Barrier to Entry — Niche market paradox (Plated, Foursquare, Hotel Tonight)
The niche market paradox states that a market cannot be too small that it would not be able to generate enough revenues for a company. However, if it truly is a sizable market, a large incumbent will come in and compete. The incumbent however has to think, “should I take my focus off of my existing business where I am unlocking more and more capital or should I chase this other business, where I’m actually going to be working from behind.”
The first examples that we’ll examine are 2 food startups that are competitors to each other; Plated and Blue Apron, both founded in 2012. They both are weekly subscription service delivers everything you need to make fresh meals. They go shopping for their customers at wholesale, and deliver all the ingredients in exactly the right proportions, along with beautifully printed recipe cards. When they launch a new city, they need to make sure they can source and deliver their ingredient on time and on budget. Their incumbent, indirect competitor is FreshDirect. FreshDirect, founded in 2002, is an online grocer that delivers its products to its customers. It’s competitive advantage is that it does not have a storefront, saves on costs and transfers the savings to the consumer.
FreshDirect can turn on “weekly subscriptions of exactly the right proportions of food, along with beautifully printed recipe cards” to it’s huge list of existing customers that are used to taking deliveries from them. FreshDirect has the infrastructure, sourcing, and delivery vehicles to pull this off. What it would need to do is invest in marketing to inform the public that it is getting into this area.
The second example is HotelTonight (founded in 2010), a mobile first application that let’s it’s users book same day hotel rooms. It works because a hotel would rather sell a hotel room at a discount than have it completely vacant because nearly all of the hotel’s costs are fixed (electricity, maid’s salaries, etc.). HotelTonight is a yield optimization business. Kayak, founded in 2004 and sold to Priceline for $1.8B in 2012, is a travel search engine which have great mind share for all prospective travelers. Kayak already has connections with all the hotels chains and over the years has sent them millions of guests.
Because of this existing infrastructure, it would be very simple for them to enable a “hotel tonight” button into their app. In order for HotelTonight to win it must become Kayak, before Kayak becomes it. This phrase came from Ted Sarandos, chief content officer of Netflix, while discussing how they stack up to HBO he says, “The goal is to become HBO faster than HBO can become us.”
Dennis Crowley, founder of Foursquare, commented on being the David in the David and Goliath scenario when Facebook announced Places (a competing product). Crowley said, “it’s definitely easy to get really stressed out and get distracted by those things. And I think a [sic] big lesson and something that we try to pay attention to here is if we have a a very clear vision about the other stuff that we want to build and know approximately what they look like a year from now, two years from now and that’s the only thing that we’re looking at. You know, like, we can look at what Google and Facebook and very easily get distracted by them. But as long as we just keep focusing on the stuff that we want to do and just don’t pay attention and I feel like we’re better off. Our products are being a bit more original we don’t get distracted by directions other folks are going and like it because of their pain to execute on the stuff that you know is really the reason we started the company to begin with.”
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