Success invites competition. Faced with an aggressive push by JP Morgan into the premium credit card market via its Chase Sapphire Reserve cards, American Express was forced to respond with more generous customer incentives and risky revenue streams.

However, aggressive competition can’t last forever. At some point, the aggressor has either won the market or is forced to concede leadership to the incumbent. The recent refresh of JP Morgan’s flagship Sapphire Reserve card represents a potential inflection in the industry. JP Morgan is now prioritising profitability, instead of aggressive customer acquisition. American Express will be a key beneficiary in this shift.

The recent industry pricing shift illustrates an investment opportunity for investors as well as a case study to evaluate emerging technology and SaaS models in the age of AI. Read on to learn about*:

• The business model of premium reward cards

• American Express’s technology-like subscription and usage based pricing model

• Withstanding competition and American Express’s competitive advantage

• Key takeaways for competing in an AI world

*All opinions are personal. This is not investment advice.

Card Reward Programs - Monetising the Premium Consumer

American Express needs no introduction. Think glamorous holidays funded by rewards points and generous rewards - in exchange for a hefty membership fee. However, as CEO Stephen Squeri highlights, that’s only half the story.

“We give access to great experiences through travel, through dining, through other events… when you’re charging a fee like that you tend to engage with more creditworthy, high-income premium consumers. And our partners love high credit premium, high-spending consumers… we will make their products and services available to people that will spend more money with them”, Stephen Squeri, American Express CEO at the Goldman Sachs December 2024 U.S. Financial Services Conference.

American Express’s affluent cardholders make it a potent customer acquisition channel to its partners. Expensive categories such as hotels and flights have price sensitive customers. Additionally, these suppliers typically operate the assets for the entire year, whether there are customers or not. For example, a hotel room left unsold this evening is simply revenue lost forever. These suppliers will fund generous upfront benefits and sell their products at discounted wholesale rates, if they believe American Express can deliver paying customers.

To incentivise cardholder purchases, credit card reward programs allow expensive categories to be subsidised by spending on everyday items, such as groceries, where the customer is less price sensitive as shown in the chart below.

Credit card reward programs subsidise expensive, price sensitive categories with frequent purchases on everyday items such as groceries

American Express earns the “spread” or arbitrage between the discounted costs of these services and the revenue American Express earns on upfront membership and usage transaction fees. It’s surprising how profitable this model has been, with many similarities to technology companies.

Hybrid Economics: The Tech-style Pricing Model

“You’re looking at a company that at the S&P 500 is in the top quartile from a revenue perspective and an EPS perspective. If you’re interested in a company with high revenue growth, mid-teens EPS growth, high ROE, good credit profile, global premium customer base and a great brand and a unique business model, you may want to consider investing in us”, Stephen Squeri, American Express CEO at the December 2025 Goldman Sachs U.S. Financial Services Conference.

Stephen’s statement above reads like that of a technology company CEO. American Express boasts profitability in line with Microsoft, with a return on equity of above 30%. Its pricing model combines the upfront certainty of subscriptions often seen in software companies like Microsoft and the scale of digital advertising based models famously used by companies such as Alphabet’s Google.

American Express’s hybrid subscription and usage based pricing model

The chart above broadly summarises the costs and benefits (rewards) for a Platinum card into subscription and usage based costs (the full list can be found here).

Card members pay an upfront annual subscription fee of $895 for the high-end Platinum card. This cost is offset by generous upfront reward credits, such as hotel benefits valued at up to $600 when booked at hotels affiliated with American Express’s reward program. Additionally, American Express receives a 2-3% transaction fee every time members use their card and is its largest revenue component. This is a form of usage based pricing.

However, this pricing model also has many of the benefits of an advertising model, given merchants contribute to transaction fees and reward credits. This adds significant scale. American Express is earning a commission (and receiving subsidised wholesale rates from advertisers) based on over $1 trillion dollars in completed transactions, significantly more than cardholders would be willing to pay themselves.

As we will see, such a lucrative model often attracts competition.

American Express’s Competitive Playbook: Subsidising Growth with High Margin Customers

“It’s been a war in that segment since Gordon Smith left American Express… when he first launched Sapphire… I think it helped us up our game a little bit… but there are a lot of people out there that want these premium cards, and we punch way above our weight”, Stephen Squeri, American Express CEO at the Bernstein 41st Annual Strategic Decisions Conference in May 2025

As Stephen Squeri highlights, competition in the premium card reward space has been intense since Gordon Smith (himself an American Express senior executive) defected to lead JP Morgan Chase’s credit card program in 2007. By 2019, JP Morgan was the top US issuer by purchase volume according to Nilson. It remains the top issuer in 2024 at circa $1.3 trillion. It was followed closely, in a two horse race, by American Express at circa $1.2 trillion. Citigroup was a distant third at $0.6 trillion.

American Express was forced to give customers a better deal by increasing the rewards. In a precursor to what many technology companies will face in the world of AI, this is akin to an increase in the cost of doing business in what was previously a high margin category.

The chart below shows a sharp decline in card reward program margins since 2016, coincidentally the year of the launch of the premium Chase Sapphire Reserve card.

American Express’s card contribution margins* have declined due to increased reward expenses.

* Card contribution margin, defined as non-interest card income less reward (variable customer expense or VCE) and marketing costs

There are two key strategies American Express has used to manage this margin pressure.

Firstly, it leaned on its most profitable customers. With interest charges of 20-30%, borrowers are American Express’s most profitable customer segment. Contribution margin profit for lending (circa 67%) were nearly double that of cards in FY24.

American Express grew this customer segment through product innovation. It made it easier for its customers to roll over their charges into a credit facility (Pay over Time feature) and launched a Buy Now Pay Later feature (Plan It).

As shown in the chart below, lending’s share of overall contribution margin has nearly doubled to 40% since FY16.

Lending’s share of segment contribution profit* has nearly doubled since FY16

* Lending contribution profit is defined as net interest income less provisions.

There is always an element of risk in lending. It is also a harder service to differentiate - I did not invest in American Express because I think it’s a great bank. However, American Express has been thoughtful to manage the credit risks. It invested in technology infrastructure to understand its customers. American Express runs thousands of risk models every time a card is swiped.

Secondly, it gave its customers more value. In a world of increasing marginal costs, this implies accepting lower margins on the usage based component to encourage more usage.

The key is that customers will find the product more valuable as their usage increases. Therefore, it’s best to price usage based benefits affordably to encourage more usage. For American Express, its best rewards require cardholders to accumulate large point balances. Its annual financial accounts indicate this is exactly what American Express has done.

With increased reward and marketing expenses, American Express now earns minimal margins on its usage based revenue

Discount revenue corresponds to the usage based revenue American Express receives from the 2-3% transaction fee every time members use their card. As the chart above shows, American Express’s discount revenue used to exceed its marketing and reward costs by over 30% in FY16.

In an aggressive competitive response, American Express’s discount revenues now barely cover its reward and marketing costs. Instead, it has captured value from increases in its upfront subscription fee component. From FY16 to FY24, net card fees revenues have increased at ~14% pa compared to ~6% pa for discount revenues.

In economic terms, American Express has priced its usage based revenues (i.e. discount revenue) close to marginal costs (customer rewards and marketing). This is represented by the line P0 in the chart below, which maximises customer acquisition (without incurring losses on every transaction). Profitability or consumer surplus is captured via the shaded area, representing other revenues, with net card subscription fees being the largest component.

American Express’s hybrid model balances customer acquisition and profitability

Sacrificing margin also has the effect of putting pressure on an aggressive competitor. JP Morgan’s pricing shift on its Chase Sapphire Reserve card signals it has finally had enough.

The Inflection Point - Competitor Price Changes

“Chase catapulted both the personal and the business Chase Sapphire Reserve credit cards to the top of the premium rewards credit card pile. At least in terms of annual fee at $795 each, but not necessarily in utility or consumer friendliness…we were seeing the increase in annual fees from everybody and the couponization of these cards which hadn’t necessarily had these coupons before…So we were seeing this, you know, negative landslide down in credit card land”, Devon Gimbel and Kelly Wright on the Point me to First Class podcast, September 2025 .

In June 2025, JP Morgan refreshed the pricing on its premium Chase Sapphire Reserve card after four years. As Gimbel and Wright highlight above, the launch represents a tougher deal for consumers with higher upfront fees and rewards that are harder to redeem. The key changes include (full list here):

• Increased upfront subscription: JP Morgan sharply increased the annual subscription fee by nearly 45% to $795. To offset this, it introduced $2700 worth of upfront reward credits.

• Reduced flexibility: Previously cardholders could earn 3x the reward points on a very broad range of travel services (even including spending on public transit). Now these will earn just 1 point per dollar spent. Additionally, JP Morgan removed the guaranteed redemption rate of 1.5 cents per point on its Chase Travel portal. This was replaced with a 2x points boost for only selected airlines and hotels.

• Prioritising direct channels: The new incentives significantly favour higher margin direct channels. Consumers can earn 8x points for flights via the Chase Travel portal. Standard redemptions have dropped over 30% to 1 cent per reward point, unless cardholders book specific inventory via Chase’s Travel portal (the points boost described previously). The new upfront credits have similar restrictions. For example, only dining at “Sapphire Reserve Exclusive Tables” to benefit from the $300 dining credit.

Collectively, these changes amount to a net increase in pricing. Subscription prices have been increased and cardholders are incentivised to book via higher margin direct channels to receive the best rewards. After years of losses, JP Morgan has signalled a shift towards profitability.

“We’ve known for a long time that the Reserve has not been a profitable card for Chase… Because the 3x points for a lower annual fee and then the addition of lounges, like they were losing money on the card, they lost money on the signups, and then they lost money over the years”, Devon Gimbel and Kelly Wright on the Point me to First Class podcast, June 2025.

The Chase Sapphire pricing change signals a shift away from aggressive customer acquisition

Prioritising profitability has significant industry implications. As the above chart illustrates, raising prices suggests JP Morgan is moving away from aggressive customer acquisition. This retreat created a pricing umbrella for American Express to follow suit. In September 2025, American Express announced a refresh of its flagship Platinum card. It raised subscription prices by nearly 30% to $895.

Major competitive pricing changes can represent a significant opportunity for investors. Those of us who invested following JP Morgan’s pricing announcement in June 2025 have seen returns of over 20% in six months.

Investors have seen an over 20% appreciation in American Express’s stock price since Chase Sapphire announced its price change

However, how did American Express withstand a competitive assault from JP Morgan, a company with a market capitalisation over three times its size? This speaks to the strength of American Express’s competitive advantage and the key to its hybrid pricing model.

Closing the Loop: American Express’s Data Advantage

Advertising powers American Express’s hybrid pricing model. It is advertising that allows American Express to tap into over $1 trillion in purchase transactions, a far greater opportunity than what cardholders would be willing to pay for directly.

The key to this is linking cardholder activity to purchase outcomes. Many of its peers, such as Chase Sapphire, are open-loop networks where the network may not include both the cardholder and merchant. In contrast, American Express operates a closed-loop network, which incorporates both the cardholder and merchant. The competitive advantage it gives is described by CEO Stephen Squeri below.

“So I mean the closed-loop networks is really key, right? And fundamentally, what it means is, we have the merchant relationship and we have the cardholder relationship… Well, what it does is it gives you more data… not only from a credit and fraud perspective, which is why we’re the best in the industry on that, but it also gives you more information from a marketing perspective”, Stephen Squeri, American Express CEO at the May 2025 Bernstein Strategic Decisions Conference.

By owning both sides of the transaction, American Express can see which rewards resonate with its cardholders. Such data allows it to both design the right rewards and demonstrate higher conversion to its travel and hotel advertising partners. Seeing the benefits, these advertisers will be willing to fund better rewards (and higher transaction fees), which attracts cardholders.

