the same set of features.

Profitability

Instead, I believe that Fintechs realized the best way to make money is to keep their users’ money in the app and sell more services. For example, prior to launching a card Venmo users would receive money from their friends and immediately send the money to their primary bank account. By offering a card, Venmo users can now spend the money they receive from their friends directly within Venmo.

Doing so means Venmo can earn money from interchange fees. In addition to this, by keeping the money within the app, it also means that users are more likely to try some of the additional services available within the app (investing, payments), generating additional revenue.

At the same time, keeping money within the app also saves on bank transfer fees. Indeed, taking money out of the app and sending into a user’s bank account can often be quite costly.

At my previous employer, users would send money from their wallet to their bank account on a near-monthly basis. Even with a small user base (~30K), it was costing us a lot of money to support. By keeping money in the app and finding ways to push to leverage that sitting cash, we could save on transfer costs and potentially generate additional revenue from new services.

All in all, I believe that it’s because of Fintechs realizing that by keeping money within the app they could generate additional revenues and lower costs that we are fintechs converge to a similar set of features that make up, in essence, the same shared notion of a “financial super app”.

Behind the Scenes of Feature Convergence

Although it is easy to point out that consumer Fintech apps have been converging towards the same shared notion of a “financial super app”, building all the necessary features to get there is a lot harder — especially when you consider how each app has different value propositions and core competencies2.

However, I believe that the aforementioned feature convergence has been vastly accelerated thanks to embedded finance and BaaS (Banking as a Service) providers3.

Embedded finance and BaaS providers can enable new user experiences that are removed from a company’s core competencies. In short, the providers enable Fintechs to outsource the expertise and regulatory compliance, enabling them to launch features much faster (and thus keep up with their peers, who are doing the same).

As a result, I suspect that the competition between BaaS and Embedded Finance providers is accelerating the convergence of features as the providers compete with one another to offer similar use cases (see below).

1. Fintech D wants to launch a new feature, they go to provider A for it (ex: .

2. Provider A builds the use case with Fintech D and D launches it.

3. Fintech E sees Fintech D winning market share thanks to this new use case.

4. Not wanting to lose market share, Fintech D goes to provider B asking for the same use case.

5. Provider B builds the use case with Fintech E, they launch.

6. Provider C sees the success of the new use case and builds it.

7. Having built a new feature, provider C pushes it to their existing client base, Fintech F.

The result ? Fintech F accepts and now, all the Fintechs have a set of features.

Naturally, I am tremendously simplifying the market dynamics and the convergence of features cannot solely be attributed to this effect. Similarly, I’ve taken the liberty of grouping together BaaS and embedded finance providers under the underlying principle that both unlock new use cases to their clients.

What’s Next

When each app had its purpose, it was normal to have multiple apps on your phone: you had one app for banking, one for FX, one for budgeting, one for P2P payments, etc…

However, as features become increasingly consolidated, Fintechs are fighting to become the financial super app, or the “go-to” money app. International digital banks seem to have a slight advantage as it’s become increasingly accepted by consumers to use a digital bank as their primary bank. Additionally, these digital banks are starting to detach themselves from the pack as they post very healthy profits and sustained growth, with more yet to come.

This begs the question: what about the others ? Is there enough market share for all of them to claw their way through and become a financial super app ?

Personally, I don’t think that they will be able to become the “go-to money app”, some will inevitably lose market share and resort to specialization as a means of differentiation. Become the very best app in FX, so good that the benefits outweigh the switching costs, and they will be able to remain. Perhaps there is an opportunity to sell that best-in-class, specialized UX to other apps who are looking to become financial super apps.

Only time will tell.

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2-min Summary

I scraped Deliveroo's website using Python, recreated Deliveroo's business model, and used simulation to analyze 250,000,000 orders to answer one question: Is Deliveroo profitable in France?

The answer? My research shows that the company is profitable in Paris but not in France. The reason is that in Paris, Deliveroo has sufficient orders to pass the "minimum required number of orders" to break even, but Deliveroo does not have sufficient orders at a European level.

To become profitable, the company needs to increase the number of orders by 2.46% ceteris paribus. However, I believe this to be quasi-impossible as the industry is highly competitive, and the CAC is high.

According to their annual report, Deliveroo claims it will become profitable by driving sustainable growth and strengthening levers of profitability. In short, this means scaling markets, expanding geographically, and selling advertisements. The first two options will be tough as they will require significant marketing to establish and maintain market-leading positions. Additionally, selling advertisements to restaurants may prove to be tough as restaurants are already annoyed by the fees platforms take.

To increase revenue, I believe that Deliveroo needs to evolve its business model and create new, high-margin revenue streams that either increase revenue per order or are detached from the order's value. I suggest that Deliveroo leverage its core defensible asset, the deliverers, to pivot its business model and create a fast last-mile logistics network by partnering with transport companies like FedEx or La Poste. This would enable Deliveroo to increase revenue without spending money on marketing and overhead. Also, it would create a win-win situation for deliverers and transporters.

How Deliveroo can Become Profitable

A bit of Context

Over the past decade, the food delivery industry has experienced a surge in investment from venture capitalists. In 2018, VC firms invested $11 billion into food delivery companies. In 2021, European VC firms pumped $4.7 billion into European grocery delivery companies alone. These investments are made with the guiding principle that perpetual scale will eventually lead to profitability. However, is perpetual scale the solution to profitability?

I asked this question to a senior strategy associate at one of the well-known food delivery companies, who told me that they were profitable in certain cities because they reached the "minimum required orders" in those cities.

This led me to wonder: what is the minimum required amount of orders for a delivery platform to become profitable? And more generally, how can Deliveroo achieve profitability?

I used Deliveroo as a case study to answer these questions for two simple reasons: I found more data on them and they did not have an anti-scraping framework on their website 🤖.

In order to answer this question, however, I first had to understand how Deliveroo made money.

Deliveroo’s Profit Equation

The (Simple) Logic

To simplify, Deliveroo generates revenue by charging a percentage of the order value as fees to both the restaurant and the customer. The amount of revenue collected per order depends on the total value of the order and the percentage charged to the customer.

On the other hand, Deliveroo incurs costs from two sources: fixed costs and variable costs. Fixed costs are taken from the company's financials, while variable costs come from the cost of goods sold (COGS), which is how much they pay the driver. However, the amount paid to a driver depends on the distance traveled.

Therefore, Deliveroo's profit depends on two factors: the basket value and the delivery distance. These values were simulated using probability distribution functions in line with the data collected, as outlined below.

Data

Now that I had a profit equation, the next step was to obtain the average delivery fee and average delivery distance (and the relationship between those two variables). To do this, I coded a web scraper that went on Deliveroo's website and simulated orders from all 20 arrondissements in Paris. I did this multiple times in the evening and during the day to gather as much data as possible. With all this data, I was able to find the average delivery distance in Paris, the average delivery fee, and the correlation between those two. This was the last component I needed before being able to run my Monte Carlo simulation.

Simulating 250 000 000 orders

At this point, I had a profit equation that relied only on distance and basket value. Thanks to my web scraping, I obtained the distribution of delivery distances and simulated the distance of 20,000 orders based on the distribution of the real-life data. External data sources gave me the average basket value, which I simulated using a probability distribution function.

Now that I had everything I needed, I could do my Monte Carlo simulation. For each run, I simulated 20,000 orders and wrote down the break-even number of orders ("minimum required number of orders").

I ran this simulation 1000 times and found that the average number of orders necessary for Paris to reach the break-even point is 4,597 orders per day.

To calculate the break-even point in France, I ran the simulation 1000 times with 250,000 orders per run. The result? Deliveroo needs at least 195,780 orders per day to be profitable in France, or 1,677,905 orders per year.

Results

Paris

To interpret the results of this analysis, we need to compare our breakeven point of 1.68 million yearly orders in Paris to the average number of Deliveroo orders per year in Paris. Basing myself on their annual report and weighing their total number of deliveries on a variety of factors, I calculated 5.53 million orders per year. This would mean that Deliveroo in Paris is more than three times the estimated breakeven point, generating a profit of roughly €79k per day.

France

While Deliveroo is seemingly profitable in Paris, the same cannot be said about France. The breakeven point for France was 71.46 million orders per year (as a quick sanity check, Gira Conseil found that 250 million meals had been ordered on food delivery platforms in 2019). Using the same methodology as above, from the annual report, we find that Deliveroo currently delivers 69.74 million meals per year across France.

On top of that, our model is not calibrated for France. Outside of Paris, delivery distances are likely to be much larger than the ones simulated in this research. However, Deliveroo’s delivery fees are capped. Thus, the costs incurred by Deliveroo are likely to be much higher than calculated above, pushing profitability further away.

Deliveroo's Path to Profitability

Deliveroo claims that it will reach the breakeven point between Q2 2023 - Q3 2024. According to their annual report, they plan to achieve this in two ways: driving sustainable growth and strengthening levers of profitability.

Driving Sustainable Growth

Driving sustainable growth translates to increasing the number of deliveries by expanding internationally and increasing their market share in all markets. However, I do not believe that international expansion is the right strategy as it will undoubtedly induce additional localization costs.

On top of that, basing a path to profitability on the adoption of market share in a highly competitive, commoditized industry is a very risky strategy. To quote the Chief Executive of GrubHub, "diners are becoming promiscuous." Diners compare different apps to find the cheapest option. In such a market, price is the only differentiator. As a result, it's very difficult to establish yourself as a market leader and gain additional market share with discount codes or other costs.

Strengthening Levers of Profitability

The company has identified three main levers of profitability: new high-margin revenue streams, optimization, and scale. The viability of scale has already been debunked in the above section, so let's focus on new revenue streams and optimization.

To increase revenue, Deliveroo could create new high-margin revenue streams that either increase revenue per order or are detached from the order's value. However, creating a revenue stream detached from the order's value would require €352M in revenue to offset the missing revenue from orders. Deliveroo plans to sell advertisements and preferred ranking to restaurants on their platform, which would require selling every restaurant an advertisement worth about €2,378/year. Convincing restaurants to spend more money may be difficult, given their existing resentment towards delivery platforms that squeeze their margins.

Regarding optimization, there are two main elements: creating a more efficient logistics network and using technology to improve operations. These objectives aim to reduce the time between order and delivery. However, since delivery drivers are paid by distance and not time, optimizing delivery time does not necessarily lead to cost savings. Deliverers also do not need optimization as they often wait for hours before receiving a delivery. Lowering their pay would be difficult due to labor laws and Deliveroo's current legal issues in France. Therefore, optimizing delivery costs is largely impossible. Advertising and overhead costs are also difficult to optimize and were not addressed in the 2021 annual report.

Overall, the levers of profitability identified by Deliveroo are either not actionable or have little impact. In order for Deliveroo to be profitable, I believe the company needs a fundamental shift in its business model.

Evolution of Deliveroo’s Business Model

At its core, Deliveroo is a demand coordinator. They coordinate a delivery service among multiple groups (deliverers, restaurants, and consumers) and in doing so generate indirect network effects.

However, their core defensible asset - the inexpensive deliverers equipped with hauling capacity - sits idle much of the time. The deliverers are defensible in the short term as they will select whichever platform generates the most revenue for them, and when they are delivering, they can only work for one platform at a time. This means that if Deliveroo could enable deliverers to earn more money, they will stay.

Thus, to create a new revenue stream and reach profitability, I believe that Deliveroo needs to leverage its technological expertise in last-mile logistics coordination to expand on its core defensible asset.

Concretely, this translates to adding a fourth agent that would benefit from last-mile logistics, such as a transport company like FedEx, USPS, La Poste, etc. After the lunch rush of food deliveries, Deliveroo deliverers could continue to earn money throughout the afternoon by delivering small packages.

This would be beneficial for Deliveroo as they would be able to charge for such a service, and similarly, there may be an arbitrage opportunity for the delivery players as the hourly wage of a Deliveroo driver is far less than the internal equivalent. This creates a win-win situation for deliverers and transporters.

Thus, Deliveroo would be able to increase its revenue without having to spend money on marketing and overhead. While they would still need to pay their deliverers, the arbitrage opportunity created by this model will enable the company to cover the costs of delivery.

As the world increasingly relies on quick last-mile delivery, Deliveroo may be able to leverage its biggest asset to coordinate last-mile logistics inside cities, where delivery trucks struggle.

I hope you enjoyed this newsletter and learned something new.

2min Summary

Reviews are everywhere, from local restaurants to e-commerce, and seemingly everything has a review already. While logic would say that positive reviews increase sales, negative reviews can actually also be used to boost sales.

This contradiction is called the "1-star paradox." In order for a negative review to boost sales even more than a positive review, two prerequisites must be met. Firstly, the review needs to associate the brand with the buyer's identity, and secondly, the reader of the review needs to feel "socially distant" from the person who wrote it. As an example, a die-hard Samsung user who writes a negative review on an Apple product is likely to trigger a strong response in an Apple fan, who feels “distant” from the Samsung and believes that the Samsung “doesn’t get it”.

I believe that they are two ways to exploit this paradox : “polarized positioning” and “shared laugh”. Polarized positioning requires that one's brand is closely aligned with a polarizing topic, whereas shared laugh is when negative reviews are assumed by the company and brought forward to ridicule the reviewer. Ryanair’s TikTok account uses the latter strategy extensively.

However, companies who wish to exploit the 1-star paradox must carefully consider their strategies as it can lead to increased disdain for another group.

Let’s dive in 👇

How Negative Reviews Can Boost Your Sales

If you’ve done any amount of research online you’ve influenced by reviews. Social proof is one of the most important factors in someone’s purchasing decision, which is why reviews are everywhere today. From local restaurants to e-commerce (and even Paris’ public bike sharing program), seemingly everything has a review already.

When thinking about reviews, common sense would have you think that positive reviews increase sales. While that is true, did you know that negative reviews can also be used to boost sales ?

In fact, it can be even more important than a positive review.

Let me explain.

Negative reviews > positive reviews ?

Nailya Ordabayeva, an associate professor of Business Administration at Dartmouth College, alongside her colleagues Lisa Cavanaugh and Darren Dahl of the University of British Columbia, conducted a study wherein they showed 300 NFL fans a description of a branded hoodie and either a one-star or a five-star review from a Cleveland Browns fan (NFL team). When people thought that they and the reviewer were similar (i.e. both the consumer and the reviewer were Cleveland Browns fans), their purchase intent was lower if they saw the one-star review than the five-star review.

However, when the consumer felt different to the reviewer (i.e. the consumer disliked the Cleveland Browns), the one-star generated a 20% higher purchase intent than the five-star review.

Thus, a negative review can boost sales even more than a positive review.

This contradiction is what I call the 1-star paradox.

The 1-Star Paradox

According to the study, there are two prerequisites to the 1-star paradox. Firstly, the review needs to associate the brand to their identity. Logically, this means that a negative review would feel like a direct attack to their identity. While that may seem exaggerated, you’d be surprised at how many individuals feel a strong sense of identity with a brand. Brands like sport teams, tech brands, cultural brands and others are closely linked to peoples’ identities. For example, Apple has always been a company associated with the “creative” and the “successful”. As such, a negative review of an Apple product may feel like a direct threat to the “creative” or “successful”.

Secondly, for the 1-star paradox to work, the reader of the review (buyer) needs to feel “socially distant” from the buyer. In other words, the buyer needs to feel as though they are different from the reviewer. Why ? Because in order for a buyer to dismiss a review (and create a positive buying intent), they first need to believe that the review is wrong. This is easier to do when the buyer believes that the reviewer is socially distant to them. Continuing with the Apple example, let’s say that there is a negative review written SamsungLover99. An apple fan who strongly associates Apple to their personality will be quick to dismiss the negative review. Why? Because the Apple fan may believe that SamsungLover99 “doesn’t get it”, because SamsungLover99 isn’t creative, isn’t successful enough, etc. Whatever the reason, an argument is easier to dismiss when we feel significantly different to the reviewer.

To give you another example, let’s say that I, a French person who grew up eating French food (see: not spicy), left a 1 star review on an Indian restaurant because it was too spicy. An Indian person who grew up eating spicy Indian food reading my review would likely immediately dismiss my review because I “don’t know what I’m talking about”. In fac, my negative review may actually encourage them to visit the restaurant as they believe that they’ve finally found a real Indian restaurant. That is the 1-star paradox — a negative review encouraged them to buy.

So what ?

The real question behind the importance of the 1-star paradox is whether other brands can exploit this phenomenon to increase sales. While I initially believed that it would be difficult for companies to exploit the 1-star paradox, I see two implementation strategies for the 1-star paradox:

1. Polarized Positioning

2. Shared Laugh

Polarized Positioning

Polarized positioning is an uncommon implementation strategy of the 1-star paradox which requires that one’s brand is closely aligned to a polarizing topic. Polarizing topics can take any form, from political topics (Republicans vs. Democrats) to sport rivalries (Manchester United vs. Liverpool). Because polarizing topics often go hand-in-hand with a strong sense of identity, by aligning on one side of a polarizing topic companies can easily create the social distance required to benefit from the 1-star paradox. For example, reviews written by Liverpool fans about a Manchester United pub is likely to further incite Manchester United to go to that bar.

However, this strategy would likely lead to increased disdain for the other, which in sport is already a problem (and is an increasing problem in politics). Thus, polarized positioning may not be a socially responsible strategy.

The social consequences of the polarized positioning implementation strategy is precisely why it’s not often used and why the second strategy, a Shared Laugh, is much more prominent.

