Why lipstick on a pig isn't the growth hack you’re looking for

#business The preferred way for businesses to expand into new markets is to build on top of products they already have but the cost of this strategy not working is often higher than starting fresh

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What if I told you that you could make a lot more money doing what you’ve been doing by just making a few changes to the way you act and dress? Sounds too good to be true, right? Companies get duped into this thinking all the time. More often than not, companies desperately want to leverage their existing product and customers as a springboard into new markets. The hope is that as a customer’s needs grow, the product grows with the customer and, in turn, attracts existing customers with more complex needs.

An example of a product that works well and spans several customer segments is the iPhone. There isn’t a separate SKU for business workers and a different SKU for consumers. Computers sold to mass-market customers are mostly the same for enterprises, but these are two exceptions that I argue are not the norm.

A more common scenario is that the amount a customer spends and the corresponding product complexity increases to a point, until one day, quite suddenly, the customer goes away.

What happened? The customer took their business elsewhere and started spending with a competitor. It’s at this point in the product’s lifecycle that I’ve seen so many companies screw up. Critically, it’s essential to distinguish the difference between when a customer leaves you for a better product that is building solutions for your customer segment, or they are building products for a different sector, and your customer graduated. If your competitor built a better mousetrap, then that’s easy. Study your competitor and make an even better mousetrap, but if you’re losing your best customers because you no longer meet their needs, then you have a different problem entirely.

A common approach is to assume that your product has a core that can meet the needs of two different customer segments. So, you share the “core” and try to serve the needs of two different masters while managing the overlap of features that are trying to serve both customers.

While these diagrams come in handy when authoring newsletter articles, the reality is that the “core” is nowhere near this neat. The truth is that the needs of the new segment probably share just a few small features from the original product, but the vast majority of the core is a compromise to serve two product lines. I depict this situation in the diagram below. Note that the random circles in the original product are a middle shade representing the intentions of the new product.

For those of us who’ve lived this scenario, you know what happens next:

1. Because the teams that work on the shared components need to serve two masters, coordination overhead increases.

2. Because both product lines are now dependent on each other, their ability to move quickly slows whenever a new feature requires coordination with the “other” team.

3. Because you are not able to iterate quickly, your competitor, who is gobbling up your graduates, runs circles around you.

4. Because you made compromises on specific aspects of the product experience to serve two masters, your original product becomes unusable.

5. Because multiple teams are now supporting competing goals, prioritization meetings become the new norm.

Engineers describe the root cause of these problems as “strong coupling.” The idea is that when we tightly couple distinct entities, it becomes challenging to make changes without impacting everyone else. In engineering, the solution is to de-couple these concerns as much as possible. Taking this same approach, the ultimate solution for the business owner may mean that they need to build a completely standalone product. Executives are often fooled by how a few small features, the equivalent to putting lipstick on a pig, can open an entirely new world of customers. However, I warn you that if it’s too good to be true, then it probably is. To make things concrete, I want to share with you an eBay story that’s personal to me.

Arbitraging clearance items at my campus computer store on eBay helped pay for my food and lodging in those halcyon days from 1993-1999. About a decade later, I had the privilege of serving as an executive at eBay during a time when eBay’s gross merchandise volume exceeded that of Amazon’s. I was excited to be part of something that helped other people make money on the Internet - including me.

At eBay, we were well aware of Amazon’s growth and were indeed threatened by them. However, the internal view on Amazon was that eBay was a superset of a typical e-commerce customer’s needs. After all, we sold both used and brand new items.

The easy solution at the time was to iterate on the core eBay platform and enhance the shopping experience by iterating on the search and the buy-it-now experience. Unfortunately, if you’ve used eBay, you know this doesn’t work. eBay remains to this day a hodgepodge of new, used, one of a kind, and outright broken items. By focusing on Amazon, the core customer who’s interested in selling and buying distressed inventory received a compromised user experience. At the same time, by trying to serve its legacy, it also managed to lose many of the sellers who had new items to sell because Amazon was just better at selling new inventory, and we could not keep up. Where did those sellers go? Amazon. We were once so afraid that Amazon itself would outsell all of eBay’s sellers. Little did we know, Amazon would beat us in the end by taking our best sellers outright. Today, Amazon’s third-party marketplace generates more money than goods sold directly by Amazon.

When I returned to eBay in 2013, after a stint at Netflix, I pitched an alternative that would allow us to compete against Amazon: build a standalone alternative to Amazon that only sold new inventory. The new site should leverage the content and relationships on eBay.com but have a vastly simplified shopping experience.

At the time, Amazon was pulling away, but they were vulnerable. Sellers hated Amazon for its fees and its control. eBay never competed with its sellers, but we never gave third-party sellers a premium platform to sell their goods. We could beat Amazon on the fees by sacrificing our gross margins and win our sellers back.

My proposal unfortunately never went anywhere, and to this day, eBay is still throwing good money after bad money. I am confident that the solution was so evident that people before and after my tenure made the same case, and we all failed to convince the powers that be. The good news is that typical companies who face these dilemmas are on solid financial footing. It’s been almost 11 years since I worked at eBay the first time. Where would eBay be today if they made the bold investment back then? Where could eBay be, if they made that investment today?

The wrong strategic choice has an entirely different cost that is more valuable than money, and that’s time. You can spend time to make money, but you can’t spend money to buy time. Cash can’t save a company from irrelevance.