Around the year 2000, a travel company was formed, and after a short bumpy ride, it managed to create a hugely successful, incredible concept. It managed to create a model that generated a gross profit margin of 98% and an EBITDA of nearly 50%. Simply phenomenal.
It soon received an acquisition offer for US$210m in cash, and its founder and investors were extremely happy with this remarkable exit. After all, the company had received a mere US$4m investment, or what we venture capitalists call “capital efficiency.”
This would normally be the end of the story, but it’s not. After only a few years had passed, the same company was spun-off its acquirer and went public. Its current valuation is more than 5 billion US dollars.
Who are we talking about?
In retrospect, it wasn’t such a great idea to sell, was it?
Is this a typical case of impatient or cash starved entrepreneurs? We don’t think so.
We think that there’s something else at play here. And it goes deep down, to what contributes to some (not all, just some) of the success of some of the world’s leading companies.
What makes a great company?
Think about the most successful companies around: Facebook, Google, Amazon, Apple.
Would you say that they’re selling the best or cheapest products? Or would you say that you know many people who use or buy their products and services and don’t consider alternative options?
Being a successful company isn’t typically about having the best or cheapest product or service available; it typically has something to do with, well, creating a monopoly.
Monopoly, you say? Apple has several competitors, there are many other companies offering search engines, and Amazon operates in several cutthroat markets. TripAdvisor also operates in a highly competitive industry, but they’ve somehow managed to fend off competition.
What we’re referring to here is not to a purely “Peter Thiel” classic type of monopoly (have you read Zero to One? It’s a recommended book), but more along the lines of an ’emotional monopoly.’
What’s an emotional monopoly?
An emotional monopoly is a phenomenon created by products or services that induce an emotional affinity to the brand, to the degree that customers affected by it refuse to consider an alternative. Their view of the world is “re-filtered”, and the new colored option makes it hard to churn.
This emotion obviously has to persist – no love affair lasts forever – but it gives an incredible edge to the company controlling it. As with all matters of the heart, it is notoriously hard to predict, analyze, or prescribe. It is also an extremely rare occasion.
People who prefer not to think their way through this intricacy will label it “branding” and move on with their lives (oh, if life were only that simple). But what about entrepreneurs, managers, and leaders that want to probe into this opportunity further?
Two types of customers
Just for the sake of simplicity, let’s use a dichotomy. Let’s divide the world of customers into two groups: rational and irrational.
Within the rational group, you have many customers that, the majority of the time, qualify as rational. We ask friends, we read online reviews, we compare prices, etc.
But sometimes, somehow, some companies manage to create an emotional transition within the customer’s mind. These customers become irrational, falling in love with a given product or service and sticking with it for a long time, despite there being equally good or better alternatives available. In extreme cases, they are even willing to settle for a seemingly inferior product (e.g. Harley Davidson).
In retrospect, you could argue that there are other factors at play, such as the “network effect” (via any messaging service) or a powerful story; Bruce Springsteen may not have the best voice, and Harley doesn’t sell the best bikes – they sell an ‘American experience.’ But how did these successful products, services, and artists manage to cut through the clutter and leverage the network effect or create a solid story with what’s typically not the first, the cheapest, or the best product/service? And if it is their “network effect” or almighty narrative that made them ‘invincible’, why are they enduring growth challenges in recent years?
Patterns of Irrational Behavior
There are many arguments that revolve around this, naturally, but our interest in this short post is not to solve the biggest enigma of marketing.
We just wish to note that while it is very hard to prescribe or predict success, you can detect it if you know what to look for.
Specifically, if you were able to track patterns of irrational behavior – addiction, obsession, or compulsion – among some of a product’s or service’s early users, that could give you a heads-up that these entrepreneurs are on to something, i.e. this venture has succeeded in creating a critical mass of Raving Fans. In Follow[the]Seed, we’re actually deploying an algorithmic platform to accomplish exactly that.
Entrepreneurs that don’t realize it, like in the case of TripAdvisor, will probably be easily tempted to take the bait of a nice cash windfall and miss out on the big prize.