Shared Laugh

The second implementation strategy of the 1-star paradox is what I coined as the shared laugh strategy. The shared laugh strategy is when negative reviews and/or negative associations are assumed by the company and brought forward to ridicule the reviewer. Absurd anonymous reviews, for example, are on the most common examples of the shared laugh strategy.

To give you an example, a company who has been successful at implementing the shared laugh strategy is Ryanair. Ryanair’s TikTok account regularly mocks consumers who complain about the lack of legroom, the delays, etc. Ryanair manages to build social distance by bringing up how ridiculous it is for consumers to complain about a 10€ seat. Social distance can also be differences in entitlement, as is the case in the Ryanair example.

@ryanairWelcome back to the party 😈 #ryanair

Tiktok failed to load.

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Do this well and it can be extremely beneficial. Keeping with the Ryanair example, Ryanair’s Tiktok has been able to amass 1.9M followers, even though most of the company’s videos are mocking consumers. Because this strategy is rather uncommon, when it is executed well it can lead to a lot of interactions and shares, increasing the number of followers.

In Conclusion

To conclude, yes it is possible to leverage negative reviews to increase sales. In fact, research shows that negative reviews can be even more powerful than positive reviews at increasing buyer intent (1-star paradox). However, the 1-star paradox has two prerequisites :

1. The brand needs to create a sense of identity (such that people can genuinely be offended).

2. There must be social distance between the reviewer and the buyer (such that people can dismiss others’ reviews).

If those two prerequisites are fulfilled, then there are two implementation strategies for the 1-star paradox :

1. Polarized positioning : brands align themselves with polarizing topics.

2. Shared laugh : brands assume their faults and mock reviewers pointing them out.

Thus, receiving some negative reviews may not necessarily be a bad thing — you may actually be able to leverage them to boost sales…

If you enjoyed this article, I’d be very grateful if you could follow or share No Ordinary Strategy with a friend or colleague.

But you know what else comes with summer?

Bare toes and horrifically ugly open-toed sandals.

Indeed, every summer cities around the world are plagued with one of the ugliest articles of clothing known to mankind: sandals. Unless you are around a pool, a beach, or you happen to be in ancient Greece or ancient Rome (good luck with that), I think it’s safe to assume that very few people want to see bare feet or toes out in public. Very few.

So what can you do? Well, you could rock any of the recommendations by George Hahn, or opt for the closed-toe alternative that is the focus of this week’s article, Crocs.

Yes, Crocs.

This week, we are focusing on Crocs. More specifically, in this article we will analyse Crocs’ business strategy in hopes of understanding how the ugly shoe company was able to rise so quickly in the late 2000s and why it crashed so epically during the 2008 crisis. Then, we will explore how Crocs was able to come back to where it is today.

Let’s dive in 👇

Table of Contents

1. The Early Crocs Story

2. How Crocs Took Off

3. The 2008 Crisis

4. The Comeback

5. The Pandemic & Post-Pandemic

The Early Crocs Story

The story of how Crocs came to be is fascinating. It starts on a boat in the Caribbean (of all places).

Three friends from the University of Colorado, Scott Seamans, Lyndon Hanson and George Boedecker, were on holiday sailing in the Caribbean. On this boat, Scott was wearing a boat shoe made by a Canadian business he was working for, Foam Creations. The shoe was comfortable to wear, could float, and it was nearly impossible for it fall off. Bref, it was the perfect boat shoe.

Proud of his purchase, Scott showed his revolutionary boat shoe to his friends. The reaction?

“Wow that’s ugly”.

However, Lyndon and George could not deny the utility of the shoe and skip forward a couple days later, and the two friends were convinced. So much so that all three friends decided that they wanted to make a company around it. They headed back to Miami, bought a garage and lived on a boat to save money. With the money they saved, the trio acquired the rights to the manufacturing process and developed Croslite foam technology. Croslite is a proprietary closed cell resin material that is lightweight, odour-resistant and ergonomic.

Having developed the Croslite foam technology, the trio created 200 pairs of “The Beach” and headed out to the 2002 Fort Lauderdale Boat Show. At the show, they set up a booth and showed their creation to the world. The result? The booth was swarmed and boat enthusiasts liquidated their stock.

The three friends had something.

The trio tripled down on “The Beach” and began producing more. By the end of the year, they had $24 000 in net profit. The company continue to grow and by 2005, they had enough money to buy out Foam Creations and consequently found Crocs. The name is an allusion to the versatility of the crocodile which can travel on land and water, like their shoes. From that point, the Crocs took off.

How Crocs Took Off

In 2004, Crocs had $24 000 in net profit. By the third quarter of 2005, the company sold 4.4 million shoes, hitting revenues of $75 million. Just a year later, in 2006, the company IPO’d and was the largest-ever US footwear IPO of the time. By 2007, the company reached revenues of $168 million. How did they achieve such phenomenal growth? By leveraging a proprietary competitive advantage, a low cost business strategy, and the power of personalization.

How a Proprietary Competitive Advantage Created Economies of Scale

What is the dream of any business? To have a patented competitive advantage. Why? Because having a patented competitive advantage creates very high barriers to entry.

And a proprietary competitive advantage is precisely what Crocs had. Their patented Croslite technology enabled Crocs to produce a moulded shoe, which is significantly simpler and faster to produce than any other sneaker. The fast production cycles allowed Crocs to produce at an unprecedented rate and unlocked unique economies of scale that no other shoe company could compete with. However, a proprietary competitive advantage is not enough to convince a buyer — the product needs to be well differentiated and offer a clear value proposition.

Low Cost Strategy + Clear Value Proposition = Profit

The value proposition of Crocs was purposefully clear: the shoes provided comfort and were incredibly versatile. A first-time Crocs wearer will find that the shoes are springy, light, and provide a “marshmallow fluffiness” to their feet. On top of that, the shoes were easy to clean, water-resistant, “vegan”, no-slip, and extremely light. In short, they were extremely comfortable and versatile. Doctors, cooks, clerks, and other workers who stand on their feet all day quickly took up the Crocs. However, they were ugly. So much so that some fans faced a Crocs Conundrum - which is that although the shoes were ugly, they could change your life.

The best part? This comfort and versatility was available for just $29.99.

The fact that Crocs were moulded enabled the company to adopt an extremely low cost strategy. In addition to this, the company invested in an expansive distribution network that put Crocs everywhere: grocery stores, shoe stores, malls, e-commerce, etc. — Crocs were simply everywhere. Their economies of scale enabled them to expand their distribution network without significantly increasing marginal cost. Their expansiveness created multiple touch points with buyers, which worked to reduce their natural guard. Eventually, shoppers justified their purchase of a clog as a “trial” or “just for the home”. What happened however, was different: they fell in love with the shoe’s comfort and versatility.

However, while Crocs were everywhere, the company quickly started facing a problem: most of their target market already had a pair of Crocs. To overcome this, they opted for personalization.

Personalization as a Revenue Growth Strategy

How do you increase revenue when you’ve nearly saturated the market with your product and don’t have a significant product innovation? You enable people to personalize their product.

Personalization, when leveraged correctly, can be an incredibly powerful strategy to increase revenue. Indeed, a Deloitte study found that 1 in 5 consumers who expressed an interest in personalised products would be willing to pay a 20% premium. Additionally, 48% of customers would be willing to wait longer for a personalized product. In short, customers are willing to pay more for personalized products.

For Crocs, the choice was straight-forward. The company realized that they could get people to buy another pair of Crocs if they offered the Crocs in a different color or style. As a result, they unleashed a nearly infinite array of different colors and styles. Rainbow Crocs, tie dye Crocs, camo Crocs, fluffy Crocs, Nemo Crocs, Disney princess Crocs, you name, it exists.

While offering a variety of colors and styles for the base of the shoe was an excellent idea, the real unlock came from the Jibbitz. In 2006 Crocs acquired Jibbitz, a manufacturer of small button-like accessories for Crocs for a reported $20 million. As a result of this acquisition, individuals could now purchase packs of Jibbitz to add to their Crocs. With other 1,000 Jibbitz available, the potential for personalization was nearly endless.

Personalization worked wonders for Crocs. The company increased their revenue by 124%, from $75 million in 2006 to $168 million in 2007. While the company seemed to be on top of the world, a wrench was thrown into the works: the 2008 crisis.

The 2008 Crisis

The 2008 crisis was an extremely difficult time for many companies — and Crocs was not exempt from hardship. Unfortunately for them, the financial crisis meant that consumers were saving as much money as possible and frivolous purchases were cut to a minimum. In turn, this meant that Crocs was faced with a mountain of unsold shoes. After record-sales in 2007, the company found itself dealing with a $185 million loss in 2008, sending the company into a tailspin. The stock plummeted from ~$67 to just ~$1,10 in less than a year.

As if things couldn’t get any worse, their financial difficulties drew shareholder lawsuits and auditors who said Crocs might not be able to pay off its debts. Desperate for a change, the company appointed John Duerden, a turnaround expert who used to run Reebok, as CEO. What followed was a masterclass in company turnarounds.

Stabilizing the Company

Arriving at the helm of the sinking ship in March of 2009, Duerden was on a mission to bring the company back to profitability. How? By executing a classic turnaround strategy perfectly: cut costs and focus on profitability.

Cutting Costs

In order to cut costs, Duerden closed factories, cut nearly a third of the company’s workforce and got rid of excess inventory. The turn-around specialist also worked to increased retail sales and Internet sales in order to maintain their margins. Additionally, Duerden consolidated warehouse space to cut costs and worked to sure up the company’s wholesale channel.

Focusing on Profitability

Beyond cost-cutting, Duerden also implemented a strategy of focus. In the anticipation of their shoes becoming out-of-style, Crocs had begun developing a range of complementary products such as lines of apparel and high-end women’s shoes. However, these products were unprofitable and only served to dilute the brand image. Instead, Duerden wanted to stick to products that were “still recognizable as Crocs” to clearly focus the brand image. As a result, he cut all unprofitable product lines, refocused the brand, and re-asserted the core values as well as its growth possibilities.

Musical CEO Chairs

Having managed to stabilize the company, John Duerden stepped down as CEO in March of 2010 after a brief year and a half. John McCarvel, a long-time Crocs executive, replaced the turnaround expert. What followed was years of stagnation and inability to reach profitability. Moreover, the company played musical chairs with their CEOs. After McCarvel stepped down in May of 2014, Andrew Rees was named President and assumed the responsibilities of the CEO while the company searched for a replacement. During this time, Rees quickly put together a restructuring plan that saw 180 jobs eliminated, 75-100 stores close, and another round of scrapping underperforming lines. During the restructuring, roughly 30-40% of the styles were cut. Soon enough however, a replacement CEO was found. In early 2015, Greg Ribatt was appointed CEO of Crocs, a position he kept until 2017. In June 2017, Andrew Rees was appointed CEO, a position which he still holds as of writing this article. In full control of the company and with years of stagnation behind him, Rees could now execute his vision and launch an aggressive growth strategy: it was time for a comeback.

The Comeback

To say that Crocs had an impressive comeback in the late 2010s would be an understatement. However, it’s important to note that it was by no means an easy comeback. In 2018, Rees announced that Crocs would close all of its manufacturing facilities and 160 of its retail stores. To add salt to injury, the CFO of Crocs resigned that same year. If this brand was going to be saved, Rees would need to implement a serious comeback strategy.

Instead of sticking with the strategies that had worked in the past, Rees looked to his consumers. He was aware that consumers were tired of the unchanged, no-frills design. Although there were infinite personalization opportunities, the shoes lost their appeal and had faded in the eyes of the public. To comeback, the company would need to become popular again.

To become popular, the company had to focus. Virality and popularity can only be achieved if consumers immediately recognize your brand and understand what it sells. With this in mind, Crocs focused on two elements: “clog relevance and sandal awareness”. That is, Crocs wanted everyone to know that they sold two products: clogs and sandals, and the company wanted to become relevant again.

Unfortunately for Crocs, the company had completely lost its relevance. Therefore, to become relevant again, the company would effectively have to start from scratch. This is precisely where the genius of Rees shines through.

How to Become Relevant (again)

Crocs recognized that targeting their traditional customers, i.e. the generation that had grown up with Crocs, was not a significant growth lever. Instead, in order to grow, the company had to target today’s young generation — Gen Z. Gen Z is the generation that spend time scrolling on Instagram, TikTok, and that is heavily influenced by pop culture and big brands. Beyond going to a new market, Crocs recognized that Gen Z has tremendous influence among their social circles and over their parents. That is, the parents who had Crocs when they were children will be more compelled to purchase Crocs for their kids or even for themselves if they see their children eyeing them.

The only problem is that becoming relevant among today’s youth is by no means an easy feat. However, Rees had an excellent idea: they needed to go where their customers were. More specifically, if Crocs were to become relevant among the youth, they would need to meet them where they spend the most time: Instagram, TikTok and pop culture. As a result, Crocs began by releasing bold, funny, and easily-shareable versions of their clog. For example, they partnered with KFC and released a shoe covered in fried chicken. Similarly, they recognized the youth’s obsession with sneaker culture/streetwear and released an $850, 4-inch platform shoe in collaboration with Balenciaga. The shoe sold out in hours.

Why? Because it gets the clicks. Crocs observed their target customers and released shoes that would create buzz. When you see a Crocs with a heel, or a Crocs with chicken over it, you’re likely to share it with friends. At scale, people created TikToks, YouTube videos, blog articles and more on the topic. Everyone was discussing the clogs. Even music stars like Post Malone, in his song I’m Gonna Be, sang about the new Crocs: “…thousand dollar Crocs”. Crocs had successfully managed to be relevant among the youth.

The company continued their path to relevancy by leaning into the image of individuality, another desire of today’s youth. Crocs branded itself as a company that enabled individuals to express themselves, however crazy that self-expression may be. Thanks to their near infinite personalization capabilities, this marketing campaign worked wonders. In 2021, Crocs stated that they had partnered with more than two dozen artists, brands and creations through collaborations and license programs. Thus, alongside a boost from the pandemic, Crocs managed to become relevant again.

The Pandemic & Post-Pandemic

The pandemic could not have come at a better time for Crocs. It accelerated the already growing trend of comfort-minded, comfort-first footwear. Suddenly, everyone spent time at home and looked for comfortable shoes that they could wear, irregardless of how ugly they were. This was perfect for Crocs.

Not only had Crocs become relevant again but macro conditions had also helped accelerate a trend that worked in their favor. As a result, the stock doubled between January 2020 and December 2021. However, this explosion poses serious question as to how Crocs will perform after the pandemic.

Crocs’ Future in a Post-Pandemic World

Crocs’ stock is up roughly 20% from their pre-pandemic levels as of writing this article. Whether or not they will be able to maintain such levels depends entirely on their ability to maintain relevancy. I believe that Crocs will again face a similar problem as before: market saturation. Today’s youth is especially quick on trends and fads. That is, Crocs can become a fad overnight and lose much of the progress they’ve made over the last few years.

Their ability to maintain future top-line growth will depend on the company’s ability to create products their customers want. Like their comeback strategy, Crocs needs to continue to listen and perceive trends and nuances within their target demographic. By doing so and by continuing to design products with clear messaging and value proposition, they may be able to maintain relevancy for some time. However, they may also see their strategy of relevancy fade if they release too many “crazy” products. The public still needs to be surprised and cannot fall into a pattern of expectation when it comes to Crocs products. Additional popular verticals like NFTs and/or the metaverse could be explored for additional relevancy.

Only time will tell whether Crocs will manage to stay in the minds of their target customers. For now however, Rees’ strategy has paid off.

In this third part of the three-part How to Negotiate series, we'll be covering cross-cultural negotiation. If you missed last week's article on negotiation strategy, I highly recommend reading it first. If this is your first foray into negotiation, I highly recommend you start with the first article, the fundamentals of negotiation. Reading these articles first is important to make sure you understand this article.

Thus far, we've focused mainly on negotiation preparation and negotiation strategy and the execution of said negotiation strategy. This week however, we'll be leaving the world of strategy and focusing on the human component of negotiation.

At the end of day, negotiation is about two (or more) parties communicating with each other in order to get what they want. Consequently, it is important to grasp the human touch of negotiation. To quote Peter Drucker,

Culture eats strategy for breakfast

How does this relate to negotiation?

You can have the best negotiation strategy in the world, however, if you offend the other party and they walk away from the negotiation table, it's game over.

Whenever you negotiate (and especially across cultures) it's crucial that you adapt to the other party's negotiation style. If you don't they will close off immediately and you are much less likely to achieve a favorable outcome. If you commit a faux pas and come off as offensive the other party is much less likely to stay at the negotiation table and be willing to work towards a solution.

Whenever you are faced with someone from the same culture as yourself, these differences in negotiation styles may arise from differences in personality. Identifying someone's personality prior to negotiating can be extremely tough and is something that can only really be determined in the heat of the moment.

As such, we will focus on cross-cultural negotiation. Whenever you about to enter a cross-cultural negotiation, there are four rules you must follow when negotiating with someone from a different culture than yours.

1. Know how to express yourself

2. Learn how the other culture builds trust

3. Avoid yes or no questions

4. Be careful about putting it in writing

1. Know how to express yourself

Knowing how to express yourself in front of a different culture is a key component of succeeding in cross-cultural negotiation. Habits and ticks that you may have developed (and that are completely normal in your culture) may be offensive to others. For example, avoid giving thumbs up in the Middle East - it's their equivalent of the middle finger.

