52 Bicycles

In Dealing with Darwin, Geoff Moore discusses two major business models for technology ventures:

Complex Systems, in which a disruptive technology requires significant change to the way people do business, and as such is a more complicated sale, with larger sale sizes and higher cost-per-sale.

Volume operations, in which a disruptive business model provides a major change in value through exploiting a technology. This disruption is usually about moving the technology in question down the value chain, making it available to a large population, hence the focus on volume.

A large part of his book is dedicated to innovation strategies for each model, and how they are different and largely do not intersect. But early in the book he shows this chart plotting the value of each model against size/type of customer that I find fascinating. In fact, spotting this chart in my flip-through led me to purchase the book

For volume operations, the sweet spot is in targeting the consumer. And this is consistent with a lot of the “web 2.0″ we have been hearing about. Really “web 2.0″ is making hay from the cost economies realized from the proliferation of web technologies in 1997-2000 for various value propositions. And as business model innovations tend toward volume operations, consumer-facing ventures are logically the focus point.

For complex systems, the sweet spot is the enterprise. Certainly we at Element55 have found this to be the case - only firms of a certain size have the infrastructure in place - both in terms of systems and personnel - to realize the full value of our integrated offering.

But note in here that small business is in the sweet spot of neither. And I have been thinking about this dip in terms of my friend Dharmesh Shah’s venture, Hubspot, among others who say they are targeting small businesses. These businesses can be the most difficult to deal with:

1. On the one hand they are usually hard up for cash, and like consumers, parsimonious with it, as compared with larger enterprises (which might or might not be profitable, but have budget for technology).
2. On the other hand, they have a higher demand for features that will drive their business profits. This is natural - businesses, even (especially?) small businesses, have more clearly-defined needs than consumers.
3. And on the physically-impossible third hand, they fragment into thousands of segments that have a limited amount of overlap among each other, making it more difficult to have a business model that serves a large number of them while keeping complexity down. Put another way, very tough to scale in this sector.

And again, I have seen this with small businesses, such that the winners come in two categories:

1. Large businesses that offer common, simple services of value to a large swath: banking, payroll, supply delivery etc.
2. Small businesses that offer products that are peculiar to a segment, and even then only get a small subset. Especially in technology, I see small businesses providing product to small businesses.

I need to step back and think about these distinctions, how good a rule they are for thinking about the market, and how it might apply to my business. Such a bifurcated market might imply an opportunity for someone who can figure out how to get a sweet spot in the middle.

This entry was posted on Monday, June 11th, 2007 at 1:25 am and is filed under Technology Business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed. Reddit This