The flywheel below illustrates this dynamic. The closed-loop network powers a higher advertiser return on investment (ROI), which causes them to contribute to better rewards (content) which grow and engage the audience. An engaged audience results in improved targeting and purchasing conversion, resulting in increased advertising funding etc.

American Express’s closed-loop network provides increased advertiser returns

While JP Morgan’s Chase Sapphire program has experienced years of losses, American Express’s data advantage helped it to earn a return on equity of above 30%. Chase Sapphire’s pricing change in June 2025 signals that American Express has successfully withstood a multi-year competitive assault by a much larger peer.

A Case Study in Surviving the AI Land Grab

175 years after its founding, American Express is often thought of as an old-school “blue chip” stock. However, its financial profile suggests a business more akin to technology companies such as Microsoft.

Its pricing strategy and data advantage have allowed it to profitably withstand a multi-year competitive assault from a much larger peer. Chase Sapphire’s announced pricing change in June 2025 signals a significant shift away from aggressive customer acquisition, paving the way for increased pricing in the industry. Investors who observed this shift and competitive implications have enjoyed returns of over 20% in the past six months.

American Express’s hybrid subscription and usage based pricing model also gives investors and technology companies a playbook to succeed during the “land grab” phase of AI disruption. Companies can withstand this by:

• Sacrificing margin for usage: Companies should consider sacrificing margin to encourage further usage of the product. Investors should assess if the company has a product that customers find more valuable with usage. Increased usage powers customer willingness to pay and potential data monetisation. American Express’s best rewards are reserved for high spending cardholders.

• Cross-subsidise with high-margin customers: Companies will need these customers to support the cost investments discussed above. American Express grew its lucrative lending segment through product innovation and technology investments in data analytics. Investors should assess a company’s ability to leverage this segment. For example, lending accounted for only circa 20% of American Express’s profit in FY16.

• Monetising a data advantage: The ability to assess and attribute user activity to commercial outcomes enables a company to capture more of its customers’ budget. This helps justify both upfront subscription costs and usage based charges. I discussed a framework for investors to assess this in a previous article. American Express’s closed-loop network achieved high ROIs for its advertisers, which supported more generous cardholder rewards and transaction pricing.

The source of Microsoft’s competitive advantage has long been its ability to bundle. Netscape and Slack famously struggled to compete when Microsoft could afford to include a competitive, “good enough” offering at minimal cost and drive rapid adoption across its enormous user base.

In early 2025, Microsoft announced a strategic shift in its Copilot pricing strategy. Thanks to its investments in capacity, Microsoft is able to expose (and charge) its entire Microsoft 365 user base to Copilot through its standard bundles for the first time. Copilot usage metrics will be a key metric for investors to monitor during subsequent earnings calls as it will be increasingly difficult to separately define AI revenue.

For investors, this pricing shift could signal a lucrative new phase of Microsoft’s AI strategy. Microsoft’s users will allocate an increasing portion of their software budget as they experience the benefits of Microsoft’s growing AI offerings. This includes replacing other SaaS applications that generative AI has the potential to disrupt.*

Read on to learn about:

• How Microsoft’s capital intensity makes it a cost leader

• Understanding Microsoft’s strength in software bundling

• Copilot’s pricing change and how it unlocks the power of Microsoft’s user base

* All opinions are personal. This is not investment advice.

Building AI Capacity - Microsoft’s Capital Intensity and Cost Leadership

For years, Microsoft and a generation of subscription-based, Software as a Service (SaaS) companies, have benefited from high levels of revenue growth and returns on capital.

However, ChatGPT’s introduction in 2022 has launched a wave of capital investment as SaaS companies raced to stay ahead by building generative AI driven capabilities into their products.

As such, Microsoft has significantly increased its capital expenditure, growing at an average rate of nearly 50% per year. However, as shown in the chart below, revenue growth has not kept pace. In FY22, capital expenditures represented 12% of revenue, but by FY25 , this ratio is projected to rise to 29%, reaching $80 billion. Investors are understandably concerned with Microsoft’s ability to generate demand and earn a return on this investment.

The truth is, capital intensity is an important feature of Microsoft’s business model. In FY24, it had $136bn of fixed assets, greater than the circa $100bn of fixed assets that capital intensive companies like TSMC and Intel have. These fixed assets are an important part of Microsoft’s cost advantage, making it significantly more efficient than its SaaS peers.

For example, Microsoft is able to spread its infrastructure costs across a larger user base by ‘renting’ it out to other software companies like Adobe. In contrast, many software companies avoid such heavy capital expenditures. They invest instead in areas like customer acquisition, which have a more immediate impact on revenue or a faster payback. This allows these companies to grow quickly but it comes at a cost.

The rule of 40 is a popular metric used to analyse the efficiency of software companies. It is calculated by adding a company’s revenue growth and profit (EBITDA) margin. This metric prevents overemphasis on either growth or profitability, as software businesses may choose to prioritise one over the other.

As seen in the table and chart below, Microsoft’s 49.2% average EBITDA margin and 11.4% per year revenue growth give a score of over 60%, considerably higher than its peers. It is a cost leader.

The benefits of Microsoft’s increased capital investments are now emerging. The surge in AI demand caught many companies, including Microsoft, off guard. To meet this demand, Microsoft invested not only in AI specific hardware, such as NVIDIA chips, but also in foundational infrastructure, including data centers worldwide. These long-term assets require years to develop but are now becoming operational.

The ‘pivot’ that Amy talks about should serve as a warning to other software companies. With its computing infrastructure in place, Microsoft has the capacity to offer its AI offering to its enormous user base through disruptive software bundling.

Understanding Bundling - The Source of Microsoft’s Competitive Advantage in AI

Microsoft is famous for its ability to disrupt its competitors with its software bundles. A well known example is the collaborative enterprise messaging platform, Microsoft Teams. Microsoft simply bundled Teams with its other products like Microsoft 365.

It rapidly outpaced industry pioneer Slack, despite being introduced 3 years later in 2016. This dominance continued even after Microsoft unbundled Teams from its Microsoft 365 and Office productivity offerings. What makes this strategy so devastatingly effective for Microsoft?

A great illustration of Microsoft Team’s adoption. Source: BEMO

Bundling has always been a powerful competitive strategy in more traditional industries. A well known example is Disney’s cable television bundle. Disney forced cable companies to take up its entertainment channels with its ‘must-have’ ESPN sports offering. This squeezed out other independent channels from cable television bundles.

However, this strategy is especially powerful in the software industry. This is due to a defining feature of software - low marginal costs. Once developed, it costs very little to produce additional copies of software. As outlined in Shapiro and Varian’s 1998 paper Information Rules:

This low cost of replication means companies can drastically lower prices to gain market share, leading to intense price competition. This is why software is such a competitive business.

Bundling turns this feature into a strength. The idea behind it is simple - by combining multiple products, companies can increase what customers are willing to pay and earn more than they would selling items separately. This happens because people’s preferences for the bundle even out, even if they value each part differently—a popular concept in statistics called the Law of Large Numbers (the mathematical proof can be found here).

To understand this intuitively, imagine a fast-food combo meal: some love the fries, others the drink, but the single price attracts a wider audience. Sellers benefit by selling more bundles, and customers get a better deal than buying each item alone.

The result is a ‘flatter’ demand curve around a common average price for the bundle. The flatter ‘Bundle Demand Curve’ (in green) reveals how a small price increase—from P1 to P2—still reaches a large user base, unlike the steeper ‘Single Product Demand Curve.’

For example, if a competitor charges $10 for one item, a bundle seller with 10 loyal customers could add an extra product for ‘free’ and raise the bundle price by just $1, keeping buyers happy while covering costs.

The above chart has 2 implications for Microsoft. Firstly, its cost leadership allows a smaller shift in price for the larger bundle (smaller increase in P1 to P2).

The second implication is that it is existing users who will largely generate the return on Microsoft’s investment in AI. The larger the existing user base, the more disruptive the bundle.

Microsoft’s user base dominates the enterprise market. For example, in FY24, Microsoft had cloud revenue of $137bn, over 3x as much as Google Cloud’s $43bn.

As we will see in the next section, for the first time, Microsoft’s new Copilot pricing strategy will harness the power of this user base.

The New Copilot Pricing Strategy - Unlocking the Power of Microsoft’s User Base

Microsoft CFO Amy Hood’s comments regarding capacity, referenced earlier, have unlocked a strategic shift in Microsoft’s ability to use disruptive bundled pricing and earn a return on its AI investments. After over two years of increasing capital investments in AI, Microsoft now has the capacity to offer Copilot’s capabilities to its entire Microsoft 365 user base, rather than a small segment of early adopters. We can see this in the increasingly aggressive pricing strategies that were recently announced in early 2025:

• Consumer Bundle - Microsoft announced the inclusion of Copilot into the Microsoft 365 Consumer bundle. Over 80m subscribers will get access to Microsoft’s AI offering, in exchange for a price rise of over 40% or $3 per month. Users will get access to a limited amount of monthly Copilot credits that “should be enough for most subscribers”.

• Commercial Bundle - Microsoft announced the inclusion of Copilot Chat into its standard Microsoft Commercial 365 bundle. This is a much larger (over 400m subscribers) and more lucrative user base Copilot Chat provides ChatGPT-like features such as file uploads and the ability to create agents that can utilise organisational data. Users pay for each message sent (i.e. usage based pricing) through the chat, which makes Copilot more accessible than a separate $30 per user add-on licence.

As Microsoft CFO Amy Hood describes, Microsoft’s pricing is designed to get its large existing base of users to incorporate Copilot’s capabilities into their usual work habits.

If Microsoft is successful in this, it will capture an increasing portion of software budgets as its users will be willing to pay more as they experience the value of Microsoft’s growing AI offering. This includes displacing other software applications that generative AI has the potential to disrupt.

For example, the $3 price increase for Microsoft’s Consumer bundle will also include Microsoft Designer, an AI-powered graphic design application and potential Canva competitor. Canva charges circa US$13 per month per user for its Pro offering.

As shown in the chart below, it will be increasingly difficult for other stand-alone software applications to find users who are willing to pay for their premium software and generative AI offerings - if Microsoft’s users can access most of this functionality though Copilot for only a marginal price increase.

Microsoft’s Copilot pricing changes now target a significantly larger part of its user base. Investors will need to monitor Copilot usage metrics as it will be increasingly difficult to separately define AI revenue from the revenue of the entire business. However, this pricing shift represents a potentially lucrative new phase of Microsoft’s AI strategy.

Conclusion

Software bundling has long been a competitive strength of Microsoft. It allows the company to adapt to technological changes by introducing new products and rapidly driving adoption through its large user base.

However, capital intensity and cost leadership are features of Microsoft’s success with this model. Since ChatGPT’s introduction in 2022, Microsoft had to invest upfront in AI capacity. Capital expenditure has grown at nearly 50% per year since then, but revenue has not kept pace.

Microsoft’s strategic shift in Copilot pricing signals an important pivot in its AI journey. Thanks to its investments in capacity, Microsoft is able to incorporate Copilot into its standard Microsoft 365 bundles for the first time. This could be a lucrative new phase for investors and a warning to other SaaS companies as Microsoft’s users experience the benefits of Copilot’s growing AI capabilities.

As AI is more seamlessly incorporated (and charged for) into Microsoft’s products, I believe Copilot usage metrics will be a key success indicator for investors to monitor during subsequent earnings calls.

“ChatGPT has consumed an extraordinary percentage of the time and energy I used to spend in Search. So it’s kind of hard to believe that it’s not really having an impact on Search revenues. But it’s not.”