On a more serious note, knowing how to adapt the way you express yourself is a crucial component of ensuring success in cross-cultural negotiation. In some cultures, it's common - and entirely appropriate - during negotiations to raise your voice, get excited, use hand gestures, etc. Other cultures may see this as childish and unprofessional. Thus, you need to understand how you can (and should!) express yourself.

There are two main axes on which cultures differ in their ways of communicating and negotiating:

• Confrontation

• Emotional expression

As such, the first rule of international negotiation is to know how you can express yourself and adapt your way of doing accordingly. Is it a bad sign that your Japanese counterpart sat calmly and showed little passion? Probably not. However, if your French counterpart behaved that way, your negotiation likely won't go very far.

2. Learn how the other culture builds trust

Building trust is one of the most important steps in any negotiation. Research splits trust in two categories: cognitive and affective. That is, cognitive trust represents how much confidence you have in somebody's skills and achievements. Do you believe that they will do their work and do it well? Do you trust the quality of their work?

Affective trust on the other hand comes from how emotionally "close" you feel to them. Beyond the business transaction, would you consider them to be a friend? Would you invite them to your home?

The results from research shows that different cultures can have very different approaches to building trust. In the U.S.A for example, there is a sharp line between cognitive and affective trust. You may trust your colleague's work, but you do not trust them as a friend. American culture tends to strictly separate the emotional from the rational. In China however, research shows that Chinese managers have a much stronger interplay between cognitive and affective trust. In most cases, they go hand-in-hand. Similarly, in most emerging countries, BRIC, Southeast Asia, Africa as well as Middle Eastern and Mediterranean cultures, individuals are unlikely to trust their counterparts until affective trust has been made. This is in sharp contrast to the task-oriented Americans, Brits or Germans.

What does this mean? This signifies that, depending on the person you are negotiating with, you may have to invest time in non-business activities (discussions, meals, sports, etc.) in order to build affective trust. Ignore the business deal and focus only on building a friendly relation with the other person. Once enough trust has been built, the deal will arise.

3. Avoid yes or no questions

"Yes" and "no" are very powerful words. In some cultures, people say no even though they mean yes, whereas other cultures consider no a strong statement completely shutting down all future negotiations.

In France for example, we have a tendency to say "oui, non, oui" (yes, no, yes) when we mean yes. Similarly, we say "alors non, oui, non" (so no, yes, no) when we want to say no. We also tend to repeat no quite a few times, essentially saying "no-no-no-no" quite quickly instead of a simple no. This is not shutting the door in the face of the counterpart, on the contrary, it's simply stating disagreement — but negotiations should continue.

However, other cultures may not have such a loose tongue with the words yes and no. For some, outright saying no can be considered as quite rude. Similarly, a simple yes may be difficult for other cultures to pronounce.

To avoid offending the other, it's best to avoid yes or no questions. Instead of asking a yes-or-no question, re-phrase the question such that you can ask an open-ended question. For example, instead asking "Do you think you can do this?", ask, "By when would you be able to complete this?".

4. Be careful about putting in writing

Before you rush to put a deal in writing, take some time to reflect whether your counterpart's culture values receiving a written recap of a discussion. In North America and Europe, repeating and synthesising key messages both during and after a negotiation is the basis of negotiation. In Africa and Asia however, immediately sending a written recap of a discussion can be a sign that you do not trust the other party.

The United States relies heavily on written contracts. As soon as you negotiate something with an American, you will likely receive a long series of documents outlining the specifics of the contract, as well as what will happen if you do not abide by the contract. The reason for this is because contracts in the U.S. are legally binding and therefore build trust among individuals who may otherwise have no reason to trust each other.

However, in countries where the legal system is traditionally less reliable, relationship capital is worth more than a written agreement. In such countries, the spoken agreement you land at may be the basis of your negotiation - asking immediately for a written version may suggest to your counterpart that you do not trust them to hold up their end.

Additionally, in countries like the United States the signature of contract often represent the "end of negotiations". However, this is not universally true: contracts can be re-formed, in some cultures see signing the first contract as just the first step in a much longer negotiation process.

As such, it is important to remember not to jump immediately to signing a contract. If you want to be one the safe side, ask the other side to draft the first version. This allows you to gauge how much detail will be written on the contract — and be ready to revisit, in case they slip something in.

Lastly, always remember the golden rule of negotiation:

Be as hard as you can on the problem but as soft as possible on the person.

It's important to remember that the person in front of you is merely a representation of the deal. They themselves are not it. Remember that at the end of the day, everyone is human; and humans are emotional creatures. They may get offended, mad, distrustful, etc. Always remember to treat your counterpart with respect and care, but don't let it get in the way of you succeeding in your negotiation.

Creating & Executing a Negotiation Strategy:

As I wrote last week, negotiation is 70% preparation, 20% strategy and 10% execution. This week, we’re covering the remaining 30% — the strategy behind successful negotiations & its execution.

Negotiation strategies need to be flexible. It is useless to follow an extremely rigid strategy as the other party could say something that you were not at all expecting, throwing your entire strategy off.

As such, the objective of a negotiation strategy is to develop a flexible plan, tailored to your counterpart, that will allow you to fulfil three objectives:

1. Reduce information asymmetries

2. Claim value through the first offer

3. Control the communication

It’s important that a negotiation strategy remains flexible as you must be reactive to any new information presented by your counterpart — you cannot be fixed on your original plan. With that in mind, let’s dive into each of these objectives of a negotiation strategy to better understand how we can build a strategy that fulfils them all.

Objective 1: Reduce Information Asymmetries

As mentioned last week, negotiation is about gathering information from the other party so that you can align interests and create mutual value. However, at the beginning of every negotiation there is information asymmetry that prevents both parties from aligning on their interests.

This information asymmetry may be deliberate, like when the other party does not want to reveal their true interests, or may simply be due to a lack of preparation or transparency.

As such, the first question you need to ask yourself in creating a negotiation strategy is:

How do you find out what the other side knows?

Generally speaking, this is done by building trust. Your counterpart will not reveal information that is important to them unless they trust you. As such, you need to figure out a way to gain their trust. Building trust is different across cultures (more on that next week), but all cultures recognise the value of being honest.

However, being honest does not mean being transparent with your information. It is much better to be honest about the fact that do not want to reveal some information rather than make an excuse — or worse, lie.

In addition to this, it is important that in your quest for information you do not make assumptions. Always test your assumptions by asking questions. An example of an assumption is if you’re negotiating the sale of your car, you may make the assumption that the buyer is not open to a trade. If that is something that interests you, should ask the buyer if they are open to a trade rather than make the assumption that they are not.

Lastly, always remember that what you learn depends on what you are willing to learn. Whenever you are asking questions, always make sure to dig deep so that you can get a fuller understanding of the person’s objectives. In the example of a car, they could be selling it for a specific reason, like to afford a trip abroad. This can be valuable information for you to revise your estimation of their RP.

Objective 2: Claim Value Through First Offers

First offers are one of the most important tools in negotiation. A first offer is an anchoring device that will allow the person who made it to always sway the conversation in their camp. That is, when you make the first offer, you set the stage for the discussion. Even if the other party categorically refuses it — you set the stage and therefore any significant increase from the first offer will seem “generous”. The other party may even think they’re getting a good deal from it.

If you have all of the information, you should always try to make the first offer.

However, do not rush into making the first offer just for the sake of it. Ensure you have asked enough questions and have gathered all of the information you need in before making the first offer. As soon as you bring up numbers, people tend to fixate on them and will be reluctant to switch back to a qualitative conversation. Only let the other party make the first offer if you have no information.

You first offer should be as high (or low) as you can go without embarrassing yourself in front of a respected third party. Factor in the ZOPA, the justification you learned and the importance of your relationship with the other party prior to settling on a first offer. That being said, you should have an internal idea of a range for a first offer prior to going into a negotiation.

What should you do if the other party opens aggressively?

Put the case that the other party beat you to the first offer and opens with a very aggressive price (a very unattractive price). Do not spend time on the other side’s offer. Every moment spent considering/thinking about the other side’s offer legitimises it. Instead, you should immediately do one of two things:

• Reframe & re-anchor (propose your own first offer)

• Ignore their anchor (“Too early to start talking numbers”)

What should you do if you love the first offer of the other party?

Do not accept it immediately. If you do, the other side will feel that they underperformed. Put yourself in their shoes: they made a first offer that is likely far above their RP. If you accept it immediately, they will feel as though they could have gotten away with more — and will therefore believe they have underperformed.

Additionally, if you find yourself surprised by the first offer of the other party, it is likely because you don’t have all the information. Your gut reaction needs to be to ask questions such that you can discover more of their ZOPA. Let me take an example to illustrate this.

Let’s say you own a large house in a medium-sized city. You put it on the market for 1.2M€. Someone comes in with a first offer of 1.5M€. Naturally, you love the offer. However, you are surprised. Intuitively, you must ask yourself whythey are making such a first offer. You need to ask questions to determine what the ZOPA is. For example, by asking what they intend to do with the house, you may realise that your house will be converted into a hotel. By asking why they chose your house, they may tell you that it is because your house is in an ideal location. Since you know that no other large houses are for sale in the area, you can expect that they are willing to pay a pretty penny for your house. Thus, you can safely counter-offer above their 1.5M€.

Objective 3: Control the Communication

Controlling the communication is crucial in achieving what you want from negotiation. As such, it’s important to think about how you are going to control the communication. Are you going to be the first person to speak? Are you going to let them explain themselves and then take over? Again, it’s important to remain flexible but do your research and keep in mind that you need to try to be in control of the communication.

While controlling the overall communication is important, it’s also important for you to control your own communication. That is, how you reveal information.

Revealing Information

You may be asking yourself what you should and should not say. While the answer is specific to the negotiation in question, there are some general rules you can follow:

• Do not reveal your RP. If it becomes known to the other party, they will never never concede above your RP.

• Do not reveal your BATNA unless it’s strong. If you reveal your BATNA, the other party may be able to compute your RP. If your BATNA is strong, then you can explain the alternative — but never give specific numbers.

• Do not state ranges. Ranges are traps in negotiation. If you state a range, then the person will always pick the end of the range that is best to them. By stating a range you give them free information and give them the opportunity to choose what suits them most.

Concessions

Concessions from both sides are a great tool to align interests and fall within the ZOPA. However, how often you make concessions depends on your RP, BATNA and the negotiation in question. Nonetheless there are again some general rules you can follow around concessions:

• Allow yourself room to make concessions. Do not go in with a “first and final offer”. First and final offers are an incredibly powerful tool, however they shut all potential discussions for additional concessions. As such, it is a tool to avoid: you’re better off allowing yourself to remain open to discussion.

• Make bi-lateral concessions. If you find yourself making uni-lateral concessions, you are losing the advantage. Always push for bi-lateral concessions, if only to elongate the process (people value process).

• Make smaller concessions as you approach your target. Additionally, avoid falling for the ‘split the difference’ approach.

Contingency Clauses

Being in control of the communication means that you can add contingency clauses. Remember that contracts can be whatever you want them to be! They are not exclusively limited to an agreement on price. You can, at any point, add a contingency clause.

Contingency Clause: A contract provision that requires a specific event or action to take place in order for the contract to be considered valid.

Contingency clauses are an extremely powerful tool to probe for truth. Whenever you are unsure if what the other party is saying is true, then you can impose a contingency clause. Let me take an example to illustrate.

Going back to our large house example, let’s say that the buyer asserts they will not use your house for commercial purposes — but you suspect that they will build a hotel. You can probe for this by adding a contingency clause that if the land is, at any point in the next 50 years, zoned for commercial activity, then the buyer must pay you a fine of 100M€. While this may seem outrageous, the reality is that if the buyer has truly no intention of using your house as a hotel (which would require the land to be zoned as commercial activity), they would easily accept.

If however, the buyer seems reluctant to accept (or mumbles some excuse) — you’ve just caught them in a lie. You now know with more certainty that the land is going to be used for a hotel, allowing you to increase your price (or end the negotiation if you care about what happens with your house afterwards).

Conclusion

To conclude, creating & executing a negotiation strategy is about coming up with a plan that will satisfy the following three objectives, all while remaining flexible.

1. Reduce information asymmetries (“how are you going to find out what the other side knows”)

2. Claim value through first offer (“how can I anchor the discussion at a price that is favorable to me? What is that price?”)

3. Control the communication (“How can I ensure I am in control of the discussion?”)

After preparing your negotiation, answering these questions and developing a strategy, you are ready to negotiate. There is, however, just one more factor that you need to be aware of: cross-cultural negotiations. People from different cultures negotiate in very different manners and it is your responsibility as a good negotiator to recognise and adapt to those differences. We’ll be covering exactly what those differences are in next week’s article on cross-cultural negotiation.

With that said, let me begin by explaining why you need to learn to negotiate.

Why Learn to Negotiate?

Why learn to negotiate? Simply put, whether you know it or not, you negotiate something every day. Although every negotiation is different, the basic elements do not change. Good negotiating also increases your value and the value of your company, and is therefore crucial to learn.

In order to understand the fundamentals of negotiation, we must begin by understanding a couple of key concepts:

• What is Negotiation?

• What is Value?

• Types of Value in Negotiation

• How to (Actually) Negotiate

What is Negotiation?

To understand what negotiation is, let us first turn to the textbook definition of negotiation.

Negotiation: Decision-making process by which 2+ people try to come to an agreement on how to allocate scarce resources

There is however, a fundamental issue with the textbook definition: it is extremely limiting and assumes that both parties are aware that they are in a negotiation, which is not always the case. On the contrary, the most dangerous negotiation is the one you don't know you are in.

As such, a more practical definition of negotiation goes as follows:

Negotiation: Process of trying to get what you want from someone who wants something from you

This is a much more practical and inclusive definition of negotiation which we will be using here on out.

What is Value?

Ultimately, negotiation is about creating enough value for both parties such that you can agree to some set of conditions. However, this also requires both parties to understand what value is. In negotiation there are two different types of value:

1. Economic Value

2. Social Capital

Social capital is a sociological concept that measures how much you are liked by colleagues, friends, etc. Although often forgotten, it is actually more important than economic value. For example, when you want to lock in a supplier, preferences may be given to those you know.

Social capital is created through repeated interaction. Therefore, in a negotiation you may decide to give up a little economic value in order to increase your social capital with an important client and/or supplier, for example.

Value in Negotiation

While there are two main types of value, economic value and social capital, these two types of value can be leveraged in different ways during a negotiation:

1. Value Creation: Value creation is about answering the question how much value is being generated? It is a collective concept and represents the size of the pie. Creating more value (growing the pie) makes everyone win, ceteris paribus.

2. Value Claiming: Value claiming is about who gets how much at an individual level? Explained otherwise, it is about the size of your slice of the pie.

Good negotiating is about creating value. The objective of negotiations that have multiple considerations will be to create value, i.e. identify the other party's interests and ensure they are aligned with yours.

In purely financial negotiations however, value creation is impossible. When there are no other interests in the negotiation other than price, it is a zero-sum game. Every euro you gain is a loss for the other side. As such, purely-financial negotiations are about value claiming rather than value creation.

Nonetheless, the objective of negotiation strategy remains the same: gain as much information as you can such that you can identify what kind of negotiation it is (is price the only consideration? Can you create value for you both?). With that in mind, let's turn to how you would actually go about negotiating.

How to (Actually) Negotiate

Negotiating is 70% about preparation, 20% about strategy and just 10% about execution. That is, if you want to be a good negotiator you need to prepare well.

How do you prepare for a negotiation?

To prepare for a negotiation, you need to answer 3 questions: What would happen we don't have an agreement? What is the absolute minimum/maximum (depending on the situation) price that I'm willing to go? And what would be ideal price? Answering questions directly to the first step of preparing for a negotiation:

Step 1: Calculate your Fundamentals

The first step to any negotiation preparation is to identify your economic fundamentals. The definitions of these metrics will be illustrated in the example below.

1. BATNA (Best Alternative To No Agreement)

2. RP (Reservation Price)

3. Target Price

Let us take a real estate example to illustrate this. Let's assume that a seller is selling land directly to a buyer, without the intermediary of an agent. The seller made an offer. If the seller does not accept the buyer's offer, then the buyer is left with no land, i.e. the buyer's best alternative to no agreement (BATNA) is no land. If the seller has other offers, then his BATNA would be the next offer. Otherwise, it's simply no sale.

Continuing with our example, both parties need to calculate their reservation price (RP). For the buyer, that is the absolute maximum price he's willing to pay for the land. For the seller, the RP represents the absolute minimum he's willing to accept for his land.

Lastly, both parties need to answer the question "what would the ideal price" be? That is, they need to identify their target. For the seller, that may be the selling price. For the buyer, that may be just under the selling price. In either case, it is important for both parties to identify these.

However, just calculating 3 metrics (BATNA, RP and target) for yourself is not enough, leading us to step 2.

Step 2: Estimate the Other Party's Fundamentals

You also need to calculate them for the opposing party. Why will make sense shortly.

For simplicity, let's go back to our land example. Let's say the land is 10 acres about 1hr away from Paris. It's listed on the market for 275.000€. The seller bought the land 10 years ago for 150.000€ and has already received an offer for it; but he is willing to talk to the new buyer to weigh his options. There are no agents in the process: the sale will be done through a 1:1 negotiation between the buyer and seller.

Let's assume the seller read this article, followed my advice and came up with his 3 metrics. His BATNA is the offer he received, cash for 250.000€. Thus, the seller's RP is 250.000€ (second offer) and his target is 275.000€.

