The Seven Year Glitch
Strategy • May 18th, 2021
From the rose-tinted days of booming growth, to times of friction and turmoil. Aino Kivinen, Product Lead charts why so many digital-native companies fail to innovate and become stale between the five and ten-year mark.
Why do so many digital-native product companies run into problems between the five and ten-year mark, with their soaring growth starting to slow? We have heard the success stories of tech companies who rode the waves of the dot com boom in the 90s, only to witness their struggle to stay on top. Product companies that were once disruptors themselves are faced with similar challengers years later, as nimble newcomers enter their markets and deliver value to customers faster, cheaper, and better.
The classic example of this is Yahoo, the internet pioneer once worth $125 billion (1). There are many theories for the reasons behind Yahoo’s fall, such as the failed acquisitions of rising stars Google and Facebook, or the inability to effectively monetise ads (2). What stands out as significant contributors were the company’s identity crisis and a lack of clear vision as they bounced between advertising, media and technology, trying to provide everything for everyone. This lack of focus subsequently meant Yahoo missed key customer trends around mobile and search, unable to creatively address customer needs around convenience and mobility.
Another story we see unfolding is that of Lastminute.com, a UK-based travel site selling unsold inventory from flights, hotels and tickets. Founded in 1998, their proposition of last-minute discounts online gained success and played a part in fundamentally changing the way we book travel. In its heyday in 2005, the company was bought by Travelocity for £577m (3). Fast forward to 2021, and you see an online travel industry that is highly competitive, with direct brands, search engines, comparison sites and OTAs (Online Travel Agents) all wanting a slice of the pie. The rise in low cost carriers and flights over the past decade, allowing for competitive pricing and shifting attitudes, means it now frequently makes sense to buy a seat for a break months in advance, rather than at the last minute. In this lucrative but highly competitive market, customers shop around looking for the best deals, frequently using price trackers such as Skyscanner or Kayak (the global travel booking abandonment rate averaged 90.7 per cent for 2019, higher than the retail average of 84 per cent (4)), while booking sites battle each other using dynamic pricing to reflect supply and demand, so as each seat on a flight is sold the prices of others change in real time.
To compete, lastminute.com has doubled down on catchy marketing campaigns (5), focusing on brand awareness and being top-of-mind the few times a year customers book a holiday. In some ways, this strategy has paid off as 84 per cent of UK consumers have heard of the brand (6), but it’s not enough to win. Lastminute.com’s customer experience ratings are notoriously poor, placing 53rd out of 70 UK travel companies in a survey run by MoneySavingExpert in July 2020 (7). Their iOS and Android apps rate an average of two stars on both app stores. On top of that, their PR is suffering from COVID-related operational issues, as the company has struggled to pay back outstanding package holiday refunds to customers (8). How long will lastminute.com be able to compete with its brand, while offering a sub-par experience that falls behind competition the likes of Airbnb and Expedia?
The niche advantage
Throughout history, we’ve seen industries traditionally dominated by few, large incumbents being actively sliced into small niches by new market entrants. But with digital products specifically, markets share can be stolen within months and years, rather than decades and centuries, as technology-wise it’s never been easier to build and launch a rival product. There is increasingly little security to be had in size.
The auction site eBay, with 187 million active buyers in 2021 (9), is one of the longest-standing and largest marketplaces globally, but market share is continuously snatched up by smaller players who have a niche focus and offer easier experiences. Sellers now have options to reach customers through platforms like Etsy and Shpock, or even ones that target specific verticals, such as Depop and Wish for fashion, or webuyanycar.com for cars.
We see a similar pattern with traditional online dating sites such as eHarmony, OKCupid and Match.com being disrupted by a seemingly ever-growing number of dating apps that each look to serve a specific target audience. Once upon a time, Guardian Soulmates was the turn-to destination for left-leaning lonely hearts. It closed its site in May 2020, with a message to users noting: "The online dating world is a very different place to when we first launched online in July 2004...We find ourselves as very little fish in a very big pool. To keep up with the changing times we’d need to invest heavily in new technology and develop a new way of operating, and it’s just not viable." (10)
When it comes to online grocery shopping, Covid lockdowns have accelerated an evolving industry to welcome new delivery services including Weezy (groceries to your door in 15 minutes) and Getir (aims for 10 minute deliveries in central London), challenging long-standing incumbents such as Ocado. Visit the website of any well-known supermarket, and you will be met with a user experience that is overwhelming and clunky. The door has been left open for someone else to come in and serve customers with better options and experiences.
These companies, among other tech giants who have changed the way we communicate, shop and bank, have all fallen foul of the Seven Year Glitch. It would be foolish to attribute these failures to a single reason, but there is a clear pattern, one that we have frequently observed as the same root cause of tech companies failing to reach their product potential: the role of innovation.
The role of innovation
In its simplest form, innovation is about solving customer problems and adding new value to the customer and the business. To be successful, innovation needs to be at the core of the business. At times innovation labs are designed like skunk works, purposefully decoupled from the main business with a belief this will achieve better ideas. While uninhibited by internal politics, legacy technologies and entrenched ways of working, these innovation teams can also be disconnected from the businesses goals and strategy, as well as the deep knowledge and experience of the people that build and run their current products.
It’s an unnecessary divide: when innovation happens at the core, it can address the biggest business challenges. For that to happen - and as we see innovative product organisations doing - product teams are given dedicated time to focus on the discovery of net-new solutions; the same teams who are intricately familiar with customer problems and needs. Innovation requires time and conscious effort, and is often left by the wayside as urgent day-to-day challenges require attention.
At Beyond, we apply an innovation framework that works at the core of the business, designed to generate and prioritise ideas that serve customer needs. This means they drive business value while staying aligned to the business strategy and objectives. We connect across the client’s business, establishing commitment across the senior team to examine a critical business question and hypothesis, and collaborating with the right teams to explore potential solutions, from product, design and tech, to data insights and customer service. We understand the market perspective, evaluating hypotheses with current and potential audiences, trends and competitive forces at play now and in the future. This bringing together of internal and external perspectives makes our innovation method effective, leading to long-lasting business value.
With Purplebricks, the overarching business goal was to increase market share from four per cent to 10 per cent. We examined their pricing proposition - which was a low-cost, fixed fee without flexibility - and worked with the CEO and leadership team to explore opportunities that would increase the target addressable market. We designed and validated different pricing options which would appeal to distinct customer segments, tailored to their needs and contexts. This included a premium package with a success-based element to the total fee payable - acknowledging that the original low upfront fee that initially set Purplebricks apart from the high-street still resonated with consumers; whilst being responsive to the opportunity that alternative pricing options would play in unlocking the next wave of growth.
Most progressive companies recognise that innovation is hard. If it weren’t, we wouldn’t see so many of our favourite companies falter after impressive growth. But while most bets won’t pay off, that isn’t a reason not to place them. Companies such as Amazon, which constantly experiment and innovate, are happy to invest in ideas that fail as well as those that succeed; Jeff Bezos invested £190m (11) working out whether to move into the mobile hardware space before canning the idea. Of course, not every company has the equivalent resources of Amazon, but there are ways of becoming more confident before investing. Funneling ideas down and examining whether they’re feasible, desirable and usable, bringing them to life and testing them - and ensuring this process is ongoing and embedded in the heart of the company - are all ways of stacking the chips in your favour to make sure your bets pay off.
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