Brad Gerstner, Altimeter Capital Founder on the BG2 Pod

Brad made this quote while reflecting on Alphabet’s recent results, which continue to show strong growth in Search revenue. While Alphabet pioneered digital advertising two decades ago and has dominated the market with its ubiquitous Google Search product, generative AI was expected to pose one of its greatest challenges.

However, Alphabet’s Google Search is uniquely positioned to benefit from this shift rather than be disrupted by it. Not only has Alphabet held its ground—it is poised to pull ahead of newer AI competitors.

This article will discuss:

• The key to making money in Search

• How AI helps, not hurts Google Search’s ability to make money

• How Google’s competitive advantages from its ubiquitous everyday applications and scale insulate it against LLM competitors

Let’s dive in.*

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* All opinions are personal. This is not investment advice.

Making Money in Search Advertising - Driving Customer Intent

In his writing, influential blogger Ben Thompson talks about AI’s ability to substantially increase advertising inventory.

In Google Search’s case, it’s about AI’s ability to increase commercialisable inventory - the inventory that can be monetised.

In simple terms, advertising monetisation occurs when the right advertisement is viewed by the right user. This requires the right balance between user experience (e.g. relevant content) and advertiser objectives (e.g. customers clicking through to their web page).

The Search business has 3 key drivers:

• Inventory - Monetisable ad inventory depends on how many users you reach (audience reach), the content they're consuming (which influences engagement and opportunities for ads), and the proportion of ad spaces that are successfully filled with advertisements (ad-fill).

• Click Through Rate - The percentage of users who click on the advertisement. The more engaged the user is with the content and the more targeted the advertisement, the higher the chances of a user clicking through to the advertiser.

• Cost Per Click - Advertisers are willing to pay more for each click if it is more likely to lead to a conversion such as a purchase or a sign-up.

Therefore, Google Search’s revenue generation relies on its ability to understand and target user intent. High-quality content engages users, enabling precise targeting of their needs, which leads to higher conversion rates—the very results advertisers are paying for.

AI’s Potential to Build Intent

At first glance, AI applications like ChatGPT are disruptive to Google’s Search business. Why bother with 10 blue links when you could go straight to the answer?

However, Philipp’s comments show that many of those blue links don’t generate advertising revenue anyway.

AI could potentially not just discover intent, but generate it as well.

Consider Google’s AI Overviews feature that is being incorporated into Google Search. AI Overviews is powered by Alphabet’s Gemini AI model and its multi-step reasoning capabilities. By doing more of the work for us, AI Overviews makes it easier for us to delve deeper into topics - it grows our intent

Take my search on disruptive business models as an example. This is a fairly broad search term on a complex topic. AI Overviews did a good job of:

• Understanding my intent - AI Overviews worked out that I wanted to learn more about disruptive business models rather than a subjective ranking of the top 3.

• Generating my Intent - Instead of a series of blue links to articles, AI Overviews gave me concise summaries that build my interest in the topic. The foundational articles at the bottom are linked to commercial intent. For example, subscribe to the Harvard Business Review or enroll in the IMD Business School.

An added benefit is that it keeps consumers on the same Google Search platform. This is an important point for an incumbent facing disruption from the likes of potential Large Language Model competitors like OpenAI.

ChatGpt’s impact on Google Search since its introduction in late 2022 has been limited. Revenues continue to grow and traffic acquisition costs remain stable.

However, the aspects of Google’s competitive advantages that competitors will struggle the most with are the sheer breadth of its online presence and the scale of its infrastructure.

Google Everywhere - It’s Not Just About Search

Sundar’s comments highlight the ubiquitous nature of Google’s applications in our lives. I use the company’s products every day. Whether it’s Search for work, YouTube to learn a new skill (or to watch the NFL Highlights!) or Google Maps when I’m driving. Google Search’s ability to gauge my intent depends on my use of Alphabet’s various applications, and that I use them constantly.

All of my interactions across these applications feed into Google’s algorithms. Analysing data from my actions across applications (product-in-use data) creates a powerful data network effect - the more I use these services, the better they become at anticipating my needs, which not only improves my experience but also enhances the algorithms’ personalisation capability for other users.

However, my intent changes over time (people change!). To stay relevant, it’s important that the algorithms can capture data from my latest interactions.

This is why it is important to have a breadth of applications. These provide a broad surface area to frequently capture my interactions keeping the data Google has, fresh.

Google’s advantage is therefore more than any one application. As Sundar highlights, few companies have Google’s expansive range of ubiquitous online properties - and the infrastructure scale to power its algorithms.

Engineering and Hardware - The Power of Scale

Gmail was revolutionary when it launched in 2004 offering 1GB of free storage. This was a time when competitors like Hotmail (remember them?) had only been offering 2-4Mb. How did Google do this? Scale - Google’s willingness to commit significant capital investment into its hardware and data centres

“Our core advantage really was a massive computer network, more massive than probably anyone else's in the world”

Jim Reese, Former Google Chief Operations Engineer and early employee (October 2012).

It would have been less risky to rent the hardware and make smaller lease payments over time. However, by locking in the variable cost of these lease payments, Google would not enjoy economies of scale.

Committing to large capital expenditures creates upfront fixed costs. In exchange, as the Gmail example shows, Google stands to benefit from significant economies of scale- particularly if Google’s margins are high enough to recoup the cost of the equipment well before the end of its useful life. In 2023, Alphabet spent $32bn on capital expenditures, more than capital intensive companies like Intel ($26bn) or TSMC ($31bn). Yet this represented just over 10% of Alphabet’s revenues.

LLM competitors like OpenAI, typically lease their compute hardware from large cloud hyperscalers like Microsoft, Amazon’s AWS or Google Cloud.

For example, The Information estimated that as of March, OpenAI was on track to spend nearly $4 billion in 2024 on renting Microsoft’s servers. This was nearly 90% of OpenAI’s estimated annual revenue. As leasing payments are variable costs, average costs do not decline as these LLM competitors grow.

Importantly, the efficiencies from economies of scale allow Google to invest in customer acquisition. Acquiring customers, feeds into the network effects that its applications need to be successful. Google Search spends roughly 24% of revenue on customer acquisition. In 2023, this represented over $50bn. Customer acquisition spending will only grow as Google gets larger, locking in its advantage.

Conclusion

Jean-Paul is the Chief of Advertising of Brave Software, a rival Search engine. Like many long term shareholders in Alphabet, I saw the introduction of AI LLMs as a disruptive threat to the lucrative Search business.

However, as Jean-Paul’s comments show, what matters is the roughly 20% of search queries that are monetisable. I.e. those that have commercial intent.

The promise of AI is its ability to grow the proportion of monetisable search queries by generating intent with Google’s users.

While researching the disruptive risk of LLMs, I was surprised at how Google’s dominance of Search is augmented by the breadth of its product offerings. Generating intent depends not only on the widespread adoption of Google’s products but also on frequent engagement with them. This underscores the importance of customer acquisition, as Google must both attract users and ensure their sustained interaction with its ecosystem.

To achieve this, Google’s scale enables substantial upfront capital investments, which will give its AI applications a cost advantage. This advantage can be reinvested to make its AI tools more affordable or to drive further customer acquisition, reinforcing its dominance.

As AI continues to evolve, Google’s competitive advantages from its ubiquitous everyday applications and scale, position it well against LLM competitors. If what Google did with Gmail’s online storage is anything to judge by, I’m excited for the affordable innovations to come.

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“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

Warren Buffett, Financial Crisis Inquiry Commission Interview

For the past 20 years, SaaS businesses with their lucrative pricing and high gross margins have benefitted from the high perceived value of their products by customers. This has allowed them to build industry defining companies and generate strong investment returns. 

However, the advent of AI could be disruptive for this perception of value and comfortable pricing dynamic. 

SaaS companies must incorporate AI to increase the value of their products. 

A SaaS product’s pricing resilience depends on its:

• Proximity to value: Software workflows closer to revenue generating functions (e.g. sales and marketing compared to productivity) are less likely to be disrupted by AI’s ability to disrupt or cut out workflows i.e. lower gap between perception and value.

• Data Advantage: SaaS companies must incorporate AI to improve the value of their products. The effectiveness of AI models depend on the quality of the data they ingest. Systems of Record like Salesforce and Workday have inherent data advantages.

Companies like Salesforce occupy the high ground - they have proximity to value and inherent data advantages.

However, SaaS companies like Canva show how this risk of disruption is being managed. It is building a Data Advantage that focuses on the basic value drivers of freemium models such as improved time to value and ROI. 

A special thanks to Ibrahim Bashir, whose writing and course on B2B SaaS helped inspire this article. Ibrahim has executive software engineering experience at global technology firms like Amplitude, Amazon, Twitter and Box. 

This article will explore the pricing conflict AI can create for SaaS companies, a framework to consider what type of SaaS companies are most resilient to this shift and Canva’s strategy to succeeding in the face of AI. *

* All opinions are personal. This is not investment advice.

Pricing Conflict and the Proximity to Revenue

SaaS companies, with their subscription based revenue models and troves of user data, have benefitted from value based pricing.

Through a strong understanding of their customers, companies price their products according to their perceived value. Pricing is thus untethered from their cost of production or  competitor pricing. 

As such, SaaS companies like Salesforce have enjoyed high gross margins which has driven strong investment returns over the past 2 decades. Pioneers like Salesforece and Workday are valued at circa $230bn and $67bn today compared to their IPO market capitalisations of $110m and $637m respectively. Canva is valued at $26bn despite being founded just over a decade ago. 

However, not all SaaS companies are created equal. Most SasS products digitise the workflow users take to complete a task. As Ibrahim highlights in his article, the perception of users change, the closer the workflow is to “the path of revenue”.

Software digitising workflows further away from revenue generation activities, tend to have pricing conversations that sound like:

• Our software makes your employee more efficient at Workflow A.

• Workflow A contributes to Workflows B, C, D etc.

• Eventually, these workflows will result in generating $X of revenue. 

• Our software pricing is only a fraction of $X. What a bargain!

In contrast, workflows relating to the customer’s revenue generating activities are less likely to face conflict over pricing. Customers can more clearly link the workflow to revenue and calculate the software’s ROI.

“... if you’re helping an enterprise be more productive, they look to you on how to think about productivity and translate that into an atomic unit that you can price around; but if you’re in the critical path of their workflow, they are well versed in how their business makes money, and your product’s value is measured solely in terms of lift to that overall metric.” 

Ibrahim Bashir, Amplitude VP of Product Management, Run the Business newsletter 

SaaS companies face disruption due to AI’s ability to disrupt workflows. This would impact customers’ perception of value, creating pricing conflict. It could even make entire workflows obsolete. The further the proximity of the workflow from revenue generation, the higher the risk of disruption. 

“AI is a shortcut into the path of revenue, and a much more direct play …. most pricing today is abstracted away from business value and more oriented on the internal employee job to be done.”  

Ibrahim Bashir, Amplitude VP of Product Management, Run the Business newsletter 

The key to resilient pricing is to leverage AI to increase the value of the software. This would depend on the quality of their data.

Systems of Record and Their Data Advantage

The disruptive effects of AI on SaaS companies are yet to be fully understood. However, the quality of data directly impacts the performance of the AI models and therefore, the value of their new product offerings.  

Salesforce and Workday belong to a special group of SaaS companies called Systems of Record, that have an inherent data advantage.  

A system of record acts as a database that is the source of truth for mission critical company data. A company can have several systems of record relating to key functions such as Sales & Marketing (e.g. Salesforce) or Human Capital Management (e.g. Workday). 

Systems of Record have the following data advantages:

1. Accuracy: They manage the key data units for a business function, serving as a ‘source of truth’ with a unique reference ID for any related data. This keeps the data accurate and up-to-date. For example, Salesforce’s various CRM clouds create a unique Salesforce ID when the company records a new sales lead or customer. Any subsequent updates, in Salesforce or other connected enterprise systems, are automatically reflected.  