Similarly, let's assume that the buyer also prepared his negotiation: his BATNA is no land (but he's in no rush to buy), his RP is 265.000€ and his target 250.000€.

The distance between the seller's RP and the buyer's RP is the Zone of Possible Agreement (ZOPA). That is, it is between these two numbers that the agreement is a better option than the BATNA.

However, this requires that you know the other party's RP. If the buyer knew the RP, then he could place an offer just above it (251K€) that would make the seller accept and the buyer extremely happy. Similarly, if the seller knew the buyer's RP then he could counter-offer with 264K€, at which point the buyer would rather buy the land than not. In reality, neither party knows what the other person's RP is. This is where negotiation strategy comes in.

Note: It is entirely possible that 2 parties' ZOPA do not overlap, in which case it is best not to have an agreement.

Step 3: Create a Negotiation Strategy

Before any negotiation, you need to have a clear strategy in mind, although it must remain flexible. Your strategy should cover: what will be your first offer, how are you going to build trust, how much information will you divulge, etc.

The reason for these questions is because in negotiation, the ultimate objective is to create value for both parties. However, this may not always be possible — it is therefore crucial than you figure out whether that is possible.

Purely financial negotiations will have a financial ZOPA in which case the negotiation is a zero-sum game: every gain you receive is a loss for the other person. When there are other interests on the table however, it becomes an interest-based ZOPA. When you are faced with an interest-based ZOPA, it is possible to create value as it is no longer a zero-sum game.

Let's take an example to illustrate this. Going back to 10 acre land scenario, let's assume that the 10 acres is currently farmland and that the seller would like to keep that way, however the buyer is a developper who wants to create a big shopping mall. If land use is the seller's #1 consideration, he will not sell to the buyer. No matter the price, the interests simply do not align. If the buyer is price-first, then the buyer might be able to offer a little bit more cash in order to have permission to develop a shopping mall. In either case, it is crucial to obtain this information.

As such, the first step of everything negotiation strategy is to get information from the other party. You need to build a strategy of how you are going to figure out what their top considerations are (price, use, new owner, etc.). Are you going to ask them a lot of questions, are you going to honestly reveal your intentions first to build trust?

Your negotiation strategy should also include a first-offer. We'll talk about the importance of first-offers more in next weeks' post, so if that sounds interesting to you, make sure you are subscribed.

Once your strategy is prepared, you're ready to negotiate. Now it's all about execution.

Business strategy as we know it today however, is far more recent. With its frameworks, models and algorithms, today's business strategy was born in the United States in the 1960s. Since then its inception however, strategy as a field of study has undergone a tremendous evolution.

In this article, we'll be analyzing the evolution of strategy from the 1960s to the late 1970s. The evolution of business strategy from the 1980s-2000s will be published next week.

Table of Contents:

Prior to the 1960s

Mid 1960s — The Birth of Strategy

• Ansoff Matrix

• HBS LCAG

• HBS Chandler - Strategy & Structure

1970s — The BCG Models

• BCG Experience Curve

• BCG Business Portfolio Matrix

Prior to the 1960s

Prior to the 1960s, strategy was only taught within "general management" or "business policy courses". Strategic management as a field of study did not exist. The general consensus within business schools at the time was that consistency was a critical condition for firm performance. As such, firms opted for strategies and tactics that ensured consistency.

However, this approach all changed with the introduction of strategy.

Mid 1960s — The Birth of Strategy

Ansoff Matrix

It was only in the mid 1960s that strategy became a subject worthy of independent study. It was Igor Ansoff, a Russian-American mathematician and business manager, who, with the publication of his book Corporate Strategy, coined the term "strategy" for business and established strategy as an autonomous field of study.

In his book, Ansoff presents the Ansoff matrix, a strategic planning framework to analyze and plan strategies for growth. The matrix identifies four broad strategies that can help a firm grow and also analyzes the risk associated with each strategy.

HBS LCAG - Learned, Christensen, Andrews, Guth

Ansoff's book prompted a number of academic and business professionals to develop their own framework and strategic analysis tools for the public to use. The next famous strategic analysis framework to make a wave across managers was that of Harvard Business School professors E.P. Learned, C.R. Christensen, K.R. Andrews and W.D. Guth.

Published in their book Business Policy, the four HBS professors presented the LCAG model, a strategic analysis framework aimed at analyzing external environment factors, internal capabilities, and how the two can be combined to create competitive advantages. The LCAG model is very similar to the ever-popular SWOT model.

HBS Chandler - Strategy and Structure

Alfred D. Chandler Jr. was a Harvard Business School professor who created a series of books in the 1960s — *Strategy & Structure, The Visible Hand and Scale and Scope* — that pioneered a new aspect of strategy: strategy implementation.

Rather than focus on strategy formulation, as the LCAG Model and Ansoff Matrix had done, Chandler focused on strategy implementation with an emphasis on structure. According to Chandler, the strategy determines the structure and environmental changes result in strategic options, which may, in turn, necessitate changes in organizational structure. Chandler believed that strategy could only be implemented with the appropriate business structure. In his words, "structure follows strategy".

1970s — The BCG Models

The BCG Experience Curve

The experience curve is one of the Boston Consulting Group's (BCG) signature concepts and is arguably one of its best known. The experience curve, conceptualized by BCG's founder Bruce Henderson in 1968, postulates that costs follow a definite pattern which is a function of accumulated production experience. A company's unit production costs would fall by a predictable amount — usually around 20-30% in real terms — for each doubling of "experience", or accumulated production volume (BCG).

The experience curve had profound effects on the relatively stable business landscape and infrequent new-product introduction that characterized business in the 1970s. Businesses followed BCG's advice and opted to produce more and leverage the experience curve to formulaically decrease their variable cost below that of their competitors. The idea was that a business could have the optimum combination of all cost elements compared to their competitor's combinations such that they could gain a competitive advantage in cost.

BCG Business Portfolio Matrix

Following the success of the experience curve, BCG developed in the 70s a series of additional models that conceptually derived from the experience curve. Chief among them was the business portfolio matrix, which focused on corporate strategy rather than business strategy (click here to learn about the difference between business and corporate strategy).

While seemingly simple, the business portfolio matrix was a powerful tool to help with long-term strategic planning. Each of the four quadrants represents a specific combination of relative market share and growth.

1. Low Growth, High Share — companies should invest in these "cash cows" for cash to reinvest

2. High Growth, High Share — companies should significantly invest in these "stars" for future potential

3. High Growth, Low Share — companies should invest or discard these "question marks" depending on their chances to become stars

4. Low Share, Low Growth — Companies should liquidate, divest or reposition these "pets"

The business portfolio matrix instrumental in helping to introduce strategy as an area of thinking and a source of long-term planning.

BCG's insights of the 1970s, derived almost-exclusively from the experience curve, were deterministic in nature. Consequently, a new stream of strategic thinking was introduced in the 1980s as a reaction to BCG's deterministic view of business. To read more on the evolution of strategy from the 1980s to the 2000s, make you are signed up to the newsletter.

In his book, The Four: The Hidden DNA of Amazon, Apple, Facebook, Google, NYU professor and entrepreneur Scott Galloway presents the T-Algorithm (Trillion Algorithm), a strategic framework based on commonalities across four technological unicorns: Apple, Amazon, Alphabet (Google) and Facebook (Microsoft joined the trillion-dollar valuation club after the release of the book). The framework aims to explain why these companies are worth over $1 Trillion and give the tools necessary for one to identify potential future unicorns.

In this analysis, we aim to understand what makes a company worth $1+ Trillion. To do so, we will base our analysis and explain, in detail, Scott Galloway’s T-algorithm.

Table of Contents:

The T-Algorithm

1. Product Differentiation

2. Visionary Capital

3. Global Reach

4. Likability

5. Vertical Integration

6. Artificial Intelligence

7. Career Accelerant

8. Geography

Conclusion

The T-Algorithm

1. Product Differentiation

he first factor of the T-Algorithm is product differentiation (Galloway, p. 183). In today’s world, customers have access to a nearly-unlimited array of different products (technological or otherwise). In addition, customers can easily compare products, reducing the need for brand power or reputation. As such, product differentiation has gone at the forefront of product strategy: consumers must know exactly what a product does, and where it fits within the spectrum of competitors.

To explain this phenomenon, let us turn to a thought-experiment. Think of a social media company. You most likely thought of Facebook and Twitter, among other choices. Now think about how you use Twitter and Facebook. Perhaps you do not use both — think about why that is the case.

Although only Facebook is a trillion-dollar company, both companies have strong product differentiation. When you thought of Facebook, you likely thought of photos of friends and relatives. On the other hand, Twitter likely spawned thoughts of a feed of quick, bite-sized epiphanies and digestible news snippets from friends and/or random people.

Nearly every product in the world, irregardless of how commoditized it may appear to be, has forged new dimensions of customer value through sensors, networks, search, display, etc. (Galloway, p. 184). Product differentiation can even come from the most mundane part of a company such as its supply chain. Just think about Amazon. Prior to Amazon, one had to pay an extra fee to get products delivered within a week. Then came Amazon, which innovated on its supply chain and differentiated itself from the competition by offering free, two-day shipping. Now, just about every website offers free shipping.

Thus, product differentiation has become a requirement. Without it a product that is truly differentiated, you’re going to have to rely on the nuisance that is advertising.

2. Visionary Capital

The second competitive factor in the T-Algorithm as defined by Galloway is the ability to attract cheap capital, i.e. visionary capital (p.188). According to Galloway, the ability to attract cheap capital is achieved by a simple and bold vision that is easy to understand.

Visionary capital allows companies to more patiently nurture assets and enables it to place more bets on innovation (Galloway, p.188). That is, the company can try more things under the auspices of a bold vision. Naturally, shareholders will eventually ask to see tangible progress against the company’s vision, however, if a company can market itself as “the innovator”, it will be rewarded with an inflated valuation, cheap capital and the self- fulfilling prophecy of being market leader that comes with large amounts of cheap capital.

A simple and bold vision and a charismatic CEO begets cheap capital, giving room for a company to innovate and receive an inflated valuation.

3. Global Reach

In order to reach a valuation of $1 Trillion, companies have to go beyond national borders (Galloway, p.190). They need to go international.

In order to expand internationally however, one needs a product that appeals to people on a global scale, crosses cultural boundaries and can be distributed easily across the world.

Apple has achieved this tremendously well: as of Q2 ’21, 67% of its revenue came from outside of the U.S.. The company has been accepted in virtually every sovereign nation without harm, and its products can easily be translated into a variety of languages.

4. Likability

According to Galloway, the fourth component behind trillion dollar companies is likability (p.191). That is, being a likable company (by the government, independent watchdog groups, the media and the public) plays a crucial role in the determination of outcomes when it faces regulatory pushbacks. Being perceived as a good company to which something bad has happened is far better than the opposite.

For example, Apple is the largest tax avoider in history (Galloway, p193) but because Apple is perceived as a cool, hip and tremendously successful U.S. company, it faces very little backlash from the government and the public on these concerns.

On the other hand, one simply needs to look at Facebook. Prior to the fake news debacle, Facebook was well-liked. Every company had a Facebook presence and the public loved the product. Over the last few years however, Facebook and Zuckerberg have gone from well-loved to much-hated. Following this shift, Facebook has seen internal whistleblowers denounce SEC violations and the company was fined by the SEC for misleading investors. Similarly, both the Federal Trade Commission and attorney generals from 48 states and territories filed twin lawsuits against Facebook.

In short, being a likable company means a company is more likely to get away from difficult situations without damage. In route to a $1T+ valuation, difficult situations are almost certain to arise.

5. Vertical Integration

Vertical integration has become a requirement with today’s highly-demanding consumers. Integrated vertically allows companies to control every component of the consumer experience (Galloway, p.194). Consequently, companies have complete control over the distribution of their products and how consumers interact with their brand.

Let us take Apple as an example. Apple controls every single own of its stores and thus has complete control over the distribution of its products and how its brand is marketed across the globe. That means that wherever you go in the world, an Apple store will always be clean, beautiful and thoughtfully-designed — a reminder to you that Apple products are much of the same.

Even Facebook and Amazon, who don’t produce their own products, are vertically integrated. Indeed, both companies are vertical in the sense that they control the entire user experience of their consumers: they own and design their own apps and consequently control exactly how a consumer interacts with the brand and site (Galloway, p.195).

In sum, vertical integration is about controlling how consumers interact and perceive your brand. By vertically integrating, a company is able to ensure satisfied consumers across the entire distribution network.

6. Artificial Intelligence

Having worked in business intelligence where I handled million of rows of data daily, I can tell you that every company, let alone a trillion-dollar company, needs to have a good handle of their data.

Artificial intelligence (AI) has gone a long way since its first uses in business. These days, D2C companies rely on behavioral targeting to sell products. Behavioral targeting works by learning from your behavior online and recommends you products and services it thinks you may be interested in.

Amazon is undoubtedly the king of behavioral targeting. Based on your history, how long you spend looking at specific products, what you watch, etc., it is able to recommend products it knows you will love. In fact, Amazon's recommendation engine is so precise that it was reported that more than a third of Amazon's revenue comes from its recommendation engine.

To become a trillion-dollar company, one needs to get a handle of the astronomical amount of data users produce. Leverage the data to further monetize your product.

7. Career Accelerant

It is undoubtedly true that people are one of a company's most valuable assets. As such, attracting the very best talent is a crucial component of a company's ability to pass the $1 Trillion mark. In order to attract top talent however, a company needs to be perceived by job candidates as a career accelerant (Galloway, p.201).

8. Geography

Last but not least, geography matters. Very few firms that aren't a bike ride away from a world-class technical or engineering university have added tens of billions of dollars in value in the last decade (Galloway, p.202). As for the trillion-dollar club, all five of them are within a 10mile bike ride of a world-class engineering university.

Microsoft and Amazon are less than 10miles away from the University of Washington. Facebook, Google and Apple are all close Stanford and a short drive from UC Berkeley.

Being physically close to world-class universities allows for deeper collaboration between companies and students, as well as some of the nation's smartest and brightest individuals every year.

Conclusion

As with all things, take the T-Algorithm with a grain of salt. Becoming a company with a $1T+ valuation is by no means formulaic. Claiming that there is a "formula" for success would be diminishing the incredible achievement these companies have reached. That being said, there are identifiable commonalities across the five, trillion-dollar companies that can be pursued by smaller companies for growth.

Just like Spotify disrupted the pay-per-song business model, Netflix is looking to disrupt the pay-per-game video-game business model. Netflix announced on Wednesday that it would reportedly offer video games within "the next year" at no extra cost. It would do so by ways of video game streaming.

In this analysis, we aim to understand the reasons why Netflix is getting into video game streaming, look at their competition and potential competitive advantages in hopes of uncovering some part of their long-term strategy.

Table of Contents:

How Video Game Streaming Works

Why Netflix Is Getting Into Video Games

• Market Share Loss

• Declining Returns on Content Spend

• Limited Ability to Monetize Content

• Why Netflix Needs Video Game Streaming

Competition in Video Game Streaming

Competitive Advantage & Predictions

How Video Game Streaming Works

Traditionally, playing video games requires three components: a physical (or digital) copy of the video game, a console on which to play and a screen. Video game streaming on the other hand, only requires a screen.

Video game streaming, also known as "cloud gaming", works by having another computer run the game for you. You provide the inputs, the computer runs the game and sends you back the images. Since another computer is running the game, your hardware doesn't matter — enabling you to play any game on any device capable of streaming a movie.

Why Netflix Is Getting Into Video Games

Loss of Market Share in Streaming

As competition within the video streaming space has grown, Netflix has been struggling to continually attract new subscribers. In Q1 2021, Netflix reported just under 4 million new subscribers, well below its guidance of 6 million and consensus expectations of 6.3 million. Management guided for just 1 million additional subscribers in Q2 2021, the lowest guidance since 2013.

While Netflix claimed in their Q1 2021 earnings press release that competition did not play a large role in their subscriber miss, market share data paints a different picture. Ampere Analysis, a media and content analytics firm, stated that Netflix dropped from 29% market share in 2019 to 20% in 2020.

Declining Returns on Content Spend

Netflix's content strategy is failing. As competitors all look to acquire rising talent and the licenses for the most popular TV shows, content spend has been increasing but returns of that spend, i.e. subscriber growth, has dropped. That is, Netflix is seeing declining returns on content spend. Without live content and a lack of additional verticals, Netflix is increasingly falling behind the likes of Disney and Amazon which can monetize additional verticals alongside their video streaming platforms.

Limited Ability to Monetize Content

In addition to Netflix's issues of decreasing market share and declining returns, Netflix also has a severe disadvantage: its limited ability to monetize content. With only one revenue stream, subscriber fees, it cannot multiply the revenue from a hit series like its competitors. For example, Disney monetizes its content by offering merchandise, creating theme parks, organizing cruises and more. As a result, Netflix is forced to burn cash in hopes of creating TV-hits that may attract new subscribers whereas Disney can monetize its past and current hits through a number of channels.

The disparity in monetization capability has put a stark contrast between Netflix and Disney, with Netflix burning $1 billion in free cash flow since Q2 2019, while Disney generated $4.7 billion in free cash flow. Over the last 5 years, Netflix has burned $11.7B in free cash flow.

Why Netflix Needs Cloud Gaming

Clearly, Netflix's current exclusive-content-focused strategy needs an overhaul: the company is quickly losing market share, seeing declining returns on content spend and burning through cash relative to its competitors. Hence video game streaming.

