Two articles in today’s Wall Street Journal triggered my realization of the how new ventures of today must provide services, not just products, to their customers..
First comes Spotify. While most people think of Spotify as a music on demand service, the company was also a pioneer in curating and recommending playlists:
Since launching a decade ago, Spotify has sought to distinguish itself from competitors by its playlists, which it says help users discover and listen to more music. Some of its most popular playlists attract upward of 10 million followers.
By focusing on playlists instead of on either individual artists, specific songs or even record companies, Spotify has created the LP of the digital age. LP initially stood for “long player” – a vinyl record that spun at 33 and 1/3 revolutions per minute, providing up to about 20 minutes listening time on each side of the record. This slower speed was in contrast to the 45, which only held up to about 4 to 5 minutes of music per side. Thus the 45 was ideally suited for individual songs, known as singles. LPs would usually consist of one or two hit 45s and the rest was filler. The LP was one of the first and most powerful examples of bundling – forcing customers to buy something they didn’t want in order to get something they did value. LPs were also called albums, as the very first vinyl records were recorded at 78 rpm. So little music was on a 78 that multiple 78s were sold as a collection known as albums, after the physical holders of the multiple 78s, similar to the way families once stored their photographs in an album – yet another antediluvian product .
Steve Jobs and Apple’s iTunes broke the LP/album model. No longer did music lovers have to spend $12 to $16 on a CD to get the one or two songs they really wanted – they could simply download those songs for 99 cents each – a price Jobs forced down the throats of the record companies. Of course, you could still download the an entire album – 12 songs – but you would just pay 12 times 99 cents for it. Digital downloads superseded the CD due to this unbundling. Unbundling provides consumers with both choice – any song you wanted for 99 cents – and convenience, you could download a song on any device from any location, so long as you had an Internet connection.
Spotify was, if not the first, the most prominent seller of streaming music, which has now surpassed the digital download as the most popular way to access music. Spotify’s
all-you-can eat, on-demand subscription model provides incredible convenience to music customers. But Spotify shrewdly recognized the megatrend of the new, consumer-driven bundle of songs known as playlists. Playlists were available on iTunes and other digital download services but they didn’t take off until Spotify added the social dimension: you can create and share your downloads with your friends, and of course, vice versa. Thus powerful social sharing, combined with great ease of use, and a vast storehouse of music, has made Spotify’s service very attractive to tens of millions of music lovers.
The playlist actually provides another value to users of Spotify’s and other streaming services: recommendations. For example today Spotify announced it is adding playlists of music soundtracks to its offerings.
Many fans already compile their own playlists based on the music they hear on TV shows and in movies. Messrs. Jernigan and Bush said they hope fans listening to the “Mid90s” playlist will discover other music from the era and start creating their own playlists.
So we see the winning business model that has elevated Amazon to the second highest valued company, after Apple, in the world: providing users with low price, convenience, ease of use, an almost infinite selection of products, and recommendations as to what else to buy (customers who bought X product also bought products W and Z.)
The other article in today’s Journal that embodies the new business model of value-added services is Tiny Rooms, Shared Kitchens: Co-Living on the Rise in Big Cities, subtitled Developers are now preparing to build some of the largest new co-living properties in North America. The new model of co-working spaces – large open plans has now superseded both the private office and the hated cubicles for businesses.
Real estate developers facing a market of rising rents, but limited supply of rental properties in the residential market, have shrewdly extended the co-working space model to the residential real estate market.
Co-living, a budding real-estate trend often derided as an extension of college dorm life, may be growing up.
At co-living buildings, tenants lease tiny rooms in larger apartments shared with strangers. Renters have access to living rooms, kitchens and other common spaces, while amenities like cleaning services, dog walking and cooking classes are part of the deal.
Co-working space providers like WeLive have now extended the office model of bundling services with rental space to the residential market, thus WeWork spawned WeLive. Note that both the open office plan and the co-living space both drive down cost by putting substantially more people per square foot than the old models.
From mailrooms and laundry rooms that double as bars and event spaces to communal kitchens, roof decks, and hot tubs, WeLive challenges traditional apartment living through physical spaces that foster meaningful relationships.
Co-working adds the social element and access to shared facilities to the staid old model of apartment living. As the authors of the article write, there is evidence that skyrocketing rents over the last six years have forced more apartment-dwellers to live with roommates.
The first lesson from these two Journal articles is that startup founders need to surf a business and/or technical wave, in Spotify’s case the digitization of music and the subscription business model and in residential real estate developers, the rapid and accelerating increase in demand for rental housing. But how does a founder discover these technical and business waves of change? The answer is simple: immerse yourself in your target market, be it lovers of music or renters of apartments. That means getting out of the office and talking to dozens of customers, reading what your customers read, attending the trade shows and conferences your customers go to, following the influencers your customers follow, using the products your customer currently use. Walk in your customer’s shoes!
And there’s one other trick that successful companies like Spotify employ: borrow a business model from another market, in Spotify’s case the subscription model used by magazines, and employ it in your target market.
The second lesson for founders is that building an app or even a software platform is necessary but far from sufficient. Founders must strategize before they start designing their product how will they add social sharing to the product? How will they provide access to ancillary products? How will they curate products and create bundles that encourage customers to buy more? How do they crowdsource recommendations to help their users make purchasing decisions?
A final lesson for founders, especially those who may not even have an idea yet, get out of your comfort zone. If your main thing is athletics, try attending a symphony. If you are really into Twitter, spend time reading the long articles on Medium. If you are into classical music start exploring hip-hop. What drives the success of many companies, especially those in which technology plays a strong part is cross pollination. The pioneers of co-living space for millennials copied the dormitory housing model of colleges and universities: tiny bedrooms adjacent to large common areas providing things large large screen TVs, living room furniture, coffee bars, and other amenities that the residents all can share.
The mega-lesson: a great product won’t succeed unless it is tightly integrated with services that help your customers make the buying decision, help them share, help them connect with other customers, help them access useful and exciting ancillary products or services. Yep the key word is help. Your goal as a business is to help your customer get what they want, when, where, and how they want it. Help! Help! Help!