2. Integration with Other Systems: They integrate with other enterprise software, allowing the data to be synchronized across departments. This means that updates in one system, such as Salesforce, are immediately reflected in all connected systems. This results in frequently updated, accurate data.  

3. Contextually Rich Data: When Systems of Record integrate with other systems, they pool data from different departments and functions. For example, integrating Salesforce (CRM) with an ERP system adds financial and operational data to the customer records. This gives a fuller picture of the customer, combining sales interactions, purchase history, and financial health. As a result, the data becomes richer with additional context, allowing for deeper insights.

Over the past 2 decades, these companies have grown to be leading players in their industries. For context, Salesforce has a market capitalisation of over $230bn and has a market share greater than its 4 major competitors combined.

Source: Cyntexa and Statista

Systems of Record have a leg-up in dealing with AI disruption. Consider the comments from the CEOs of Salesforce and Workday. 

“Each day, hundreds of petabytes of data are created that AI models can use for training and generating output. But the one thing that every enterprise needs to make AI work is their customer data as well as the metadata that describes the data, which provides the attributes and contacts the AI models need to generate accurate, relevant output. And customer data and metadata are the new gold for these enterprises. And Salesforce now manages, as I mentioned, 250 petabytes of this precious material.”

Marc Benioff, Salesforce Founder and CEO, 1Q25 Earnings Call

“So when we think about AI, I think we're taking a slightly different approach to thinking about AI, specifically on how we're going to monetize it... We think it's important that all our customers get access to AI that's built deep into our platform, taking advantage of our highly curated data set. We have 65 million users processing 800 billion transactions a year on our platform.”

Carl Eschenbach, Workday CEO, Jefferies Software Conference 2024

A Framework for Pricing Resilience to AI

To avoid disruption, SaaS companies must leverage AI to increase the value of their software. Their ability to do this depends on:

• Proximity to Value: Software closer to revenue generating workflows reduces the  difference between the customer’s perception and realised value. It also makes the workflow less likely to be disrupted by AI. SaaS companies like Salesforce occupy valuable digital real estate in the Sales and Marketing function. Customers can more easily estimate the software’s ROI, reducing the potential for pricing conflict. 

• Data Advantage: The effectiveness of AI powered products is dependent on the quality of data they ingest. Systems of Record such as Salesforce and Workday benefit from accurate, contextually rich data.

Companies like Salesforce occupy the high ground as they have inherent Data Advantages and operate close to their customers’ revenue generation workflows. 

However, companies at the bottom left of the chart like Canva, are certainly not standing still.

Canva - Building a Data Advantage and Going Back to the Basics

Canva’s AI strategy is to build a Data Advantage that significantly reduces the friction for its users to derive value out of its product. As Ibrahim discusses in his article on B2B SaaS growth strategies, levelling up subscribers to become power users is an important step in  growing penetration and monetisation in enterprise customers.

Founded in 2013, Canva is an online platform for the design of creative visual content used in areas such as social media advertising campaigns. With a valuation of US$26bn, it is one of the world’s most valuable private companies. 

Canva faces disruptive challenges due to its Proximity to value. Designing the creative or visual content is an important workflow in a social media marketing campaign. But what matters is the successful conversion of these advertisements. 

Platform owners such as Meta have closer proximity to conversion due to owning the relationship with the consumer. 

“You think about Canva being super popular for Social Media marketing…I’m very bullish on Facebook’s generative AI ads products where it’s not just where you go in - they will find the customers for you… The truth function in this case is not “is the creative good”. It’s “does the creative lead to conversion”. And that can all be done algorithmically without any humans in the loop… So there is a bit there where this market that has been a very strong market for Canva is under threat. Because what’s even better for not having to go to the designer - not having to actually make any creative at all”

Ben Thompson and Andrew Sharpe, SharpeTech Podcast

In response, Canva has improved its image library by partnering with leading providers like Getty Images. 

“This partnership gives Canva an advantage that differentiates it from Adobe’s offerings. The Getty Images library includes more than 350 million images, which compares to 248 million for the Adobe Stock library (including photos, illustrations and vectors).” 

Forbes Contributor Melody Brue, Moor Insights and Strategy

This data will feed into its own AI foundation model after its recent acquisition of Leonardo.AI for over $80m. 

Leonardo.AI's generative AI models allow users to easily create high-quality images from simple and guided text prompts.

Essentially, Canva use of AI goes back to the basic value drivers of the freemium or product-led growth SaaS model.

Conclusion

Nearly 2 decades ago, SaaS pioneers like Salesforce disrupted traditional software models with their innovative subscription pricing and cloud based value proposition. 

Faced with being disrupted themselves, SaaS companies are investing heavily in AI to improve the value of their products. 

Some companies are better positioned, occupying valuable digital real estate and possessing inherent data advantages. Others are building more value into their products through focusing on the fundamental drivers of value for freemium SaaS businesses. 

Whether you are an investor, founder or consumer, these are exciting times.

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However, if done right, the same study found company valuations could benefit by 20-25%. 

6 years after Cameron McIntyre succeeded founder Greg Roebuck, carsales is a valuable example of a transition done right. 

Following my previous article on carsales, I’m grateful for the opportunity to interview Cameron on how he achieved this feat and how his people centric approach has driven the growth and international expansion of an $11bn business. Let’s dive in. 

Article Summary Points

• Founder successions are risky but unlock growth when done well. It’s a long process, which requires building trust with the founder and fellow executives. 

• The right successor is crucial as they will redefine the organisation based on their strengths; Cameron's journey, marked by his expertise in marketplaces, international acquisitions, and unique people-centric perspective, positioned him as the ideal candidate.

• Leveraging his strengths in organisational change and people management, Cameron created a structure that elevated executives, achieving their buy-in for his leadership transition.

• He combined this with a culture of transparency and accountability. The result is an organisational structure that facilitates sustainable growth as executives could be added while maintaining consistent decision making. 

• carsales’ organisational structure and culture created the foundation for its successful international expansion. Local executive buy-in is key to the adoption of new products and technology that will drive growth in the acquired businesses. 

* All opinions are personal. This is not investment advice

The Secret to Successful Founder Succession

Founders tend to build their businesses around themselves. They are heavily involved in major decisions. 

While such an approach can work well during the earlier stages, it can limit growth as the business scales and becomes more complex. A well planned succession process will allow the business to effectively capture the next stage of growth. 

However, it is no easy feat. Founders have their identity inextricably linked to the business they built. Stepping away is an emotional and difficult process.

carsales achieved a masterful outcome where Greg

• Gave Cameron the freedom to exercise his leadership as CEO by stepping away from carsales’ executive leadership and from the Board.

• Remained supportive of the transition and of Cameron's ascension to CEO. He maintains a close personal relationship with Cameron.

“I’ve also opted to step down from the carsales Board to ensure a clear runway for Cameron as the incoming CEO but will remain close to the business.” carsales co-founder Greg Roebuck, January 2017

How was this achieved? My conversation with Cameron highlighted 3 key ingredients for a successful transition: 

• Creating Trust with the founder through a professional and personal relationship

• Unlocking Growth in the business through increased executive autonomy

• Creating Buy-in with fellow executives to support the leadership change

There is a strong personal element to building trust. Who is Cameron McIntyre? This is his journey.

Cameron’s Journey to carsales

It was 2007. carsales was growing rapidly and Greg needed a CFO. 

The stakes were high. Many of us have seen how the wrong senior hire can cripple a business.

With a career in legacy businesses such as manufacturing and publishing, Cameron seemed like an unlikely candidate for a disruptive startup like carsales.

What got him across the line? Cameron’s journey displayed all 3 elements needed for a successful senior hire - Cultural Fit, a Unique Perspective and Relevant Experience.

Cultural Fit

Befitting a startup’s culture, Cameron had a strong affinity to entrepreneurship. His father ran a print distribution business called Celmac. Cameron himself dabbled in business ventures while he was studying accounting in university. 

Unlike your typical accountant, he was hands-on. Early in his career, he was working closely with the people on the manufacturing floor while working at British American Tobacco and L’Oreal. He viewed things strategically. 

“In manufacturing, it’s about inputs, processes and outputs” Cameron McIntyre 

Cameron began to see people as the inputs. As we will see, this would become a feature of his leadership career. 

Unique Perspective

The benefits of a senior hire lie in their unique experiences through their careers. Cameron’s leadership style is defined by his belief in empowering people.

“There are 2 types of leaders. Those who surround themselves with people that are better than them and those that surround themselves with people that aren’t as good. I’m the first type of leader.” Cameron McIntyre, carsales CEO 

He learned the leverage people could give an organisation from John Kotter while attending a management course at Harvard University. John is a leading voice on business leadership and organisational change. 

His management frameworks emphasise communication, motivation and collaboration. These would become essential tools as Cameron transitioned to CEO. 

During one of John’s lectures, he made a comment that would shape Cameron’s decision to leave a prestigious corporate job for a disruptive startup.

“Life is short. Do something cool with it” John Kotter

Relevant Experience

Cameron’s experience at Sensis made him well-versed with the dynamics of a rapidly changing classifieds industry. 

In 2007, with nearly $2bn in revenue and $800m EBIT, Sensis was a high profile division within the  Australian telecommunications giant Telstra. 

It was a major player in the classifieds advertising industry, with formerly ubiquitous brands like the Yellow Pages and Trading Post.

However, being a legacy print business, it was being rapidly disrupted. As Finance Director, Cameron worked on Sensis’s nascent digital strategy. He closely studied the disruptive online players like REA (property), carsales (auto), Seek (employment) and Wotif (travel). 

However, management balked at moving away from its lucrative print business. They lacked the entrepreneurial vision that would appeal to Cameron. 

It was during this time that a recruiter called about a CFO position at carsales.  

Building Trust - A Professional and Personal Connection

To unlock the next stage of growth, an incoming CEO needs to build an organisational structure around her/his strengths. However, this change is risky. Doubly so for founder led businesses given their influence throughout the business. 

carsales was no exception. Like many founders, Greg was involved with all aspects of the product and the organisation’s decision making, revolving around him. Changing this structure would be impossible without Greg’s support. 

This is why building trust with the founder is crucial - it began with Cameron’s first meeting with Greg when interviewing for the CFO role.

“We got along well. Greg even agreed to have my next interview in a bar. We sat for 3 hours chatting and drinking beer” Cameron McIntyre

Professionally, Cameron was dependable and a high performer. He prepared the business for IPO in the midst of the GFC while also running the private seller business. He also embodied Greg’s culture of paranoia towards competitors and of “owning every dollar”. 

Importantly, Cameron built a personal connection with Greg. Both of them loved cars. Their daughters went to the same school. Greg gave his support to Cameron’s succession and they remain close friends today.

“Cameron’s nine years of service to carsales have been marked by outstanding performance and he has demonstrated remarkable talent and sound judgment in everything he does. The Board believes his appointment reflects the strength of the company’s succession planning and the quality and depth of its management team.” carsales Chairman Jeffery Browne on Cameron’s CEO appointment, January 2017

Creating Buy-in - Elevating Executives

“Greg built the organisation around product, which was his strength. My strength is empowering people… The conversations shifted from tactical product considerations, to strategic talent considerations. ” Cameron McIntyre

With Greg’s endorsement, Cameron was free to restructure the organisation. However, he still needed his executives to buy into his leadership. 

Cameron had an important insight - if the business was to grow, its people had to be empowered to grow as well. 

His set up a new organisational structure that

• allowed for more executives at the leadership table and 

• empowered them with more autonomy. 

With their positions elevated, executives were incentivised to support this new structure. However, it also comes with risks.

Creating Sustainable Growth - A Culture of Transparency and Accountability

To grow sustainably, carsales has to keep track of the activities of all these newly empowered executives and hold them accountable. 