To say that the gaming industry is big would be an understatement. While exact numbers are not known, the gaming industry in the U.S. alone is worth over $65B, with U.S. consumers spending over $11B on video games in Q2 2020.

As such, cloud gaming presents a non-cannibalizing growth opportunity for a company which is struggling to find new verticals. The real challenge will be execution.

Competition in Video Game Streaming

While video game streaming might seem like a revolutionary idea, the space already has a lot of competition, none with great success. Critics argue that cloud gaming is bogged down by frustrating glitches and requires a strong local internet connection. Google's was the first big tech company to offer such a product. Google released its Stadia subscription service in November 2019 and was quickly criticized for poor performance and a scarcity of games.

Since then, a number of companies have attempted to put their spin on it. Console manufactures like Xbox and Playstation developed their own subscriptions, just like Amazon, Facebook and Google created their own platforms. The chip maker Nvidia also gave it a shot.

All in all, competition within the space is fierce. Without technical expertise in the space, Netflix may be doomed to fail. However, the company does have some competitive advantages over the likes of Google and Facebook.

Competitive Advantage & Predictions

The biggest weakness in Netflix's plan is the fact that it has no prior gaming experience. The company seems to be rectifying this issue with the recruitment of ex-Oculus and EA executive Mike Verdu, who may be their key in understanding the complicated video game market.

Beyond this issue however, there are some competitive advantages Netflix has over its competitors. For one, Netflix has tremendous experience providing high bitrate content to screens all around the world. Whether it be encoding algorithms or data structure, Netflix has tremendous most industry-knowledge when it comes to delivering high-quality, lag-free video around the world.

Additionally, Netflix also has a competitive advantage in its entertainment-specific penetration rate. As of 2020, 52% of adults in the U.S. had a current Netflix subscription (excluding all those who may have access to a subscription through friends or family). Unlike Amazon Prime, which majority of adults only have for the 2-day free shipping, Netflix subscriptions are specifically for entertainment. When someone opens Netflix they are looking for entertainment. This is not the case for Amazon, Facebook, or Google. In turn, this expectation creates an advantage for Netflix as it likely suggests that Netflix may have a higher adoption rate among its subscribers. Since you already have the Netflix subscription and are looking to be entertained, why not give cloud gaming a try?

Netflix's higher potential adoption rate in turn means that, either through word-of-mouth or press coverage, more individuals on the fence about a Netflix subscription may choose to subscribe, boosting their numbers. Additionally, Netflix Gaming would potentially disincentivize account-sharing as video game progress could only be saved to one account.

Lastly, Netflix's last competitive advantage is through its prevalence across TVs, consoles and more. These days, you'd be hard pressed to find a single modern TV and/or console that does not have Netflix installed. Unlike Stadia, Xbox Cloud or PS Now, which all require some sort of console to run, Netflix is already built-in to TVs and consoles around the world. This makes a consumer's adoption of video game streaming quick and simple relative to its competitors.

What do I personally think of the idea? Well, I expect that their release will be overshadowed by performance glitches and controversy surrounding the availability of games. While hiring Mike Verdu is a step in the right direction, I do not think Netflix has the industry knowledge required in order to make the amount of deals required to provide the selection of games that would appease gamers. That being said, I do not think that this is a problem without a solution. Over time, I expect Netflix's game library to get better. That being said, I would expect Netflix's adoption to be above that of its competitors. Regardless of what happens, I think it's a good attempt for Netflix to diversify its offerings. It signals to me that they've realized one of their biggest issues, their money-losing mono-channel streaming business and are looking for alternatives to grow subscribers. Only time will tell whether this comes true.

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Most recently, the UBS Evidence Lab surveyed over 2,000 U.S. adults who visited a fast food restaurant at least once a month and found that McDonald's was the favorite by a wide margin across several categories.

For research purposes (of course) I had to try the fan-favorite out myself.

Personally, not a fan.

Either way, the rivalry is a fascinating tale of marketing strategy, brand positioning and competition. In this article, I will break down the burger wars and look at what the future holds for the two fast-food giants. We will do by breaking down our analysis into 4 parts:

1. The Origins of McDonalds

2. The King Arrives

3. The Burger Wars

4. A New Flare-up in the Burger Wars

Let us begin by looking at McDonald's origins.

The Origins of McDonalds

McDonald's (McD) was started in 1940 in California by the McDonald brothers Dick and Max (McDonalds). The menu offered only a handful of products: cheese/hamburgers, shakes, fries and soda. Taking inspiration from industrial assembly lines, the brothers streamlined their small menu, reduced costs and launched their "Speedee Service System". Fast-food was officially born.

In 1954, Ray Kroc, a milkshake machine salesman, convinced the brothers to take him on as a partner. Ray was ambitious and wanted to upend McDonald's business model. Instead of the slow, controlled growth the McDonald brothers were looking for, Ray wanted explosive growth. More specifically, he wanted to move away from managing stores to a franchising business model, where he would lease stores out to franchisees. His vision was that the McDonald's Company would retain the brand and land, but would outsource the operations of the management too franchisees.

While the McDonald brothers were weary of the plan, they didn't stop Ray Kroc. In 1961, Ray bought the brothers out of the business and set up the McDonald's Franchise Realty Corporation, later to become the McDonald's Corporation. The company bought land, developed stores and would lease them out on long-term contracts to franchisees. Ray would charge variable rent depending on the store's gross sales.

Kroc opened more than 700 franchises this way across the U.S. in the following decade. By 1980, McDonald's had 6,000 restaurants and had gone international (@McDonaldsCanada).

However, McDonald's success did not go unnoticed - competition quickly followed.

The King Arrives

After a visit to McDonald's, Keith Kramer decided to start a competitor. He and his wife's uncle, Matthew Burns, bought the rights to an instant-grilling machine called the Insta-Broiler and launched Insta-Burger King in 1953 (Daszkowski). The appeal of Insta-Burger King was the quick and efficient way in which they made burgers, all thanks to their instant-cooking technology.

The first store was a resounding success, opening the path to franchising. Inspired by McDonalds, James McLamore and David Edgerton opened the first Insta-Burger franchise in Miami in 1954. They continued to grow their franchises across Florida and even upgraded from the Insta-Broiler to a Flame Broiler.

Even though Insta-Burger King was expanding, the company quickly ran into financial difficulties. McLamore and Edgerton purchased the national rights to the chain in 1959 and renamed the company to Burger King - starting the company as we know it today.

To differentiate themselves from McDonald's, the new owners, McLamore and Edgerton, decided to operate a slightly different franchising model. Instead of buying land and leasing it out, Burger King sold territorial licenses to private franchisees across the U.S. and did not have contractual restraints or controls on franchisee operations.

The lack of contractual obligations and controls quickly grew to a nationwide quality and consistency problem, among other problems. In 1978, the company restructured all their franchising agreements to follow franchising model set forth by McDonald's: Burger King would own the properties and lease them out to franchisees. Burger King would also have strict quality controls and contractual obligations.

With the new franchising agreement, Burger King continued to grow, albeit at a slower pace than McDonald's. By 2019, there were 18,838 Burger King restaurants worldwide vs. McDonald's' 38,695 (Lock).

The Burger Wars

The Beginning

Prior to 1980, both McDonald's and Burger King focused on positive marketing tactics to attract customers domestically and internationally. McDonald's differentiated itself by being family-friendly and Burger King focused on customizability. McDonalds introduced the iconic Happy Meal and Burger King launched its "Have it Your Way" slogan.

However, the positive marketing did not last long. In the early 1980s, Burger King fired the first shot in the Burger Wars when it ran a marketing campaign attacking the size of McDonald's hamburger (Simpson). Burger King then followed suite with a series of comparative advertising campaigns to draw attention to the poor quality of McDonald's products and the superiority of Burger King's taste and methods (Twisted Food).

Naturally, McDonalds retaliated. The market leader launched a counterattack in 1985 with a new burger, the McDLT, which was a direct copy of Burger King's best-selling Whopper but cheaper. The round of attack ads went on, using television commercials, billboards, print advertising and other media to assert the superiority of each company (Twisted Food).

While both McDonald's and Burger King were growing quickly during that time, the advertising wars proved unsustainable — they were too costly.

Pressured by new market entrants such as Wendy's and Starbucks and pressured by customers becoming more aware of what food they were eating, both companies were forced cut their marketing budgets. Although attack ads comparing the size of burgers, quality of meat, value and other factors were occasionally run, the two fast-food giants had other fish to fry. If they were to survive in the diversified and changing fast-food industry, the companies would have to attract customers who valued quality over convenience.

They'd have to turn inwards rather than attack each other.

The New Millennium

At the turn of the millennium, McDonald's started to feel the heat. The fast-food industry was over-saturated with restaurants, competition was fierce, and customers were moving away from the greasy, calorie-dense fast-food restaurants. As if that wasn't bad enough, in January 2003 McDonald's posted its first ever loss (Cunneen).

McDonald's needed to turn itself around.

McDonalds realized that instead of spending money on attack marketing tactics, they needed to differentiate themselves from Burger King. That is, McDonald's needed to focus on their brand positioning that would be their differentiating factor that would win customers over.

Most importantly, McDonald's needed to disassociate itself from grimy, outdated restaurants. At Jim Cantaloupo's (McDonald's CEO during the early 2000s) first investor conference, he stated that the company's vision was to provide "clean restrooms and hot food" at every restaurant (Cunneen). The vision was simple yet highly effective — investors and consumers alike understood the need. The clarity and simplicity of the vision helped McDonald's quickly cement its position as the market leader.

Meanwhile, Burger King was stalling. Between 2002 and 2004, Burger King revenue dropped by 1.3% and between the years 2001 and 2004, the fast-food chain only opened 8 restaurants worldwide (2004 10K). However, in 2004 Burger King decided it needed to re-invent itself.

The company decided to focus on the fundamentals: optimizing cash flow (2004 10K), selling better products and a launching a new marketing campaign that focused on "superfans" (Sainz, 2007).

The "superfans" the company had identified were individuals who went to fast-food burger restaurants about 16 times a month (5 of those at Burger King) and liked sports, movies, music and video games (Sainz, 2007). While often forgotten, it is extremely important to have a clear target customer in mind — which is exactly what Burger King did.

The company also introduced a new line of premium products, such as "premium" flame-broiled products with high profit margins, quality chicken products and salads (Sainz, 2007). Combined with their refreshed "Have it your way" marketing campaign, Burger King aimed to offer something for everyone.

The effort proved tremendously successful: Burger King's net income increased by 2860% between 2004 and 2007 (2007 10K).

Since 2008, both McDonald's have been strengthening their franchise networks, selling thousands of corporate-owned stores to independent owners (Carter, 2019). Both companies have focused on putting in place solid management systems which include marketing, brand and operations management so that franchisees can focus on providing superior customer service and delivery. As a testament to this change, in the summer of 2018 McDonald's restructured its field operations to become nimbler and focus on franchising margins (Jargon, 2018). The stock was up 4.4% on the news (Utermohlen, 2018).

The 1980s to the 2000s were defined by expensive, attack-style marketing campaigns. The early 2000s were characterized by slump in sales for both companies, until both companies managed to turn themselves around. Since 2015, both Burger King and McDonald's have been focusing on becoming leaner, more agile franchising companies. So what's to come? I believe we're going to see a new chapter in the Burger Wars.

A New Flare-up in the Burger Wars

Post-Pandemic Relevance

It is no secret that pandemic has deeply affected the restaurant industry. While the quick-service industry tends to have bigger pockets (and are thus more resilient to macro-shocks), nearly 10% of fast of restaurants within the quick-service industry (McDonald's, Burger King, Subway, etc.) have had to close (Datassential, 2021).

Even though eating out is the second post-pandemic priority, I do not believe that the fast-food industry will see much of the dining resurgence (Kantar). Rather, I expect that diners will be rushing to smaller, independent restaurants with family and friends. As such, I would hypothesize that the fast-food industry will need 2-3 years to recover to pre-pandemic levels. Shifts in remote work habits may also push fast-food restaurants to focus away away from cities and into the suburbs.

Either way, I believe that the fast-food industry will struggle to remain relevant for at least a year after the pandemic. This struggle for relevance will open the way for a new wave of marketing campaigns. I expect to see more tense competition between McDonald's and Burger King as they fight to win over the post-pandemic consumers.

Changing Consumer Tastes

American fast food tastes are changing: customers are demanding healthier options. "Fast casual" restaurants such as Chipotle and Panera Bread, offering healthier options at a marginally higher cost to fast-food, have stolen market share from the fast-food giants.

Vegetarian meats such as Beyond Meat and the Impossible Burger have also recently flourished, forcing both McDonald's and Burger King to offer vegetarian burger products. To remain competitive in the changing market, both McDonald's and Burger King are going to have re-position themselves to offer more than standardized, predictable and unhealthy fast-food. They are going to have start marketing healthier offerings if they want to become market leaders within these new, changing tastes.

An example of Burger King running ads (indirectly) attacking McDonald's on new, healthier food categories

Burger King and McDonald's are market leaders in the fast-food category. However, much like what they had to do in the 1980s, in order to protect their market share from one another and from the rise of fast-casual restaurants, both companies will have to pursue aggressive marketing tactics. I would not be surprised to see another flare-up of the burger wars as a result. Who has the bigger bite remains to be seen.

👋 Hi! I’m Benjamin, a salesperson and entrepreneur with a strategic edge. The majority of my career has been focused on selling and scaling B2B products in new countries or on new market segments. I’m currently with Thales, and previously launched and scaled October’s SaaS product (acquired by Sopra Banking Software in 2024).

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Micromobility is a young industry and yet, it's predicted to be worth between $200B - $300B by 2030. Currently, there are 127 mobility service providers that offer shared transportation methods (dockless scooters, bicycles and mopeds) across 626 cities and 53 countries. As if that didn't capture the zeitgeist of the industry, know that electric scooters (e-scooters) are the fastest growing mode of transport ever documented.

Before analyzing anything, let us define micromobility. Micromobility refers to short-distance transport, usually less than 6-miles, and has become synonymous with the growing crop of shared bikes and scooters, both human-powered and electric, docked and dockless, that have begun to remake the urban landscape.

In this analysis, we aim to understand what the industry is like today, what the challenges are, and where the industry will head over the next 10 years.

Table of Contents:

Current State

Market Analysis

• The US Market

• Unit Economics

• Competition

• Challenges

Future Opportunities & Predictions

Current State

As observed in the second-part of our analysis, COVID's overall impact on the industry has been largely positive. In the short-term, the micromobility industry saw consolidation and increased adoption as cities and consumers looked for open-air, socially-distant alternatives to public transportation.

Over the long-term, our analysis showed an increased adoption of micromobility in cities while also noting the trend of individuals moving to the suburbs. Although seemingly contradictory, the reality is that moving to the suburbs will create new market opportunities for individual e-bike/e-scooter retailers but will not disrupt the growth of other micromobility platforms.

As such, the micromobility industry finds itself poised to grow in a post-pandemic world where cities begin to re-open.

To understand which companies are going to reap the rewards of this growth however, let us turn to market analysis.

Market Analysis

The US Market

The US was the first country to see dockless electric scooters in its city streets, with Bird dumping hundreds of scooters on the streets of Santa Monica in 2017. Since then, electric scooters have become the preferred method of dockless transportation and according to a 2018 survey, about 70% of Americans living in major urban areas view e-scooters positively. In fact, e-scooters are so popular in the United States that they've become the fastest growing mode of transport ever documented.

In the US, the obsession for the easy-to-use electric scooters have turned Bird and Lime, two of the first electric-scooter platforms, into industry leaders. California-based Bird achieved unicorn status ($1B+ valuation) in less than 9 months after being founded in September 2017 (the fastest company to do so) and Lime also quickly reached unicorn status.

While e-scooters startups were once among the hottest commodities money could chase, that is no longer the case. During the pandemic, Bird's valuation dropped from $2.85B to $2.3B and the company had to lay off over 400 employees (~30% of its workforce) in order to cut costs.

Similarly, Lime's latest funding round valued the company at $510M, a 79% drop in valuation compared to the April 2019 valuation of $2.4B. Like Bird, Lime had to lay off workers during the pandemic, about 13% of its workforce. Neither company is profitable.

Investorshave left the e-scooter party and are going through an e-scooter hangover.

Reason being, Bird and Lime both have simple unit-economic issues that make them fundamentally unprofitable and (in my opinion) not deserving of valuations in the $2B+ range.

Unit Economics

While e-scooters are not the only micromobility offering, they are a great microcosm for the rest of the industry. As such, let us analyze one of the most fundamental problems with e-scooters (and micromobility providers as a whole): unit economics.

Most, if not all, micromobility platforms are unprofitable. As growing startups, this is normal. Startups often require significant capital investments, high marketing costs, etc. However, most micromobility platforms (e-scooter platforms especially) are unprofitable even at a unit-economics level.

The cost of an e-scooter for Bird includes charging, maintenance/repairs, insurance, operations, payment processing fees and depreciation. However, these costs were eating away at their margins to the point where the payback period for the initial purchase of the scooter was less than the life of the scooter. That is, the company was a facing a negative return-on-investment for every scooter purchased — they economically could not be profitable.

Bird's CEO, Travis VanderZanden, tweeted in July 2019 that Bird's unit economics had just turned positive at an average of $1.27 per ride on their Bird Zero scooters. 