There is a natural tension between autonomy and organisational control. Greater autonomy promotes executive buy-in, innovation and dynamism. However, it can come at the cost of accountability and increased risk.

We can visualise this tension through 4 types of leadership styles:

• Autocratic (high control, low autonomy): Seen in ‘old world’ industries such as manufacturing

• Saboteurs (low control, low autonomy): Ineffective leaders who are not competent enough to provide meaningful guidance but too insecure to allow staff autonomy

• Empowering (low control, high autonomy): High levels of autonomy promotes creativity and innovation. However, the lack of standardisation of activities could lead to inconsistent results

• Aspirational (high control, high autonomy): A utopian leadership outcome, with empowered employees and high levels of control. Control is achieved indirectly through a strong organisational culture

carsales’ unique culture of transparency facilitates an Aspirational leadership style that promotes sustainable growth.

Executives are kept accountable through frequent communication within the business and with external stakeholders.   

“Communication is key. We have weekly meetings where we share our successes and learnings. There is full transparency and accountability. While our executives are competitive on their results, everyone gets along.” Cameron McIntyre

Additionally, Cameron exposes his executives to the impact of their actions.

“My executives are allowed to hold investor meetings. I want them to feel the joy when our business delivers. But also the pain when it doesn’t. I use the market as a way to keep us accountable.” Cameron McIntyre  

This transparency extends to the Board. Directors regularly hold meetings with executives and senior leaders. 

“Through these meetings, the Board has an operational understanding of the business. They are brought along on the journey and are therefore comfortable making fast decisions” Cameron McIntyre

Cameron’s strategic approach to leadership and a culture of transparency allows for both executive autonomy and organisational control. It’s a scalable structure that allows him to add executives to grow the business sustainably. 

This laid the groundwork for the international acquisitions that would transform the business.

International Expansion - Combining Strategy and Culture

Merger and Acquisition (M&A) transactions, while glamorous and transformative, are often risky ventures. A significant number of M&As fail to add value to the acquiring business. 

Yet, with over $2 billion spent on international acquisitions in just two years, Cameron’s strategy was far from an impulsive decision; it was a calculated move that had been years in the making.

This is where Cameron’s previous experience and organisational changes come together. His insights were to:

• Acquire dominant marketplaces that benefit from network effects

• Create local executive buy-in that will enable growth

“Why was I so confident the acquisitions would work? Because I’ve seen how it can work and how it can fail.” Cameron McIntyre.

Cameron’s approach to international expansion is threefold, involving strategy, cultural fit and executive autonomy. 

In my previous article on carsales’ strategy, I highlighted how the market leader benefits from network effects. This principle is evident in carsales’ international acquisitions, which have the largest audience in their respective markets. 

“We buy businesses that we can grow, not those that we need to fix.” Cameron McIntyre.

Prior to carsales, Cameron was a senior finance executive at Email Ltd. He witnessed the acquisition of the company by Swedish acquirer Assa Abloy Group. This experience served as a blueprint for successful integration, emphasising a shared culture of collaboration and intellectual property sharing.

“That’s why we started with smaller stakes before buying them outright. Culture doesn’t come up in due diligence. We needed time to assess it.” Cameron McIntyre

His strategy also involves empowering local executives by offering elevated positions and autonomy. These executives find themselves with more autonomy and resources to grow their business.

By allowing them to grow, Cameron creates executive buy-in. 

“I think, what we are most excited about is that we have a team that we're aligned with, that we're excited about working with and that we really want to be able to move forward on some of those longer-term transformations within the company.” Lori Stacy, Trader Interactive CEO

Executive buy-in is key to the adoption of new products and technology that will drive growth in the acquired businesses. 

Conclusion

Navigating founder successions is delicate and risky. Yet with trust and executive support, it can drive further growth.

At carsales, CEO Cameron McIntyre has successfully fostered a culture of empowerment and transparency, laying a solid foundation for the company’s ambitious international expansion. 

This approach has allowed for a scalable and accountable organisational structure, crucial for consistent decision-making and long-term growth. 

People are a key part of understanding competitive advantage and a big reason for my writing on Venture Journeys. My conversation with Cameron has reinforced my confidence in carsales' strategic direction and future prospects.

I welcome your thoughts on founder succession and leadership change. Feel free to share this article or reach out with your insights.

Venture Journeys articles are provided for informational purposes only and should not be construed as investment, business, legal or tax advice. Please do your own research or consult advisors on these subjects.

carsales spends heavily on Sales and Marketing, generating high levels of engagement and advertising return on investment for its customers. As a result, it has won the audience in Australia and dominates the Australian market for the buying and selling of used cars. Margins are therefore far higher than its peers. 

But this isn’t your usual mature cash cow. With take rates of only 7-8%, carsales has yet to fully monetise the engagement on its marketplace. 

This is about to change. Its innovative new products like Select and Instant Offer, are poised to unlock higher take-rates. 

At the same time, carsales spent over $2bn to acquire controlling stakes in international marketplaces. Such an investment reflects the significant audience market share these businesses have captured. Fuelled by carsales’ enlarged product portfolio and technology, these acquisitions set the business up for growth over the longer term.

These initiatives give carsales a compelling combination of growth, profitability and value.** It follows a two decades strategy of maximising customer outcomes, a big theme of the blog.

My sincere thanks to the fund managers and analysts for your invaluable insights and engaging discussions for this article. Let’s dive in.

Table of Contents

• Customer Outcomes and carsales’ Founding Journey

• The Rise of Online Marketplaces

• The Internet Era - All About Winning the Audience

• A Highly Efficient Business Model

• An Evolving Marketplace

• A Global Opportunity

• Conclusion

* *All opinions are personal. This is not investment advice.

Customer Outcomes and carsales’ Founding Journey

In the late 1990s, Greg Roebuck and Wal Pisciotta seized the opportunity to revolutionise the way Australians would buy and sell used cars. They founded carsales.com (carsales).

Today, carsales is the leading online platform for buying and selling used cars, but its success was hard-won.

carsales operates on a marketplace business model, connecting used vehicle sellers with interested buyers. To be valuable to consumers, Greg and his team had to overcome the challenge of convincing dealerships to list their inventory on the platform. 

"You had to spell 'internet' to people in those days," carsales Founder Greg Roebuck

In those early days, they went the extra mile, physically visiting car dealerships to collect information, take pictures, or manually input data. Their dedication to making it easy for dealerships to join carsales was crucial to their growth.

The journey was not without difficulties. carsales initially struggled with profitability and faced limited access to capital after the dot-com crash. In 2002, it was losing $200,000 per month with only $600,000 left in the bank.

It was then that Greg made a pivotal decision that transformed its fortunes. He changed the pricing model, charging dealerships based on customer enquiries rather than a fixed price per listing. This incentivised dealerships to work harder to convert enquiries into sales. For private sellers, carsales introduced a fixed fee until the vehicle was sold. These customer-centric changes led to profitability in 2002.

Today, carsales boasts a valuation of $9 billion, a testament to their resilience and commitment to customer satisfaction. Their early focus on understanding customer needs and providing value has become deeply ingrained in their culture. 

Current CEO Cameron McIntyre, who worked closely with Greg, continues this legacy of customer centricity. Under Cameron’s leadership, carsales is embarking on its most ambitious venture yet, with customer outcomes remaining pivotal to its success.

The Rise of Online Marketplaces

Over 20 yrs ago, newspapers used to be a bundle of 3 products:

• Content:  Journalistic content attracted and engaged a large audience.

• Advertising: Companies placed their advertisements alongside the newspaper’s content. I.e. companies were paying for the attention of an engaged audience.

• Classifieds: Thanks to their large audience, newspapers were a great platform to bring buyers and sellers together to transact. Examples include buying a used car, applying for a job or buying a house.

Classifieds were so profitable that they were described as ‘Rivers of Gold’. A local newspaper could have 80% of its revenue coming from advertising, of which two-thirds was from classifieds advertising. 

Naturally, this attracted the attention of a new generation of internet based companies like carsales. 

The internet was clearly a superior platform for the classifieds advertising of niche products like used cars. Newspapers are a blunt instrument, good for reaching many people with a mainstream message. Due to space constraints, newspapers disproportionately favoured the most popular products. 

However, online marketplaces, benefitting from the virtually unlimited space of the internet, were able to cater to the "long tail" of classified advertisements like individual used cars. Long tail volumes can be significant. For example, in search they can make up 70% of the volume. 

Combining this inventory in one place created a customer value proposition that newspapers couldn’t match. Online classifieds companies would take the lion’s share of the classifieds advertising dollars over the next twenty years.

Their success illustrates how explosively disruptive the internet has been to once dominant business models like newspapers. 

The Internet Era - All About Winning the Audience

Ben Thompson, Clayton Christensen and others have written about the disruptive nature of the internet. 

Before the internet, legacy companies could build competitive moats by investing in physical assets that allowed them to control access to supply. 

For example, newspapers owned expensive printing presses which made them monopolies for consumer readership in a geographic region. It was too expensive for a competitor to enter as the local area couldn’t support the fixed costs of additional printing presses. It wasn’t the quality of the content that made newspapers great businesses, it was their stranglehold on distribution. 

The internet drastically reduced the cost of distribution. Readers could now get their news directly from any supplier with just a few clicks. Newspapers now have to compete for audience attention like any other supplier. 

Given the abundance of supply, the winning strategy in this new era would be to aggregate demand. We’ve seen this in success stories like Facebook, Amazon and Google.

For online classifieds businesses like carsales, it became all about winning the audience. 

A Highly Efficient Business Model

“Our game plan was always focused around the consumer…We are very focused on outcomes.” Cameron McIntyre, carsales CEO

This customer-centric approach is not just a philosophy, but the engine that powers carsales' business model.

Standing out is a challenge. Giants like Google and Facebook dominate customer acquisition, making it hard for businesses to scale. However, successful marketplaces like carsales leverage the power of network effects. In simple terms, this means that the more buyers and sellers that use the platform, the more attractive it becomes to even more buyers and sellers. It's a virtuous cycle that fuels growth.

Despite this, carsales invests heavily in sales and marketing, dedicating 18% of its revenue to these efforts. This is a significant amount, even when compared to fast-growing marketplaces like Uber and Airbnb. 

Why this substantial investment? The answer lies in two key areas: delivering customer value and gaining a competitive edge. 

carsales operates as a customer acquisition channel for used car advertisers. It attracts consumer traffic, transforms these visitors into valuable leads, and then sells these leads to advertisers at a markup. 

This commitment to customers is further demonstrated by carsales' on-the-ground salesforce in Australia, which actively engages with dealership customers. As a result, carsales has a larger audience, attracts more used car inventory, and achieves higher engagement than its peers. This leads to more sales and a higher return on investment for customers.

As a result of its consistent investment, carsales dominates its market for used cars to a greater extent than its classified peers.

Winning the audience battle allows the company to be exceptionally profitable, boasting over 50% EBITDA margins. 

Looking ahead, the opportunity for growth lies in leveraging its high levels of engagement to evolve the marketplace. 

An Evolving Marketplace

The used car marketplace is notorious for its inefficiencies and transactional complexities. Each used car is unique, necessitating negotiations and incurring substantial transaction costs. For instance, a new car loses 10%-15% of its value the moment it leaves the dealership, and another 10-15% by the end of the first year, a depreciation that does not correlate with the vehicle's performance.

This inefficiency presents an opportunity. Marketplaces like Airbnb and Uber have demonstrated how reducing transaction costs and enhancing user experience can expand markets, with take-rates significantly higher than carsales’.

With its new products, carsales is poised to do the same in the used car market.

carsales’ innovative new products such as Select and Instant Offer, allow for fixed-price buying and selling of used cars, respectively. These offerings, along with carsales' Encar Home service in Korea which handles vehicle delivery logistics, are designed to streamline the transaction process, reduce inefficiencies, and enhance customer experience.

These new products yield higher returns than carsales' traditional lead generation model.

However, their success hinges on the cooperation of used car dealerships on the supply side of carsales' marketplace. 

Unlike its traditional lead generation model that simply connects buyers and sellers, these new offerings require a higher level of standardisation, quality inventory, and service from dealerships. They mirror standard eCommerce transactions, with fixed prices and commitment required from only one party.

Why would dealerships agree to support this? They recognise the potential for market growth. By reducing the inefficiencies inherent in used car transactions, carsales can expand the market and justify higher take-rates. In fact, carsales estimates that the potential market for these new products in Australia is nearly as large as its existing market.

carsales' innovative new products allow it to capitalise on its high engagement levels. They also expand carsales’ playbook for its overseas markets.

A Global Opportunity

2023 marks an important milestone in carsales’ history. For the first time, its international operations are projected to constitute over half of the business, a substantial leap from just over 20% from an underlying basis in FY17. carsales is now a global technology business. 

But it took an ambitious bet to get here. The company spent over $2bn to acquire controlling stakes in overseas marketplaces. For a company with a $9bn market capitalisation, this is a significant amount especially considering the high multiples paid. 

The high prices were a calculated move given the company

• Strategically targetted established marketplaces that had already captured significant audience share. 

• Took initial stakes in these acquisitions and successfully grew them before taking full ownership. The earnings of Webmotors and SK Encar nearly tripled under carsales Ownership to FY22.

These international marketplaces offer fertile ground for carsales to deploy its expanded product portfolio and advanced technology. Currently, their take-rates are only a fraction of what carsales achieves in Australia, indicating a significant potential for growth. 

While realising that the full potential of these acquisitions may require time and investment, they provide carsales with a platform for long-term, double-digit growth. 

“We are a growth company… we are rewarded based on achieving double-digit growth... that’s how we set our objectives and that’s what we go after every year.” Cameron McIntyre, carsales CEO at their 2021 Investor Day.

As a result, carsales offers a compelling balance between earnings growth, profitability and valuation compared to other marketplaces. 

Conclusion

carsales dominates the Australian market for the buying and selling of used cars. However, it’s by no means a mature business.

Its consistent strategy of winning the audience has not just made carsales highly profitable. It has unlocked the next stage of growth.

The combination of its expanded product portfolio and significant acquisitions of established international marketplaces set it up for double-digit growth over the long-term. 

It now offers a compelling blend of growth, profitability and valuation. Its continued success stems from a continued focus on customer outcomes from its founding journey nearly 3 decades ago.

Venture Journeys articles are provided for informational purposes only and should not be construed as investment, business, legal or tax advice. Please do your own research or consult advisors on these subjects.

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Before Jeff Bezos became an entrepreneur, he was an investor at a pioneering quantitative hedge fund, DE Shaw. The scientists and mathematicians who worked there envisioned the business models that would win in the emerging internet era. It was here that Jeff developed the idea that would become Amazon.

There are 3 parts to Amazon’s success and defensibility:

• Providing a customer centric offering that existing physical store incumbents could not match. 

• Building an efficient business model that allowed Amazon to grow with positive cashflow economics.

• Reinvesting this efficiency into proprietary assets that are the source of its pricing power. Examples include logistics, membership programs and cloud computing.

While Venture Journeys is yet to be DE Shaw, the rise of artificial intelligence (A.I.) and its disruptive potential, bring the lessons from Amazon's journey into sharper focus. Understanding these lessons becomes increasingly crucial if we aim to invest in businesses that are poised to succeed in this new era.

“A.I. is going to be debated as the hottest topic of 2023. And you know what? That’s appropriate. This is every bit as important as the PC, as the internet,”

Bill Gates, Microsoft founder.

Let’s dive in.

DE Shaw and the Origins of Amazon

Nearly 40 years ago, most people could not guess how the internet would change nearly every aspect of their lives in the space of just a generation. David Elliot Shaw was one of the few who tried. 

In 1988, this professor from Columbia University founded the pioneering quantitative hedge fund, DE Shaw, with $28m of assets under management (this stands at $60bn in December 2022).

Staffed by scientists and mathematicians, his firm attempted to predict the winning business models of the internet era using mathematical models and game theory.  In fact, DE Shaw was among the first Wall Street firms to register its website address in 1992, 3 years before Goldman Sachs.

In 1990, Jeff Bezos became one of David’s early recruits. Jeff graduated summa cum laude in electrical engineering and computer science from Princeton University. David recognised Jeff as a rising star and chose him to to spearhead DE Shaw’s internet initiatives. 

Their weekly brainstorming sessions led them to a compelling realisation: the winning business model would revolve around a company that harnessed the internet's power to connect customers with suppliers across a vast array of products. 

Such a company’s key advantage over physical stores would be the wider selection of items it could offer customers. This was the concept behind “the everything store”. 

At the very dawn of the internet era, DE Shaw understood how powerful businesses that could aggregate demand and supply would become. Such a business model would power some of the internet’s most successful businesses and would be the secret to success in eCommerce.

“The idea was always that someone would be allowed to make a profit as an intermediary. The key question is: Who will get to be that middleman?”

David Elliot Shaw, founder of DE Shaw

There was one glaring issue. To attract customers, this company would first need to offer a comprehensive supply of items. It's a tough ask for an internet website no one had heard of.

The Amazon we know today has been methodically solving this over the last 3 decades. But it all began with a simple category, books. 

The Everything Store - How Books Were The Perfect Category

Selection is the key to success for intermediaries on the internet. Customers perceive you as the place where they can purchase whatever they are looking for. However, it is expensive to build a comprehensive selection. Jeff Bezos found a solution by identifying a category that met two crucial criteria:

• A category with an extensive range of suppliers that no physical store could possibly stock entirely.

• A category in which Amazon could easily aggregate suppliers.

Books were the ideal choice, as Jeff later explained:

“I started ranking them, and I picked books because books are super unusual in one respect: There are more items in the book category than in any other category. There are three million different books in print around the world at any given time. The biggest bookstores only had 150,000 titles. So the founding idea of Amazon was to build a universal selection of books in print.”

Jeff Bezos, Amazon Founder

Moreover, a significant portion of book titles could be sourced from just 2 major distributors, Ingram Book Group and Baker & Taylor. As for the remaining titles, Amazon showcased the customer obsession that remains a hallmark of the company today. 

Former Amazon Senior Software Engineer, David Whitney, recalled,

“If you wanted a book, you could call up Amazon and talk to a customer service rep who probably had a master's degree in Literature and could talk at length about what you might like to read. Customer service is still good, but it is nothing like it was in the 90’s. Every stray English major in Seattle got a job at Amazon Customer Service”

David Whitney, Former Amazon Senior Software Engineer.

Customers loved it and Amazon grew quickly. 

As Amazon grew, it developed its sourcing and logistics capabilities. However, this was getting expensive. To help pay for these capabilities, Amazon launched its 3rd party marketplace in late 2000. 

How The Marketplace Model Powers the Everything Store

Becoming a marketplace was a pivotal point in Amazon’s history. It was a scalable solution to its promise of providing customers with the best selection of products. Sellers provide the inventory and pay a fee to Amazon.

The expanded selection proved to be a magnet for more customers, in turn attracting a growing number of suppliers. This virtuous cycle unleashed powerful network effects, fueling Amazon's growth.

Fast forward to today, Amzon's third-party marketplace represents the majority of its eCommerce sales. The success of this model extends beyond mere growth; marketplaces are renowned for their remarkable efficiency as well.

Efficient Growth and Pricing Power

A marketplace leverages the efforts of its suppliers and consumers to drive its growth. Consider the capital efficiency of Amazon’s marketplace compared to an eCommerce company like Wayfair from 2013 to 2022.

Amazon is over 4x more efficient at generating sales while spending nearly 3x more on capital expenditure. It is this capital expenditure (rather than just marketing) that allowed Amazon to build proprietary long term assets that underpin the defensibility of the business.

While many eCommerce businesses find themselves compelled to allocate increasing portions of their cash flow to digital marketing (where established players like Google and Facebook capture the lion's share of value), Amazon's strategic investments have yielded remarkable new ventures such as Amazon Prime, AWS (Amazon Web Services), and Fulfillment by Amazon logistics operations.

The true pricing power and growth potential of Amazon stem from these service-based businesses (now over 50% of Amazon’s revenue) rather than their revenue from traditional eCommerce products. During the 4th Quarter  earnings call, CEO Andy Jassy shed light on Amazon's latent pricing power, stating:

“If you step back and think about a lot of subscription programs, there are a number of them that are $14, $15 a month really for entertainment content, which is more than what Prime is today. If you think about the value of Prime, which is less than what I just mentioned, where you get the entertainment content on the Prime Video side and you get the shipping benefit … that is remarkable value that you just don't find elsewhere.”

Andy Jassy, Amazon CEO

Conclusion

Nearly 30yrs after its founding, Amazon has grown to be one of the most defensible businesses in the world. 

Amazon grew exponentially with a customer centric offer that incumbents couldn’t match. However, it’s not just about growth. Rather, it’s about efficient growth.  The capital efficiency of its business model allowed Amazon to invest in proprietary assets that are the source of its pricing power today. 

At the dawn of the internet, a New York quantitative hedge fund foresaw one of the most triumphant business models of the digital era. Now, as we face another disruptive technological revolution fuelled by A.I., the lessons from Amazon's remarkable journey become even more pivotal for any investor. They hold the key to identifying and investing in businesses poised to thrive in this new era of disruption.

Venture Journeys articles are provided for informational purposes only and should not be construed as investment, business, legal or tax advice. Please do your own research or consult advisors on these subjects.

The New York Times (NYT) needs no introduction. Despite its brand heritage, the fabled newspaper faced years of disruption and declining revenues.

However, over the past 10 years, the NYT has been writing the playbook for how old media companies can succeed today. And investors have rewarded it.

In this article, learn about the NYT’s transformation and what it could mean for other old media companies (for example, Nine Entertainment in Australia)*.

The Insights category of articles applies learnings from Venture Journeys to larger businesses. For investors with only a few minutes to spare, here’s what you need to know about how ‘old media’ companies like the New York Times (NYT) are becoming growth companies again.

• In the past, it wasn’t just content that made old media companies great businesses. It was also their distribution infrastructure. The high fixed costs of the printing press or TV broadcast spectrum were strong competitive barriers and made them local monopolies.

• In the early 2000s, the internet changed the nature of content distribution, leading to over a decade of disruption and fleeing investors.

• For the last ten years, the NYT has been writing the playbook on how old media companies can succeed in the internet age. Content, technology and a large registered audience are the building blocks of the ‘modern printing press.’

• The NYT is an example of an old media business that is successfully monetising its audience. Investors have rewarded its improving financial profile with a technology-like valuation of nearly 30x trailing PE.

• Such a valuation re-rating is of great interest to other old media companies. For example, Nine Entertainment (NEC) in Australia, trades at less than half the NYT’s price earnings multiple. Few businesses can match the NYT’s brand and journalism heritage. However, NEC shares similarities that could result in improving long term returns.

• If you’re interested in future articles on NEC, let me know by clicking the feedback link at the end of the article.

NYT CEO Meredith Kopit Levien as profiled on the Information. *All opinions are personal. This is not investment advice.

Old Media Disrupted

There are so many lessons we can learn from international companies. But for me, what I truly appreciated was the ‘escape’ their conference calls provided during those late nights of investment due diligence.

I pictured myself in the audience, in countries I had never been to before. I felt this sense of romanticism while listening to the jazzy introductory music of the New York Time’s (NYT) investor day. I imagined the glitz and glamour of New York, while sitting at the front row of their presentation on Eighth Avenue.