Critics argue that Bird has stated that their Bird Zero scooters' lifespan was of 13 months, even though the scooters had only been around for 10 months at the time of posting the tweet. It could be that the scooter's life has been exaggerated to make the contribution margin positive.

Similarly, it is worth noting that the contribution margin turned positive as the summer approached. Since e-scooters are highly weather dependent, I would only believe Bird has achieved sustainable positive unit economics if it has maintained it from July 2019 through February 2020 (pre-pandemic in the US). As of writing this article, those numbers have not been published.

All the same, unit economics for e-scooter platforms have remained a challenge. While Bird claimed to have positive unit economics, Lime has made no such statement and there has been little news since.

As exemplified with e-scooter companies, a funadamental problem with the industry is making the unit-economics work and reaching profitability. Without tremendous scale and/or R&D (read: acquisitions), profitability seems unlikely.

Competition

Competition in the growing industry is fierce. In direct competition to Lime and Bird, Uber acquired bike-share startup Jump in April of 2018. Similarly, Lyft partnered with Citi Bike (NYC bike-share program) to allow the docked bikes to be rented through the Lyft app. Beyond e-scooters and bikes, there are also dockless mopeds available from Scoot and Revel.

The two big companies competing in the space are Uber and Lyft, who both hope to become a "one-stop shop" in their own regards. Uber wants to become your go-to app for, well, everything. The company acquired a majority stake in Cornershop, a grocery delivery app. It also acquired Drizly, an alcohol-delivery app and along with Uber Eats, its restaurant-food delivery app, Uber can delivery just about anything to you. Uber seems to pivoting away from transporting people to transporting goods.

Lyft on the other hand, seems to be doubling down on transporting people. With the introduction of real-time public transportation information, the company is projecting itself as the one-stop shop for all things mobility. The idea being that whenever you want to go somewhere, you open the Lyft app. In New York City for example, Lyft will show you the route, time and price for ride-hailing, Citi Bikes, car rental and the subway/bus.

There are, of course, a number of smaller startups hoping to corner their own segment of the market. For example, Revel is a dockless electric moped sharing startup founded in 2018 that is "electrifying urban mobility". Not without controversy (more on that later), the company has expanded all throughout NYC and Washington D.C. The company has recently expanded to offer an all-Tesla ride-hailing service, a monthly e-bike subscription and electric-car charging hubs.

All in all, the micromobility industry is a crowded but potentially highly-profitable industry. Before it can reach the predicted $200B-$300B market size however, it has a lot of challenges to overcome.

Challenges

Several factors continue to plague the industry as it attempts to segment itself as a serious transportation alternative.

For one, just like the beginning of the ride-hailing companies, micromobility platforms have run into a series of regulatory issues. Electric scooter companies were banned from San Francisco after the companies dumped the scooters without permissions nor permits. Similarly, Revel had to temporarily suspend its moped sharing service after 3 deaths occurred in NYC. Whether e-scooter, e-moped or other, regulatory issues will continue to plague micromobility platforms and the high-growth numbers they so deeply desire.

The longevity of the bikes, scooters and mopeds also pose a challenge to micromobility platforms. Both Bird and Lime stated that their electric scooters tend to last one to two months before having to be replaced — if even that. A dataset released by Bird found that the average life spawn of a scooter was just 28.8 days. Similarly, Revel mopeds have been a favorite target of scavengers looking to sell batteries or other parts. As such, micromobility platforms must deal with longevity issues and the stealing of scooters, moped, bikes or their component parts.

Lastly, another challenge facing companies is weather. Electric scooters and mopeds are both highly-weather dependent. In cities across California, who rarely see a day of rain, this may not be a problem. In Seattle however, where on averageit rains 42% of the time, consumer usage may be limited by weather.

That being said, none of the aforementioned challenges are insurmountable. Regulation will slowly be put in place, longevity issues will be resolved through product iterations, and companies will ultimately have to be selective about the cities in which they expand. With that in mind, let us turn to the industry's future opportunities.

Future Opportunities & Predictions

Future opportunities within the micromobility industry lie in the global post-COVID bounce-back and in consolidation.

Using the post-COVID bounce-back effectively is crucial. Companies within the industry are in a sink-or-swim environment and retaining the customers that tried their service during COVID or boosting their marketing efforts as cities re-open are the solutions. Why? For one, because as people start going out and traveling again, others will see individuals riding these services. Whether it be Revel, Bird, Lime, Citi Bike, Capital Bike or any-other, social proof will convince reluctant individuals to try it — and adopt it.

Additionally, I believe that brands who helped individuals successfully navigate COVID have a deep emotional (trauma) bond with their consumers. In the highly commoditized micromobility industry, having a brand advantage can be significant.

The second source of future opportunity is in consolidation.

Micromobility services have high upfront costs, high maintenance costs, and benefit tremendously from economies of scale. Less choice is easier for consumers but most importantly, being a larger company gives you more bargaining power. Because regulation/city governments are the ultimate roadblock for companies in this industry, having more bargaining power is essential for growth. The bigger and better-established a company is, the less likely a city is to not accept their proposal. I believe the industry only has space for around 3 large micromobility service providers, like ride-hailing today, which makes more consolidation a certainty.

While there may be regional offerings, such as NYC's Citi Bike or Washington DC's Capital Bike, these offerings will be integrated into some larger provider — like Citi Bike can be payed for via Lyft. Smaller, geographically-focused and/or one-vehicle-only micromobility services (Bird, Lift, etc.) will be acquired by larger players looking to access new markets or expand their offerings.

I also predict that the 3 "big players", nationwide one-stop-apps for all things mobility, will focus on a particular market segment. This phenomenon can already be seen with Lyft, Uber, and Revel, with Lyft positioning itself as an app exclusively for "human mobility", Uber increasingly positioning itself as the app for "commodity mobility" (food, groceries, alcohol, etc.) and Revel, albeit a small company, positioning itself as an electric-only offering (e-mopeds, e-charging stations and all-Tesla ride-hailing fleet).

Over the next 5-10 years, I expect that independent players will be pushed aside or acquired into another's solution and that ultimately, only about 3 large nationwide micromobility providers will prevail. Regional providers will still exist, however they will all be integrated into the offerings of some larger provider.

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COVID has transformed the way individuals think about transportation. For one, safety and health have become top considerations for passengers and as a consequence, the sales of bicycles and other single-seater, open-air transportation methods (deemed safer in a pandemic) have surged. In fact, bicycle sales are up 120% and bike shortages are expected through 2022.

Beyond changing consumer habits, government lockdowns also affected all sorts of transport, from cars and public transport in cities, to buses, trains and planes nationally and internationally. Global road transport was almost 50% below the 2019 average by March 2020, commercial flight activity was down 75%, and the London underground saw a 95% decrease in ridership. Overall, the number of passenger-kilometers is estimated to have declined by 50 to 60% during the pandemic.

In this analysis, we aim to understand how the COVID-related drops in ridership and changes in consumer preferences have affected the micromobility industry. The goal of our analysis is to gain an understanding of both the short-term and long-term impacts of the pandemic on the industry.

Table of Contents:

The Short-Term Impact

• Industry Consolidation

• New City Policies

• Changing Consumer Use Cases

The Long-Term Impact

• Increased Adoption of Micromobility

• Moving to the Suburbs

The Short-Term Impact

Industry Consolidation

In the short-term, the pandemic has pushed the industry towards consolidation. As the pandemic caused ridership to plummet, so did companies' valuations. According to research by McKinsey, the valuation of one company operating a global network of e-bikes and e-scooters reportedly dropped by 79%, while others halted operations, laid off workers and cut working hours.

Low valuations led the way for cheap acquisitions by capital-rich companies looking to expand geographically. Since the beginning of the pandemic in the U.S. (approx. March 2020), there have been 5 important acquisitions within the space. 3 out of 5 of these acquisitions were established micromobility companies acquiring another micromobility company in order to expand their geographical footprint. The acquisitions were vertical integrations.

Because the industry is currently highly fragmented, consolidation would help it lower costs and increase margins (more on that in the 3rd part). In turn, lowering costs will entice more individuals to use these services and companies will be more profitable as a result. The subsequent increase in ridership will also force cities to start building more infrastructure to accommodate this growing industry, a trend which can already be observed independent of industry consolidation.

New City Policies

For a number of cities, city-wide lockdowns have shown its citizens how enjoyable a city can be when it has less cars. Combined with a pandemic-induced surge in bicycle usage, cities have pushed a number of new citywide policies focused on the creation of bike lanes. To name just a few examples, Paris will convert 50km of car lanes to bicycle lanes and plans to invest $325M to update its bicycle network (France24). Similarly, Montreal announced it would create over 320km of new pedestrian and bicycle paths across the city (Montreal Gazette).

One of the limiting factors of the micromobility industry is infrastructure. While the industry can have an initial surge as it expands to a new city, it will always be throttled by the city’s infrastructure and/or policies (more on that in pt.3). Only city-wide policies to make biking a sustainable replacement to cars like those above will help create the basic, micromobility-friendly infrastructure that is required for the industry to develop.

Changing Consumer Use Cases

On an individual level, the pandemic has also changed consumers' use cases. According to a McKinsey study, a US micromobility company that rents e-scooters saw a sharp increase in the usage of e-scooters to go to pharmacies and restaurants to pick up food. Additionally, the company's average trip distance increased by 26% during the pandemic, with some cities, such as Detroit, seeing an increase of nearly 60%.

Similarly, an academic study by two researchers at the University of Porto found that the average trip distance of Citibikes, NYC's bike-share program, have increased during the pandemic.

But what do these changing consumer use cases tell us?

Longer Citi Bike trips and longer e-scooter trips signify that consumers are not simply using micromobility services for neighborhood errands, but are also using them as an alternative method of transportation to what would otherwise have been some form of public transit (bus, subway, train or other).

As consumers begin to use these services over longer distances, I suspect that consumers will be increasingly likely to accept micromobility services as a replacement or an addition to their current methods of transportation. That is, I suspect usage will go up in the long-run. Let us dive deeper into this long-term impact of COVID.

The Long-Term Impact

The long-term impact of COVID on micromobility is two-fold. For one, the pandemic helped introduce micromobility to individuals who may otherwise not have given it a try, boosting adoption of the blossoming industry. However, the adoption of remote work has pushed a lot of individuals to move out of cities and into the suburbs. While seemingly a negative, it also created new opportunities for micromobility retailers.

Increased Adoption of Micromobility

As individuals looked for open-air, single-seater and more-hygienic alternatives to public transit, a number of people gave biking and scooters a try. In fact, according to the NPD Group there was a 190% growth in e-bike sales YOY, the most of any bike category. NIU Technologies, an electric-vehicle manufacturing company, saw a 61.2% jump in e-scooter sales.

Additionally, a McKinsey consumer survey found that consumers are more willing to regularly use micromobility in the future, having given it a try it during the pandemic.

Similarly, an academic study by two researchers at the University of Porto found compelling evidence of a possible modal transfer from subway users to Citibike — that is, the pandemic seems to have caused previous subway-riders to switch to Citibike. Whether they stay with Citibike remains to be seen, nonetheless, it continues to reinforce the notion that the pandemic helped with the initial adoption of micromobility services.

Having ridden e-bikes, Citibikes, e-scooters and e-mopeds myself, I am a firm believer that those who give micromobility a try will find value in this sustainable, noise-reducing and fun method of transportation. As such, I expect that some percentage of those who tried it out during the pandemic will stick to it, helping to fuel growth within the industry.

Moving to the Suburbs

The pandemic has showed the world that remote work can be effective, and people have reacted accordingly. According to an NPR study, Manhattan home sales are down 56% year-over-year while sales in suburban counties around the city are up 44% year-over-year. While Manhattan may be an extreme outlier, I believe there is a general US-wide trend of people moving away from the cities and into the suburbs.

However, even though companies may offer work-from-home capabilities, only 5% of employers want to be fully remote. Realistically, people will still be going in to the office, if only for a couple days per week. The problem now becomes about getting people from their homes in the suburbs into offices in the cities.

So what does this shift entail for micromobility services?

Individual e-scooter/e-bike retailers will have an new market opportunity while shared-micromobility platforms will be unaffected.

Because of the sheer size and spread of U.S. suburbs, it will be difficult for a company to setup a docked or dockless shared micromobility platform. As such, the suburbs will likely be dominated by the private-owned e-scooter and/or e-bike.

The use case in the suburbs is simple: instead of driving to the public transit and/or driving to work, one could simply take an e-bike or an e-scooter to get there. Not only would the person benefit from the aforementioned fuel savings, but when adding the cost of parking at public transit, the switch to micromobility becomes a no-brainer. To make this process even easier, train stations could also replace a couple of parking spots to bike scooter/parking.

As for the micromobility services themselves, it's important to remember that although people who can afford to do so may have chosen to leave the hustle and bustle of cities, plenty of people still remain. While hundreds of thousands may have left NYC, there are still over 8M people living in the city. The same holds true for San Francisco, Boston, and other big U.S. cities.

Micromobility service providers will have no problem growing their business.

As the pandemic raged across the globe, the world shut down. People stayed at home and road usage, public transport ridership, and airline traffic all plummeted to record-breaking levels. For those who dared to venture outside, public transportation was out of the question. Instead, city-dwellers looked for the single-seater, open-air and more hygienic transportation methods found with micromobility services.

As a result of the pandemic, cities have begun building additional infrastructure for these fun, environmentally-friendly transportation methods. Customers have also begun to adopt them as genuine replacements to cars and public transport. While not without its own set of challenges, I fully expected the micromobility industry to grow.

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This is the first part of a three-part analysis on micromobility. The first part aims to explain why micromobility is so appealing as an alternative to public transportation. The second part of the analysis will focus on how COVID has affected the industry. Lastly, the third and final part of the analysis will focus on the future of the industry.

City residents have by now undoubtedly observed the explosion of e-bikes, e-scooters and electric mopeds that have taken over bike lanes. In New York City alone, I've seen everything from generic electric Citibikes to custom-made, light-up and music-blasting electric mopeds ride down the bike lane outside my apartment.

As cities become more congested, the pre-existing, car-focused infrastructure has struggled to keep up. A Texas A&M Transportation Institute study found that commuters wasted an average of 54hrs in traffic every year (pre-pandemic). In New York/Newark, that number nearly doubles to 92hrs/year.

Yet, a study by the Office of Energy Efficiency & Renewable Energy found that nearly 60% of all vehicle trips were less than six miles.

This presents an interesting paradox: commuters are wasting a lot of time commuting and yet, most trips are less than 6 miles in distance. What can be done about this?

Queue micromobility.

What is micromobility? Micromobility refers to short-distance transport, usually less than 6-miles, and has become synonymous with the growing crop of shared bikes and scooters, both human-powered and electric, docked and dockless, that have begun to remake the urban landscape.

As with many industries, COVID-19 has been an accelerant of long-term trends, and micromobility is no exception. As the pandemic wrecked public-transit ridership, people have looked for single-seater, open-air alternatives to public transit, which they've been able to enjoy with bike-sharing and scooter-rental companies. At the beginning of the pandemic, bike sales were up 120% and bike shortages are expected all the way through to 2022.

As consumers begin to hop on the micromobility trend, the market opportunity is poised to expand. A study by McKinsey's Center for Future Mobility estimates that in the US alone, the micromobility market is predicted to be worth between $200B - $300B by 2030. Worldwide, investors have already poured more than $5.7B into micromobility startups since 2015.

While there are still hurdles for micromobility startups to overcome, from legal issues to theft, micromobility seems positioned to change the way people get around.

In the first-part of this three-part analysis on micromobility, we analyze the appeal of the industry in order to understand why it's taking over cities.

The Appeal of Micromobility

Cities are facing rapid population growth and record-levels of congestion. Over half of the world lives in urban areas, a ratio which is expected to increase to two-thirds by 2050 (UN). The number of people living in urban areas is showing no signs of slowing down and consequently, the need for cities to move populations through existing transportation networks is increasingly pressing.

While mass-transit remains the most efficient method of moving large numbers of people over long distances, the problem is in covering large distances. Rather, getting people to and from transit remains the biggest challenge: the so-called first/last mile problem.

Connecting Individuals to Public Infrastructure

The first appealing component of micromobility platforms is in connecting individuals to public infrastructure, i.e. solving the first/last mile problem.

Junfeng Jiao, director of the Urban Information Lab at the University of Texas-Austin, identified "transit deserts" (areas where people do not or cannot afford cars and lack convenient access to other major forms forms of transportation) in 52 U.S. cities and metro areas, including New York City. Transit deserts can also be considered as areas with an exasperated first/last mile problem.

In the U.S., the first/last mile problem has devastating impact: not having access to public transit means individuals forgo job opportunities, access to healthy foods, preventative medical care and more. In a 2013 review of 25 separate studies, researches found that 10-51% of healthcare patients reported that transportation was a barrier to healthcare access.

Not having access to public transit infrastructure is a serious problem in the United States, to which micromobility is an appealing solution. By giving individuals an easy way to cover short/medium distances, it's providing transportation where public services don't.

Alleviating City Congestion

On top of connecting people to pre-existing infrastructure, micromobility also serves as a credible solution to the environmental and congestion challenges cities face today.

Prior to the pandemic, 55% of major U.S. metropolitan areas measured by the TomTom Traffic Index saw increased congestion. Only 5 of 80 measured areas saw their congestion levels decrease. Since nearly 60% of all vehicle trips in the U.S. cover 6mi or less (precisely the range at which micromobility excels), these short-trips are prone to be replaced by shared e-bikes and/or scooters.