The New York Times Headquarters on Eighth Avenue, New York.

Then CEO Meredith Kopit Levien mentioned these words that jolted me out of my reverie:

“This goal, importantly, reflects a shift in our emphasis from counting individual subscriptions to counting total subscribers.”

Meredith Kopit Levien, New York Times CEO

This is a remarkable statement of transformation for any old media organisation. Let me explain with some historical context.

Over 20 years ago, the high fixed costs of the printing press and broadcast spectrum gave old media companies like the New York Times (NYT) virtual local monopolies in content distribution.

Why bother to know individual subscribers when they’ve captured the attention of everyone in the area? They offered an unbeatable solution for advertisers who could be sure of reaching their audience.

Old media companies had excellent economics and would have been a core position in an equity investment portfolio.

The internet changed the nature of content distribution. The barriers to distribution that old media companies relied on for so long, gave way to internet giants like Google, Facebook and Twitter.

These new entrants didn’t just control access to consumers. They offered advertisers things that old media companies never did - targeting and measurement.

As a result, advertisers would know that their message was reaching the right audience and could measure how their advertisements were impacting their bottom lines.

Old media companies simply could not compete based on broad audience reach alone.

By 2012, old media companies were firmly in the risky ‘value’ portion of investment portfolios, if they were included at all.

The situation was becoming desperate. Something had to change, and it did. In 2012, the Sulzberger family who controlled the NYT, hired Mark Thompson.

Mark led the turnaround at BBC, re-establishing its editorial authority and overseeing its digital and international strategies. He would be instrumental in shifting the strategic direction of the NYT.

Building a Business for Subscribers

“I never believed we could have the same pricing power in digital (advertising) that we had in print… it’s an important adjunct source of revenue but I never thought it could save the Times. It had to be subscriptions.”

Mark Thompson, New York Times CEO, 2012-2020

Till then, old media companies like the NYT had a largely transactional relationship with its users. Building a subscription based business requires creating an ongoing relationship based on frequent usage and quality content.

For a 160 year old company, leading such a transformation can be a daunting task. Like most successful transformations, Mark leveraged the NYT’s greatest asset, its brand authority and journalism heritage.

“The question is fundamentally about willingness to play… The better stuff, discerning users will pay for…Why can’t we be the first successful general-internet news provider and prove willingness to pay?”

Mark Thompson

The great thing about news is that fresh content gets generated every day. The NYT’s journalism assets produce a mix of breaking news, trending topics and journalistic projects such as their collaboration with the Washington Post on the Pulitzer Prize winning series of articles on Russian interference in the 2016 US Presidential election.

The goal was to leverage their news and journalism content and a portfolio of lifestyle content to create an entertainment product that is used frequently.

An engaged user base is the crucial building block to monetisation. The NYT’s paid digital subscriptions began to grow and accelerated in 2018 with their registered user strategy.

How The New York Times Monetised Its Subscribers

“You see that inflection point after 2018 when we launched our registration model, when we require readers to register much earlier in their journey in exchange for access to additional articles.”

Hannah Yang, New York Times Chief Growth Officer

User registration is a crucial point in the customer journey. Registered users allow the NYT to understand their unique preferences by observing their behavior while they are logged on.

The ability to create engaging and customised experiences from this information is just the beginning. It also feeds into their machine learning and data science models which evaluate their willingness to pay.

Thanks to its data models, the NYT has perfected ‘flexible paywalls’ or converting customers with promotional introductory prices that rise to full rates over time.

The results were impressive.

• Registered users were 40x more likely to convert to paying customers

• Over 50% of registered users convert to full-price after the expiry of their introductory offer

• Subscriber acquisition costs reduced by 50% since 2018

Additionally, a large number of registered users (and the first party data generated from observing their preferences) created the foundation of an attractive digital advertising business.

“First party data has been a real unlock for us. It’s built on this foundation of registrations, 135 million now. And so that’s only made our data more powerful and our ads more performant and attractive for the market.”

Lisa Howard, New York Times Global Head of Advertising

By 2016, the bleeding had stopped and growth began to accelerate after 2018.

By 2022, the NYT had proved their model worked. It was time for the next stage of their growth journey.

Long Term Growth: How Old Media Is Relevant Again

CEO Meredith’s focus on subscribers rather than subscriptions marks an exciting shift towards a bundled pricing model.

Bundled pricing is a highly profitable model used by a wide variety of industries such as cable TV and technology. Customers pay more and have higher retention.

It works well in media because the costs to the company of replicating an article are negligible. For the consumer, this is good news.

“We expect we’re going to get continued accretion on ARPU…really about moving people up from a single product or multi-product that has a heck of a lot more value”

Roland A. Caputo, New York Times Chief Financial Officer

My subscription offers from the NYT. Note the initial promotional pricing and substantial discount from the All Access bundle.

Why now? The competitive advantage of old media companies has always stemmed from their distribution. In the past, they relied on their expensive printing presses and broadcast licenses to lock in customers.

This time, the NYT has rebuilt their distribution engine for the internet age. Their sizable registered audience, content and technology have replaced their reliance on the printing press. Bundled pricing represents the next stage of monetising their audience.

The new printing press: Leveraging technology, content and customer data. Source: Venture Journeys, 2022 Investor Day Presentation

“We have tremendous potential to attract and retain a larger subscriber base driven by a model that we think is fundamentally competitively advantaged … and we expect that model to drive Adjusted Operating Profit expansion, even as we continue to invest for growth.”

Meredith Kopit Levien, New York Times CEO

The result is a business with growth drivers that more than offset the declines in their legacy print business. After years of disruption, the NYT has shown how old media companies can be relevant again. At a price to earnings multiple of nealy 30x, investors have taken notice.

How old media is relevant again: The NYT has re-rated and is now in the growth portion of investment portfolios.

Such a valuation re-rating is of great interest to other old media companies, like Nine Entertainment (NEC) in Australia, which trades at less than half the price earnings multiple?

Few old media companies have the brand heritage or journalism strengths of the NYT. However, these 2 businesses share important similarities. Media company NEC was an early mover in Australia in building a registered audience.

If you’re interested in an article on NEC, let me know by clicking the feedback link below.

Venture Journeys articles are provided for informational purposes only and should not be construed as investment, business, legal or tax advice. Please do your own research or consult advisors on these subjects.

I’d love to hear your feedback!

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eCommerce is a competitive space, as online homeware and furniture retailer Temple & Webster's recent results have shown. But what is the long term lesson we should take away from the result?

“Insights” articles apply learnings from Venture Journeys to larger businesses. Learn about the capital intensity required to grow in eCommerce and the genesis of the Amazon Prime strategy.

For investors with only a few minutes to spare, here’s what you need to know about the capital intensity of building a competitive advantage in eCommerce*:

• In their recent results, Temple & Webster’s reduction in active customers came as a surprise to investors, given how early they are in their growth journey.

• There is a certain mystique surrounding technology businesses and their potential. But eCommerce businesses are simply the online version of the distributor business model. As the middlemen between suppliers and customers, their competitive advantage depends on how firmly they control access to these participants. 

• In the online space, Google and Facebook (Meta) control access to customers. As a result, eCommerce businesses face barriers to scale from price competition and rising customer acquisition costs.

• This is why the most successful eCommerce businesses are marketplaces benefitting from network effects. Marketplace participants do the heavy lifting on customer acquisition and retention for these companies.

• Building marketplaces requires upfront investment and time. As Amazon has shown, Temple & Webster needs to build the customer base and supply chain to attract large numbers of 3rd party merchants to their platform. 

• Scaling in eCommerce is not a capital-light endeavour. Investors need to consider this in their analysis and valuations. 

* All opinions are personal. This is not investment advice.

The Reality of eCommerce

"Online homeware and furniture retailer Temple & Webster had $164 million slashed from its sharemarket capitalisation after it revealed the number of active customers using the site dropped by 11 per cent and group sales fell 7 per cent in the first five weeks of trading this year."

Simon Evans, Senior Reporter at The Australian Financial Review

Macroeconomic factors notwithstanding, Temple & Webster’s (TPW) loss of customers came as a surprise, given the early stage of their growth. As I outlined in my article on eCommerce last year, eCommerce companies are at the mercy of Google and Facebook.

There is a certain mystery about technology businesses. eCommerce can be a great customer experience. It should be a bigger part of the furniture and homeware industry, particularly in Australia, which lags behind the US and UK in online penetration. This is why results like this can be jarring to investors.

It’s best to keep things simple and think of eCommerce as the online version of the age-old distributor business model.

How Access Defines the Value of Distributors

Consumer markets broadly consist of 3 parts- Suppliers, Distributors and Consumers. eCommerce companies like TPW are distributors. They are the link between manufacturers and consumers. Their value and competitive advantage are based on access. 

Take newspapers, the primary way news was distributed before the internet. The large fixed costs of the printing press and physical distribution made newspapers a virtual monopoly in a given city. A newspaper controlled consumers’ access to news, which gave it pricing power.

“When Charlie and I were young, the newspaper business was as easy a way to make huge returns as existed in America… No paper in a one-paper city, however bad the product or however inept the management, could avoid gushing profits… Typically, rates for both advertisers and readers would be raised annually – and the profits rolled in. ”

Warren Buffet, quoted from the Berkshire Hathaway 2006 Annual Letter

Distributors that don’t control access tend to be price takers, often reliant on macroeconomic or industry cycles. Commercial insurance brokers, which are distributors of commercial insurance policies between insurers and commercial businesses, are good examples.

“In accordance with market commentary of commercial lines premium rate reductions of up to 30%, premium income performance has been reflective of this environment with gross written premium on a same client / same policy basis reducing by 10.8% over the period… Accordingly, AUB anticipates its Adjusted NPAT to be in the range of $12.0 to $12.5m (down 17.8% to 14.4%..).”

Ausbrokers Market Update, January 2015

Most eCommerce companies are price takers because they don’t control access to the consumer. Google and Facebook do. 

The Gatekeepers of the Internet and What It Takes to Succeed

The internet has changed the dynamics of competition for distributors in 2 major ways. First, it’s easier to set up an online store compared to a physical one. Second, and more importantly, it has created 2 global giants that firmly control access to customers online. 

Google and Facebook dominate Search and Social respectively, the 2 largest sources of eCommerce traffic.

Google and Facebook (Meta) dominate Search and Social. Source: Statcounter and DataReportal

Google and Facebook extract an enormous amount of value through their auction-based pricing models. eCommerce companies are bidding against themselves. 

https://twitter.com/jayvas/status/1296438514138177536

You can see this from the results of listed eCommerce companies shown in the chart below. Over the 4 years (FY18 - FY22), the revenue of these companies grew 32% per year while disclosed customer acquisition costs grew 44% per year.

Disclosed customer acquisition costs - TPW: Customer service, advertising and marketing KGN: Marketing, ABY: Marketing and Advertising, Wayfair: Customer Service and Advertising. Source: Company documents

So how can eCommerce companies succeed? It’s telling who the largest players globally are.

Global e-retailer market share 2021. Source: Statista

Leading players like Alibaba, Amazon and JD.com have marketplaces that benefit from network effects. The beauty of marketplaces is customers do much of the heavy lifting, which helps them scale sustainability. Unlike normal eCommerce businesses, scale works for them, not against. 

While they are strong business models, they require capital to build.

Building Competitive Advantage

To have a competitive advantage online, companies need to provide customers with something Google and Facebook cannot. Amazon wrote the playbook here - build expensive offline supply chain infrastructure, and get someone else to help them pay for it. Free 2-day shipping was the genesis of the Amazon Prime program. 

“I want to draw a moat around our best customers… I’m going to change the psychology of people not looking at the pennies differences between buying on Amazon versus buying somewhere else.”