Micromobility is appealing because not only do bikes, e-bikes and e-scooters produce less noise, they also take up less space. It is estimated that 10+ bikes can fit in a single parking space, a number which is likely to increase when trying to fit scooters. For reference, replacing just 1% of NYC's free, on-street parking spots to bike parking would add 400,000 bike parking spots across the city. While this is by no means a perfect solution, it is representative of the small, non-invasive changes that can be made alongside micromobility services to help city congestion.

The aforementioned benefits cities get from these services has already caught their interest: Atlanta, Dallas and Washington D.C. all introduced shared micromobility platforms in 2019. Similarly, adoption amongst city residents is catching on: 2019 saw a 60% YOY growth in shared micromobility ridership, primarily driven by the increased adoption of scooter share. Total station-based bike share ridership increased 10% in that same period, even though the number of systems decreased by 4%. Residents are clearly adopting these services as a new method of getting around.

Gaining traction with city residents, shared micromobility platforms are an increasingly-appealing solution to a city's environmental and congestion challenges which will only get worse as populations grow.

Energy Efficiency

Beyond alleviating city congestion, micromobility is also appealing because of its energy-efficiency. Let us focus on the energy-efficiency of e-scooters as an example. E-Scooters are so efficient that a human walking some arbitrary distance would burn about 9x as much energy walking and 4x as much energy bicycling as an e-scooter would covering that same distance. Even compared to electric vehicles, e-scooters are 19x more efficient.

As the climate crisis continues, energy efficiency will become an increasingly important topic for cities. It is estimated that improving energy efficiency could provide more than 40% of the reductions in carbon pollution pledged in the Paris Climate Accord. As such, creating an energy-efficient, short-distance transportation network is appealing to the city government as well as its residents.

Cost Efficiency

While energy efficiency often doesn't speak to people, money does. Part of micromobility's strong appeal is its cost effectiveness, especially when compared to pre-existing alternatives. The fueling costs of 5mi a day of daily transportover a year for an e-scooter come out to $2.93 for the year, i.e. the price of one coffee. A conventional vehicle's fueling cost for that same distance would cost $185.10/year, and an electric vehicle's fueling cost would come out to $78.87/year.

That is, riding an e-scooter on your 5mi commute to work comes out to be 63x cheaper than driving your conventional vehicle, and nearly 27x cheaper than driving an electric vehicle. Talk about saving money.

With such impressive cost-efficiency and energy-efficiency, it is no surprise that micromobility platforms have become increasingly appealing to both urban dwellers and city governments. There are however, a number of hurdles and challenges the industry will have to face, which we will cover in the third installment of this three-part analysis on micromobility.

Cities are increasingly congested, individuals lose days in traffic every year and yet most car trips are less than 6mi in distance. With such a paradox, shared micromobility services are an appealing solution. These services offer a cost-effective (see: cheaper), energy-efficient and environmentally-friendly alternative to traditional transportation. Not only can these services be used to reduce the number of cars on the road, but they can also be used to connect individuals in transit deserts to pre-existing infrastructure and in turn, help communities be healthier and gain access to better economic opportunities.

Unfortunately however, the pandemic put a pause on the micromobility boom. As we will see in the second installment of this analysis, COVID seriously dampened the micromobility industry. However, it also created opportunities for the industry to consolidate and prepare itself for a post-COVID boom.

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Founded in 2002, GoPro (NASDAQ: GPRO) is the pioneer in active lifestyle cameras, practically inventing the market segment (GoPro). While their brand may be a household name, GoPro is struggling: ever since its 2014 IPO, the company has seen very-little to zero growth. Since its 2014 peak of $86.97, the stock has dropped by 87.6% to $10.83 as of publication.

While certain investors may see GoPro as a relic of the past, others are betting on GoPro's Founder and CEO, Nick Woodman, to turn the company around. This begs the question...

How Can GoPro Make a comeback?

Answering this question requires a two-part analysis:

1. The Current State of GoPro

2. How GoPro Can Grow

As always, none of what you read here is financial advice. I am not a financial advisor and do not have $GPRO stock. With that out of the way, let us dive into the current state of GoPro.

The Current State of GoPro

The Basics

Founded by Nick Woodman in 2002 after a surfing trip in Australia, GoPro pioneered the active camera industry. Targeting the outdoors and the extreme-sports community, GoPro has made a name for itself by offering high-quality yet little, impact-resistant cameras that can be attached on the body, on helmets, or just-about anywhere else.

GoPro's bread and butter remains its active lifestyle cameras. The cameras are now powerful and indestructible, and are capable of 360 degree video, 5K resolution, 20MP photos, slow-motion and more (GoPro). Beyond their traditional cameras however, the company also sells a 360 degree camera, the GoPro Max, as well as a digital subscription, a mobile app, camera accessories and apparel.

GoPro also offers its very own subscription. The subscription, which costs $49.99/yr, offers unlimited cloud storage, access to their video editing app Quik, livestream capabilities, free "no-questions-asked" camera replacement and discounts on all accessories and products (GoPro).

Industry & Landscape

GoPro is undeniably the market-leader within the active lifestyle camera industry. However, that industry it not very large. The global digital camera market was valued at only $13.1B in 2020, a small fraction of which is the active-lifestyle camera industry (iMarc). While GoPro's total addressable market (TAM) is rather difficult to calculate, it's a fair assumption to make that the company's TAM is small.

Within the digital camera market as a whole, GoPro's competitors include Nikon, Sony, and Canon. However, the real competition comes from the cell-phone manufacturers such as Apple, Samsung and Google, which have squeezed GoPro's TAM and made have rendered GoPro's cameras obsolete for the masses (more on that later).

Beyond hardware, GoPro only offers some software products such as its video-editing software Quik. Again, the size of the video-editing software market is difficult to estimate, and GoPro is a tiny-player in the market. Market-leading video-editing software include Adobe (Premiere), Apple (iMovie), Sony Vegas, and a whole lot more.

Management

Nick Woodman founded GoPro and has served as the CEO of GoPro for 16 years. He holds 19% of the shares outstanding but has 69% of voting rights (CCM). Total institutional ownership represents 48% of outstanding shares, Vanguard and BlackRock hold 7% and 5%, respectively (CCM). While institutional ownership may appear low, I expect institutional ownership to increase if GoPro gives signs of a promising turnaround effort. GoPro currently faces a 9.67% short percentage of shares outstanding as of March 31st, 2021 (Yahoo Finance).

Balance Sheet

Let's dive into the numbers (if you aren't a big numbers person, I suggest you skip to the "Why GoPro Has Struggled to Grow" section). GoPro has $326M in cash with debt of $280M, some of which stems from leases, however, most of the debt comes from convertibles (CCRM). The convertible debt has a $10 strike price, meaning that there is likely to be 10-15% stock dilution. The company's net cash position is of $46M, which is by no means a crazy cash position, but I would consider it to be a solid cash position given the GoPro's recent troubles.

In addition to this, days holding inventory spiked in the first half of 2020 as the company was negatively impacted by COVID, however, total inventory and days holding inventory have both significantly dropped in the second half of 2020 (CCRM). This comes as a result of GoPro's shift away from traditional retailers and the D2C space (more on that later).

Overall, the balance sheet is reasonable and does not have any particularly alarming component. With this in mind, let us turn to valuation & earnings

Valuation & Earnings

GoPro's market cap is of 1.74B with a price-to-sales (P/S) ratio of 1.928, which is more than double its digital-camera competitors' (Sony, Canon and Nikon) average of 0.885 (YCharts). GoPro's 12-month trailing P/E ratio is undefined. This is explained by the fact that the pandemic seriously affected GoPro, since retail stores were closed and individuals could not go outside and use their GoPro. GoPro's quarterly P/E ratio calculated from Q4 2020 data is 27.6 (MacroTrends). The company's digital-camera competitors have trailing P/E ratios of 32.83 for Canon, 38.69 for Nikonand 14.02 for Sony. Although not perfect competitors, the comparison is still worth noting as GoPro seems to be in-line with its competitors (at least when using GoPro's quarterly P/E ratio).

In addition, GoPro's Price/Book ratio (mrq) is of 7.98, which is far higher than its digital-camera competitors' average of 1.52 (Yahoo Finance). This suggests that the company may be over-valued compared to its digital-camera competitors.

Overall, the valuation of the company seems to lean slightly on the over-valued side, but maintains a hold consensus. Combined with a healthy balance sheet, these factors suggest that investors understand GoPro's business well and that investors are not categorically against the potential for GoPro to grow. If investors did not believe GoPro had any possibility to grow, they'd have jumped ship. While the path to growth may not yet be clear, the potential remains.

Why GoPro has Struggled to Grow

GoPro has been struggling to grow for a number of years now. For one, the nature of the product doesn't allow for much "natural" growth. That is, once a consumer has purchased a GoPro, there is very little incentive for them to upgrade to a newer model unless the customer is keen on having the latest resolution or slow-motion technology. For the average user, having one GoPro is enough to last a number of years. Until phones and laptops adopt the latest resolution (which always takes a considerable amount of time), the average consumer will not feel the need to upgrade to the latest GoPro camera.

In addition to this, GoPro has also been made irrelevant by the incredible advancement in cell-phone camera technology. Unless you require a camera that can withstand shock, a cell-phone camera is a perfectly acceptable replacement for a GoPro. The evolution of cell-phone camera quality has pushed GoPro to have to focus purely on its niche of active lifestyle cameras rather than expand into more general, every-day film cameras. This forced focus has tremendously limited growth at GoPro since they cannot leverage their know-how in any aspect other than by continuing to develop increasingly better iterations of the same product.

However, that isn't to say that GoPro didn't try to expand beyond their traditional camera. Over the years, GoPro has attempted to launch a media division, a drone and a VR-camera, all of which failed (Sun, 2018). To this day (for better or worse) GoPro remains largely focused around their hardware.

How GoPro Can Grow

Competitive Advantages

As it stands, GoPro does not have many competitive advantages. While this may be worrying for its growth potential, the few competitive advantages that the companies does have are strong and need to be maintained. The first competitive advantage GoPro enjoys is its niche expertise.

Niche Expertise

GoPro practically invented the active lifestyle camera and created the market for it. The company was the first to offer such a product and has dominated the niche market ever since. By continually being in the market — and hardly nowhere else, the company has built-up a large array of knowledge relating to its niche. From IP to marketing techniques, GoPro's niche expertise has enabled it to cement its position within the market and keep competitors at bay.

Beyond niche expertise however, we also find that GoPro enjoys tremendous brand recognition.

Brand Recognition

Over the years, GoPro has been able to build a reputation for its brand as the go-to for small, high-quality yet indestructible camera. By leveraging user-generated content (UGC), GoPro has been able to solicit and repurpose content showing real people using its products. This marketing strategy combined authenticity, visualization and peer-to-peer recommendation all in one, creating tremendous brand recognition from backcountry skiers to new parents.

The GoPro universe is also vast: GoPro has over 10M subscribers on Youtube, nearly 18M followers on Instagram and 10M likes on Facebook, putting it at a total of over 38M followers across social media. However, some of the hype has faded: GoPro's most recent Youtube uploads only average about 70K views compared to its older videos. GoPro's 10 most popular videos are all at least 3 years old.

Nonetheless, GoPro enjoys and maintains tremendous brand recognition within the market.

Future Growth Opportunities

Doubling-down on D2C:

GoPro can grow by continuing to develop its direct-to-consumer (D2C) store, gopro.com. Going direct-to-consumer would be beneficial to the company for a number of reasons. For one, going D2C would enable GoPro to control their inventory and reduce their average days holding inventory. In addition, going D2C would make the company leaner, which combined with lower inventory and average days holding inventory, may drive the GoPro stock price up.

Going D2C also enables the company to take control of its margins. When GoPro releases a new product, retailers (Best Buy, Walmart, Target, etc.) will discount the previous models in hopes of getting rid of the inventory, squeezing GoPro's margins. By going D2C, GoPro takes control of the distribution and can work to ensure that they sell nearly-all of the previous models prior to releasing a new one — keeping margins steady.

Lastly, going direct-to-consumer also gives GoPro full control of the purchase experience. Crucially, being in control of the purchase experience enables it to create a number of upsell opportunities for the GoPro subscription or other camera accessories. So long as GoPro receives a majority of sales from the traditional retail distribution system, it will never be able to fully leverage the power of upsell opportunities.

To GoPro's credit, the company has already been focusing on shifting to a D2C business model. In 2020, GoPro's sales coming from gopro.com increased from 12% to 30% (CCM).

One of the ways GoPro has been engineering the shift to direct-to-consumer is by promoting their e-commerce site. According to SimilarWeb, 1.96% of visits to gopro.com came from advertising and 5.98% of visits came from paid search, for a total of 7.62% of visits coming from pay-per-click (PPC). For comparison, Canon has 1.09% of visits coming from advertising and 3.35% coming from paid search, for a total of 4.42% of visits coming from PPC. GoPro is clearly spending a lot more money to promote their website across the internet.

While GoPro has started to pivot to a D2C business model, I'd like to see a more aggressive stance on shifting to a direct-to-consumer model. In my opinion, GoPro needs to go back to its roots: viral UGC marketing. I'd like to see a GoPro marketing campaign focused on the achievements/incredible moments of everyday people, not just elite athletes. Having an "average Joe" UGC marketing campaign go viral may remind individuals of GoPro, driving sales to their website outside of their niche market.

That being said, I do not think that doubling-down on D2C can be their main source of growth. I personally consider the shift to D2C to be more about becoming a lean company rather than driving real growth. For real growth, GoPro needs to build an ecosystem.

Building an Ecosystem

The biggest issue facing GoPro is the small and limited customer lifetime value (CLV). As previously mentioned, GoPro has limited natural growth — a customer is unlikely to buy a new GoPro for quite some time, limiting the average CLV. Hardware isn't driving profitability or growth. If GoPro wants to grow, it needs to focus on high-margin, recurring revenue, i.e., GoPro needs to pivot to a subscription business. How could it do this?

By building an ecosystem.

GoPro has the exact opposite problem that Netflix and Disney have: it has the hardware but does not have the software. That is, GoPro has an ecosystem of hardware products but has done little to connect them all together.

Their most recent product launch, Quik, along with the GoPro subscription plan, seems to be a step in the right direction. However, I believe that GoPro needs to do a lot more than offer basic editing tools.

As mentioned before, the editing software market is extremely crowded and saturated with a number of players. Adobe Premiere, iMovie and Sony Vegas are just a couple of the hundreds of movie-editing software packages that exist. While I think that creating an editing system is a nice thing-to-have, I do not think that Quik is the solution to GoPro's growth.

Rather, the GoPro subscription needs to focus on integration. Without having interviewed GoPro users myself, I hypothesize that the majority of GoPro users are looking for an easy way to share their clips. As such, I believe that the main appeal of the subscription service should be frictionless integration with cloud infrastructure, computers, editing software and social media. Taking inspiration from Apple, I think GoPro can build subscription service offering unlimited cloud storage, automatic backups, easy-upload to social media, the Quik video-editing tool and seamless integration into the top video-editing softwares. For GoPro to grow, it needs to push out software on the existing network of hardware.

It is only by focusing on increasing the customer lifetime value with high-margin, recurring sources of revenue that GoPro is going to grow. Hardware isn't driving profitability or growth. It's time for GoPro to pivot to become a software-first camera company rather than hardware-first camera company. Only then can GoPro recover.

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Just last week I bought a new bathmat for my apartment. Like most Amazon shoppers, I didn't think twice about the exact price: it was within my price range, the mat had good reviews and it would be delivered the very next day.

Great. I ordered it.

In hindsight, it turns out I got a good deal. At $12.99, the bathmat was the cheapest it had ever been.

As most Amazon shoppers are aware, prices on the platform change regularly. On average, Amazons' prices change every 10 minutes (Business Insider). This process is called dynamic pricing.

To understand why Amazon prices change so often, we'll break down dynamic pricing into 3 components:

1. What is Dynamic Pricing?

2. Benefits of Dynamic Pricing

3. Downsides of Dynamic Pricing

After understanding all of the above components, we'll be able to conclude and understand why Amazon prices change every 10 minutes.

1. What Is Dynamic Pricing?

Dynamic pricing is a pricing strategy in which companies leverage real-time data to continuously adjust the price of a product or service. Most often, these are digital-first companies - which the type of company we'll focus on today.

If you've ever booked a holiday, you've most likely seen prices move day-to-day for flights and hotel rooms. The prices might even have changed by the time you reach checkout. This is an example of dynamic pricing.

However, successful dynamic pricing strategies require a tremendous amount of data. The more data a company has, the better it can understand customer's price elasticity and price products accordingly.

While dynamic pricing is common practice today, no company has been able to accurately predict a customer's price elasticity on an individual level. Instead, companies following a dynamic pricing model often pursue certain dynamic pricing tactics.

The three most common dynamic pricing tactics used by digital-first companies are highlighted and explained below:

A.  Segmented Pricing

B.  Peak Pricing

C.  Penetration Pricing

A. Segmented Pricing

Segmented pricing is the most common and intuitive dynamic pricing tactic - if you've taken a micro-economics courses, you're likely to have come across it. Simply put, segmented pricing is a pricing tactic which charges different prices to different groups of customers depending on their willingness to pay (WTP).

While willingness to pay cannot be measured per se, companies estimate consumers' WTP from a variety of socio-economic and behavioral factors such as income, location, type of computer, habits, number of times the webpage has been refreshed, etc.

A famous example of segmented pricing comes from Orbitz, the travel fare aggregator. In 2012, it was revealed that Orbitz charged Mac users more for hotels than PC users. Their price segmentation was based on the assumption that Mac users were more likely to spend more at hotels (Simon). According to Barney Harford, Orbitz's former CEO, the company found that "Mac users are 40% more likely to book four- or five-star hotel than PC users" (Simon). The company has since abandoned their OS-segmentation.

B. Peak Pricing

Peak pricing (or "surge" pricing) is simple. It's a dynamic pricing tactic in which prices are raised during periods of high demand, and lowered during periods of low demand (Hayes). Peak pricing is most commonly used by utility companies, who will charge a premium for utilities used when demand is highest (like cold, Winter afternoons).

Examples of digital-first companies that implement peak pricing are Uber and Lyft. When you order an Uber at rush hour, you're likely to see higher fares than you would for the same trip in off hours.

C. Penetration Pricing

Penetration pricing is a dynamic pricing tactic in which prices are purposefully set below market price in order to increase demand (Kenton).

Examples of companies leveraging penetration pricing are airlines, who will use penetration pricing in order to fill up empty seats on planes. Similarly, online event-ticketing platforms such as Ticketmaster will drop ticket prices to fill concerts that are not in high demand.

2. Benefits of Dynamic Pricing

The benefits of dynamic pricing to a company are three-fold:

A.  More Flexibility in Pricing Strategy

B.  Motivates Consumer

C.  Maximizes Profits

Let us analyze the aforementioned benefits through the lens of Amazon.

A. Flexibility in Pricing Strategy

Firstly, dynamic pricing gives Amazon flexibility over its pricing strategy. Being in control of the price of their products means they can leverage penetration pricing to attract more customers to a particular segment. For example, if Amazon Fashion sales are low and the company wanted to increase them, it could leverage penetration pricing to attract customers to that segment. On top of this, sellers (who are negatively affected by penetration pricing) would have no ability to complain because of Amazon's tremendous market power. Having control over, and being flexible with your pricing strategy is a unique advantage that Amazon leverages to meet their long-term strategic objectives.

B. Motivates Consumer

Secondly, dynamic pricing motivates the consumer to purchase. Indeed, consumers aware of Amazon's dynamic pricing may purchase immediately in fear that the product's price will increase. Macro changes such as a change in weather, season, temperature, and even events like the Superbowl or the holiday period may increase prices of certain items.

The chart above exemplifies the process of consumer motivation well. The prices of Tom Brady youth jerseys increased sharply right before the 2018 Superbowl. In anticipation of this increase, consumers may choose to purchase in early January rather than wait longer.

C. Maximizes Profits

Last but not least, dynamic pricing allows Amazon to maximize its profits. By analyzing consumer behavior, it can estimate the consumer's WTP for a product more or less accurately. In doing so, Amazon can change the prices of products in near real-time, allowing them to capture more of the consumer's WTP. While Amazon does not perfectly price discriminate, dynamic pricing enables them to get relatively close.

3. Issues with Dynamic Pricing

While dynamic pricing is beneficial in some cases, there are also a number of issues associated with such a pricing strategy. Continuing with the Amazon example, let's examine the three main issues of dynamic pricing:

A.  Customer Loyalty

B.  Algorithm Accuracy

C.  Increased Competition

A. Customer Loyalty

Customer loyalty is often adversely impacted when implementing a dynamic pricing strategy. For one, some consumers believe that dynamic pricing tactics are purposefully deceptive and unethical. As such, those consumers may choose to shop at more price-transparent shops.

Additionally, dynamic pricing may irritate consumers who feel cheated by price discrimination. The consumer may feel duped or cheated by Amazon, destroying the company's brand image. When done inappropriately, dynamic pricing can destroy a brand's image and incentive consumers to consider competitors (Hamel).

B. Algorithm Accuracy

A successful dynamic pricing strategy requires both a robust algorithm and extremely accurate input data. Often times, an algorithm may receive bad data or the algorithm itself can make a mistake. Algorithms cannot, by definition, account for all events that occur. They are limited by the assumptions made in collecting the data. As such, they cannot always be 100% accurate. Pricing too high could negatively impact sales and pricing too low could hurt profitability (Robles).

Worst of all, if a big mistake in Amazon's pricing algorithm goes viral, the company's brand image would be very negatively impacted.

C. Increased Competition

As mentioned above, dynamic pricing adversely impacts customer loyalty. As such, customers are incentivized to compare prices with that of competitors. Consequently, companies are forced to compete on price in order to convert customers. This cycle forces the companies into a price war, where their only point of differentiation becomes their price.

Price wars (and increased competition in general) benefit the consumer but hurts the company, as companies are forced to accept lower margins. More often than not, the companies engaged in a price war come out with a net loss.

Conclusion

Ultimately, Amazon prices change because the benefits of dynamic pricing far outweigh the potential downsides. As it is, Amazon's market power negates a lot of potential issues highlighted above, making a dynamic pricing a pure-upside.

First of all, Amazon has incredible customer loyalty and is close to invulnerable to algorithmic mistakes. A 2019 survey revealed that 89% of buyers agree that they are more likely to buy products from Amazon than from other e-commerce sites (Mohsin). Even though the pandemic saw the price of computer monitors, facial tissues, face masks and other pandemic-necessities increase by over 100% on Amazon (Lee), Amazon continued to grow throughout the pandemic. Amazon shoppers seem to be understanding of price changes on the platform. The company has such a strong offering and brand image that consumers will continue to shop on the website irregardless of price hikes.

As for the increased competition from dynamic pricing, Amazon is most often the price-leader amongst its competitors since it can offset losses on the Amazon marketplace by its other ventures. More often than not, Amazon is the competition companies fear.

With the potential issues from dynamic pricing accounted for, Amazon implementing a dynamic pricing strategy is a pure upside: it gives flexibility in pricing strategy, motivates the consumer to buy early and maximizes profitability.

In short, Amazon follows a dynamic pricing strategy because it makes them more money.

Founded by Stacy G. Spikes in 2011, Moviepass wanted to offer a subscription-service for movie-goers. According to Spikes, the idea behind Moviepass came from his realization that with an ever-declining number of movie theater attendees, there was an opportunity to modernize the movie-theater industry.

The company was backed by True Ventures, AOL Ventures, Lambert Media, Moxie Pictures and Helios and Matheson. Helios and Matheson completed acquired MoviePass in 2017 (Albert-Deitch) and by January 2018, Helios and Methson had fired Stacy Spikes from the company he founded.

In its heyday, Moviepass allow subscribers to see one movie per day, in theaters, for a price of $9.95/mo. For reference, the average price of a movie theater ticket in 2019 was $9.17 (Julia Stoll).

In June 2018, Moviepass peaked with over 3M subscribers (Julia Stoll). By January 2020 however, Moviepass' parent company, Helios & Matheson Analytics Inc., filed for bankruptcy (Maidenberg).

How did MoviePass plummet so quickly? In this article, we'll be unravelling the series of strategic failures that led to Moviepass' bankruptcy.

The analysis will explore Moviepass' strategic failures across 3 components of strategy:

1. Pricing Strategy

2. Strategy for Profitability

3. Competitive Landscape

The 3 sections will explain, in detail, how poor pricing and profitability strategies eroded MoviePass customers' trust, destroyed the company's brand image and blocked it from re-inventing itself. Then, we will analyze how competitors positioned themselves in relation to MoviePass in order to take market share from the failing company.

1. Pricing Strategy

MoviePass' Pricing History

The price for Moviepass changed a lot over the years, ranging from $50/month to $9.95/month. When the company was founded in 2011, the subscription service offered unlimited movie tickets for $50/month. In 2012, Moviepass adopted a location-based pricing model which ranged from $24.99 to $39.99 per month for access to one 2D film per day (Meyer).

In 2016, after former Redbox executive and Netflix cofounder J. Mitchell Lowe joined Moviepass as CEO, two subscription plans were launched: 1. Unlimited movies for $40, $45 or $50 per month (location dependent) and 2. two films per month for $15, $18 or $21 per month (location dependent) (Pahwa).

After being fully acquired by Helios and Matheson however, the location-based pricing strategy was abandoned. Instead, Moviepass opted for a one-size-fits-all pricing strategy of $9.95 per month for one-movie-per-day (Roger Ma). For reference, the average price of a movie theater ticket in 2019 was $9.17 (Julia Stoll).

This was an extremely aggressive pricing strategy. At $9.95/month, Moviepass opted for a breakage business model. A breakage model is when a company relies on unredeemed prepaid services as their source of revenue (Investopedia). To make the breakage model work, Lowe relied on the fact that 89% of movie-goers only go 4x per year (Vice News). Put the case that 89% went 4x per year and the other 11% of subscribers went to 1 movie per week. With 1M subscribers, Moviepass would have a gross profit of nearly $35M from the breakage model alone (ignoring cost of manufacturing the card & running the service).

While the breakage model may have its merits, Moviepass' reality was different: the company lost $45M in June 2018 alone. Why did this pricing strategy not work?

Why Moviepass' Pricing Strategy Failed

Moviepass' pricing strategy failed for two reasons:

1. Miscalculated Demand

2. The Offerings Were Changed too Many Times

1. Miscalculated Demand

The first reason why the company's pricing strategy failed is because the $9.95 price-point had no consideration for demand. Let's analyze the costs associated with a movie ticket. In 2019 the average price of a movie ticket was $9.17. If a Moviepass user watches one movie per month, the company only earns $0.78. This is without considering the costs of manufacturing the card, shipping it and the maintenance of the service itself.

The company relied on the fact that 89% of movie-goers went to see a movie, on average, 4 times per year. Should that have been the case, even with the other 11% watching 1 movie/week, the average subscriber would see 0.77 movies per month. However, the nature of a card offering unlimited movies heavily incentivizes subscribers to go more often - which is exactly what happened.

In June 2018, the average Moviepass subscriber was seeing 2.11 movies per month, far above Moviepass' ideal of 0.77 movies/month. While they did eventually reach that threshold in September 2018, they only did so after numerous changes to their offerings, which we will highlight below. Nonethess, the company lost $130M for the three months ending September 30, 2018 (Business Insider)

Aggressive pricing is often used to lure customers into subscribing. Amazon Prime, Netflix, Spotify were all purposefully unprofitable to garner as many subscribers as possible. The idea being that profitability would come with scale and retention. However, such a strategy requires large stockpiles of cash ready to burn through the deficit. Moviepass had none. With Moviepass' parent company, Helios and Matheson Analytics, Inc. (NYSE: HMNY) trading at $0.07 by the end of July 2018, the company had little access to capital.

Ultimately, the company's inaccurate demand prediction was only one of the factors behind Moviepass' pricing failure. The other was that they continuously changed their product offering.

2. The Offering Changed too Many Times

In its history, Moviepass changed the deal 11 times (Sean Buckley). In the first 8 months of 2018, Moviepass altered its offering deal 6 times:

• In 2017 the company introduced the $9.95/month, unlimited movie pass.

• In early 2018, the unlimited deal was replaced by 4 movies/month + a 3 month iHeartRadio trial.

• In April 2018, Moviepass re-released its "unlimited" deal, except subscribers could not see the same movie twice.

• In May, subscribers had to take a photo of their stub to prove that they had gone.

• In June 2018, Moviepass introduced surge-pricing, tacking on an additional $2-$6 depending on the film and time (which made Moviepass more expensive than simply buying a ticket).

• In July, Moviepass blocked weekend showtimes of popular films.

• In August 2018, Moviepass offered its service at 3 different price-points, from $9.95 to $25 for varying levels of theather access.

Needless to say, customers were confused and trust was eroded. On top of this, in July of 2018 the company had run out of money. MoviePass could not pay its suppliers.

Without its key suppliers, the app didn't work. Customers grew increasingly impatient as MoviePass' services malfunctioned (Sarah Toy). The company simply did not have enough money to pay the services its app relied on (payment processing, servers, card manufacturing, etc.).

With such instability in price and a service that doesn't work, customers cancelled their subscriptions. Between July and August 2018 alone, the company lost 92.3% of its subscribers (from 3M to 0.23M). The company looked incompetent to users.

With near-negative margins, grossly mis-predicted demand and a deal that changed every month, Moviepass' failure to plan and execute a strong pricing strategy was a core reason why Moviepass was forced out of business.

2. Moviepass' Strategy to Profitability

Diversifying the Business Model

In hopes of minimizing their losses, Moviepass expanded into 3 additional revenue streams:

1. Data Monetization & Advertising

2. MoviePass Ventures

3. MoviePass Films

Beyond the subscriptions, MoviePass also monetized the data they collected from viewers. In early 2018, the company offered to sell advertiser and subscription location data access to restaurants, bars and cab services (Dawe). The idea was that different businesses could send location-based advertisements to MoviePass subscribers who had just finished a movie. These advertisements would be targeted to the type of consumer, ensuring better results (Dawe). For example, a cab company could send a "techie" advertisement to someone who had just finished watching Star Wars.

MoviePass also launched MoviePass Ventures, its movie financing and investment branch (Meyer). Similarly, in 2018 company launched its own production company, MoviePass Films (Meyer). Helios and Matheson's idea was that MoviePass Ventures and MoviePass Films would be important sources of revenue which could help offset the losses incurred with the MoviePass subscription.

Why the Diversification Failed

Diversification is considered to be "good growth" when it creates synergies with other segments of the business. Out of all the aforementioned diversification ventures, only one had synergies with other parts of the business: data monetization & advertising.

Selling data had synergies on dimensions of coordination, as both ventures can coordinate across production, distribution, and R&D. Selling more data would force MoviePass to better understand their customer, further bettering their subscription business. Additionally, development costs could be spread out across both business segments.

However, selling data only works at scale. Even though analytics is Helios & Matheson's forte, with a plummeting subscriber-count MoviePass simply did not have the numbers to make their analytics and advertising branch successful. No business would pay to have location access to just 230,000 subscribers spread around the United States.

As for the other ventures, both MoviePass Ventures and Films were illogical hail marys. Not only did the ventures not have any synergies with the existing business, but the company was completely outside of its area of expertise - and it showed.

The first movie MoviePass Ventures helped finance was a the mob film Gotti. The movie was produced for $10M but was a complete flop, bringing in only $6.1M at the box office (Meyer). MoviePass also backed The Row, which was also a box office failure.

Unsurprisingly, MoviePass Films was also a failure. The company acquired 51% of Emmett Furla Oasis Films (EFO Films) and acquired the rights to EFO's library of films such as Lone Survivor and Rambo (Perez). Since then, MoviePass Films did nothing with the venture.

Ultimately, it is important to analyze growth, especially diversification, on dimensions of synergies. While the data and advertising branch showed promise, the company's failure to retain its users caused it to fail. As for the others, the diversification efforts failed because they carried no synergies to the core business.

3. Competitive Landscape

Moviepass Failed to Deter Competitors

First-mover advantage does not ensure long-term profitability.

While MoviePass disrupted the movie theater industry and had first-mover advantage, they were in no position to compete. In fact, MoviePass was easy pickings for competitors. The company had not created any defensible moats around itself that stopped competitors from copying their business model, their customers' trust was eroded, and the company was bleeding money. In short, they had built sustainable, long-term advantage beyond being first-to-market.

On the other hand, the pre-existing players (AMC, Regal, Cinemark, etc.) had high incentives to copy MoviePass' business model. Firstly, the additional foot-traffic inside of the movie theaters meant that the large movie-theater chains could sell more concessions. Additionally, these companies could put MoviePass out-of-business simply by refusing to accept MoviePass ticket holders. Lastly, these companies also owned the movie-theaters and had the data to manage movie-ticket demand. They could accurately predict what the demand of a movie would be and therefore run a profitable business even while offering heavily-discounted tickets through their subscriptions.

For the large movie-theater chains, offering a monthly subscription service was an excellent move - and that's exactly what they did.

Soon after MoviePass gained traction, movie theater chains revoked access to MoviePass holders and offered their own equivalent. AMC, Regal and Cinemark all released their own movie subscription services. AMC released AMC Stubs A-List, which allows users to see 3 movies/week for $19.95/month (price can vary based on geography). Regal and Cinemark released similar propositions.

Not only did MoviePass face tremendous competition, its competitors' products were better. Without talking about the functionality or the technical side of things, AMC and Regal subscribers could see more movies/month than MoviePass subscribers. Similarly, for those who did not need access to near-unlimited movies, Cinemark offered a 1 movie/month subscription. MoviePass was in the one category that did not appeal to customers: less movies/month at a higher monthly price. MoviePass was crushed by the competition.

In conclusion, MoviePass' failure started with their poor pricing strategy: their price point had no consideration for costs, they failed to predict demand and their deal was changed too many times. Their poor pricing strategy eroded customer trust, destroyed their brand image and made the company bleed cash. With such poor pricing strategy, they were doomed from the start.

In a desperate attempt to revive themselves, MoviePass tried to diversify its revenue source. However, their diversification into data & analytics was too little too late. Their other diversification efforts, MoviePass Films and MoviePass Ventures were not within their domain of expertise and had no synergies the movie-ticket business. Unsurprisingly, they failed.

Without cash and without a brand, MoviePass could not do anything to stop the better-positioned competitors from stealing market share. Large movie theater took MoviePass' idea and implemented it as their own, ultimately forcing the company to go under.