Jeff Bezos on launching Amazon Prime 2-day shipping in 2004

Amazon started out as a pure e-commerce bookseller. But as we discussed, eCommerce is competitive. Jeff knew they couldn’t sustain their early advantage without some way to lock in their customers. 

Prime locked in their best customers by charging them $79 upfront. In exchange, subscribers would get free 2-day shipping instead of the usual charge of $9.48 per order. 

The genius behind Prime was it attracted new customers with its 2-day delivery and incentivised retention as subscribers would need multiple purchases to recoup their membership fee. 

Amazon Prime exerts control over access to customers

Of course, building and maintaining the supply chain infrastructure for this service was expensive. So in 2006, Amazon launched Fulfillment by Amazon which allowed 3rd party merchants to use Amazon for storing and shipping their goods for a fee. 

“That allowed merchants to qualify their goods for Prime two-day shipping and helped Amazon greatly expand the catalogue of goods available to Prime members. It was, and is, a huge competitive advantage.”

Julie Todaro, former Amazon Director of Finance

Amazon Prime exerts control over access to customers and suppliers

The issue with Amazon’s strategy was the upfront cost and time it took before they benefitted from the network effects of their marketplace. Building a competitive advantage and scaling in eCommerce is not a capital-light endeavour. Investors need to take this into account in their analysis. 

Temple & Webster’s CEO, Mark Coulter, alluded to this when talking about Amazon’s success in an interview with the Australian Financial Review.

“In online, bigger is better… The bigger online retailers can keep investing.”

Mark Coulter, Temple & Webster CEO as quoted in the Australian Financial Review.

Venture Journeys articles are provided for informational purposes only and should not be construed as investment, business, legal or tax advice. Please do your own research or consult advisors on these areas.

Have you ever worked for a manager who constantly underestimated you? It’s hard for companies to understand what each employee is capable of. Frustrating micromanagement is often the result. Yet, creating a culture where employees feel empowered is essential to customer centricity.

This is why I’m excited to profile SeenCulture and its founder Nikki Tugano. Nikki’s central insight is based on positive psychology, a science encouraging people to focus on their strengths. We feel engaged when we are working on what we are good at.

Learn about Nikki’s inspiring journey and her mission to improve workplaces globally.

Nikki Tugano, Founder of SeenCulture

All opinions are personal, this is not investment advice

Talent Management’s Untapped Opportunity

“What sets one airline apart from its peers are its crew and their attitude toward passengers… People are your key assets. On the front lines of business, they can make or break a company.”

Sir Richard Branson

Culture plays an important role in customer centricity. Employees go the extra mile when they feel engaged and connected to a company’s mission. Sir Richard Branson used this idea to succeed in industries ranging from music to airlines.

Sir Richard Branson

Yet, when it comes to talent management, companies have traditionally focused on recruitment and skills instead of retention and development.

Improving retention is an untapped opportunity. Replacing staff can cost up to 200% of their salary due to recruitment costs and lost productivity.

But it’s not easy. It takes a lot more than hiring based on skills and experience, which major systems like SAP and Workday focus on. Improving retention requires a cultural change across the organisation.

Successful cultural change is all about trust. Seeing employees as individuals motivates and gives them the confidence to contribute fully. Companies need software for managers to engage employees at scale.

Understanding how to motivate people enabled Nikki Tugano to overcome her challenging background and find success in her career.

Her business SeenCulture, is part of a growing breed of software solutions that use the principles of Diversity, Equity and Inclusion (DEI) to build trust with employees.

How Diversity, Equity and Inclusion Drive Retention and Performance

It’s getting harder for companies to meet their talent needs.

Disruptions such as COVID and the growing skills gap are raising the stakes of holding on to valuable employees. Managers need to make their employees feel valued at work.

They are increasingly turning to software systems that promote Diversity, Equity and Inclusion (DEI) in the workplace. In 2022, this was a $7.5bn market growing at 12.6%.

What makes DEI so effective in the workplace?

Seeing employees as human beings creates a psychologically safe environment where they feel safe to contribute fully. 3 principles of DEI are:

• Intersectionality focuses on the background of the individual. People from minority backgrounds face multiple societal challenges that stack, making it harder for them to contribute.

• Privilege describes the advantages that belong to a group of people due to aspects such as race and gender. Understanding privilege allows managers to relate to employees.

• Allyship encourages managers to become collaborators with team members by removing barriers to their participation.

DEI doesn’t just engage employees. It also drives performance. Google’s landmark study found psychological safety to be the most important factor driving team performance.

DEI is a bit like oxygen. You notice how important it is when you have to live without it. What follows is Nikki’s journey.

Nikki’s Journey to Discovering Her Superpower

“I’ve needed to become quite savvy about human behaviour and really knowing and understanding what sets people off and what motivates them to action.”

Nikki Tugano, Founder of SeenCulture

Nikki faced intersectionality from an early age. She was raised by a single mother who was a migrant from the Philippines with very little to her name. Coming from a broken family, she lacked the unconditional love a child should experience.

Think about this. Your childhood is the one time when you are loved and ‘seen’ for who you are rather than what you can do.

Nikki’s childhood lacked this level of psychological safety. Growing up with divorced parents, Nikki developed a unique ability to understand human behaviour to avoid setting them off. She learned to ‘see’ people despite not being ‘seen’ herself.

School was an important turning point. She faced challenges such as bullying due to her migrant background. But this time, she was ready for them.

“I gained a lot of confidence when I realised I could do well at school. That was the first thing I had control over.”

Nikki Tugano

Nikki’s hard work and understanding of human behaviour allowed her to take bold initiatives that would propel her ahead of her peers.

Despite her background, she made it to Macquarie University, where she majored in Human Resources, Marketing and Psychology. But it wasn’t enough for her.

While in university, she worked in a series of full-time jobs.

“I was in my early 20s, working full time managing several teams, and at the same time studying a full time double degree.”

Nikki Tugano

How did she inspire loyalty from team members who were older and more experienced than herself? These people would not see her as their manager unless she made the effort to understand their individual roles and challenges.

Nikki spent time doing everything from packing boxes in a warehouse to managing inventory in supply chain management, all the while leading business operations as the 2IC (second in charge) to the Managing Director. Going out of her way to understand them, won her team members over.

She was integral to the business’s growth from 12 people to 70.

From a family surviving on very little, Nikki had already achieved more success than the vast majority of her peers. She had the means to travel to Europe and the UK, where she discovered the benefits of positive psychology.

Achieving Diversity, Equity and Inclusion Through Positive Psychology

“Work is no longer just a source of income… it’s a source of identity. My vision would be for everyone to say they feel ‘seen’ in the workplace, be recognised for their strengths, and are engaged with meaningful work.”

Nikki Tugano

Nikki wanted to delve deeper into understanding human behaviour, the skill that played such an important part in her life.

She found success by using her strengths, not by dwelling on her challenges. But most psychology programs focus on the problems individuals have.

After careful searching, Nikki found the perfect post graduate program. She won a scholarship to study a Masters in Applied Positive Psychology and Coaching in the UK.

Positive psychology and coaching emphasise helping a person succeed through their strengths.

In the workplace, people are motivated by:

• Autonomy: Trusting them to use their strengths to accomplish important goals. For example, trying new ideas or methods.

• Growth: Creating growth opportunities aligned with their strengths.

• Connection: Being part of a team and a shared sense of purpose.

Recognising a person’s strengths requires that they are ‘seen’ as individuals rather than through their job titles or backgrounds. This is the essence of DEI.

Nikki with the ‘father of Positive Psychology’ Martin Seligman

Following her Master's degree, she relocated to Melbourne where she teaches and conducts research on positive psychology at the University of Melbourne's Center for Well-being Science.

To Nikki, positive psychology needed to go beyond academic theory. Her vision is to bridge the gap between what science knows, and what business does.

She founded SeenCulture to provide people in the workplace an opportunity to be seen for being more than just a worker, but a human being with a myriad of strengths, values, motivations and aspirations.

Building The ‘Moneyball’ for Teams and Organisations

It’s challenging for companies to use positive psychology in the workplace because it’s too hard to understand everyone’s individual strengths and potential. SeenCulture’s unique approach uses a combination of positive psychology and data science to interpret the results of a proprietary employee survey.

The survey also involves colleagues and managers which creates trust. The entire team feels part of the process, not just an opaque algorithm or individual manager.

While other solutions focus on subject matter expertise, SeenCulture evaluates employees against 5 intelligence types as shown below.

See graphics of the framework here:

SeenCulture 5 Intelligence Types

The additional 4 intelligence types (blue boxes above) give a more complete picture of an employee's unique strengths and motivations. It helps them to be ‘seen’.

These intelligence types also make SeenCulture a valuable DEI distribution partner for larger companies like CultureAmp and bambooHR.

Based on the results from the survey, SeenCulture uses predictive modelling to match employees to roles that best fit their unique strengths and potential.

Using SeenCulture’s dashboard, managers select team members for projects and promotions based on diverse attributes rather than individual bias.

It’s like the movie ‘Moneyball’ where the Oakland Athletics baseball club found success by constructing their team based on player attributes rather than reputation.

Like the Oakland Athletics, companies can uncover the untapped potential within their workforce.

“Think ‘Moneyball’ but for teams and organisations. It’s like finding the $50 note in your jeans you didn’t realise was there.”

Nikki Tugano

It’s Ultimately About Trust

SeenCulture can unlock productivity, retention and other benefits for its customers.

Ultimately, Nikki’s mission and SeenCulture’s product is to promote cultural change in the workplace.

But cultural change is all about trust. Managers and employees need to believe in SeenCulture’s recommendations.

Few people have Nikki’s diverse perspective on DEI from her youth, academic and professional career.

She designed an empathetic ‘reward’ where employees receive individualised talent reports recommending development paths that match their strengths.

Personalised development roadmaps for employees serve as a basis for discussing career goals

It’s a foundation for an authentic discussion. Employees feel they can influence their career growth and managers become allies by advocating employees be included in positions that best fit their strengths. 

Due to SeenCulture’s collaborative process (e.g. peer contribution to the survey), employees also feel part of the broader organisation’s mission and decision making process.

How SeenCulture’s Customer-Led Design Is Giving It a Head Start

“The reason why we had so much traction in such a short period is because we did everything backwards… I got the customer first, developed a solution to meet their needs, piloted it, built an MVP, and then I started the business.”

Nikki Tugano

SeenCulture shows what can be achieved when solving a real problem.

Bootstrapped and with just an excel sheet, in 6 months SeenCulture achieved $186,000 in revenue with 2 global customers and over 1300 users. This includes $47,000 in annual recurring revenue.

With this traction and a promising pipeline of 3 to 4 major customers, Nikki built out her team with experts in psychology and data science. She also secured a technology partner, Everest Engineering, to turn her excel sheet into a SaaS solution.

With a working solution, team and technology partner, SeenCulture’s next goal is to develop a scalable distribution strategy through partnerships with larger players like CultureAmp.

Conclusion

Culture is a crucial part of customer centricity. Nikki’s insights show how employees can be engaged by seeing them as individuals and encouraging them to lean into their strengths. It’s a valuable addition to the Venture Journeys Customer Centricity Framework shown below.

Venture Journeys Customer Centricity Framework

The challenge has been finding a scalable way to apply positive psychology in the workplace. It’s too hard for managers to have a detailed understanding of every employee.

SeenCulture solves this through a combination of data and behavioural science. Most of all, it rewards both employees and companies.

Employees are given development opportunities tailored to their strengths, while companies see increased performance and uncover capabilities they never realised they had.

If you are a medium to large size organisation or an investor interested in this space, check out SeenCulture here.

For investors, Nikki is a finalist at The Pitch by Smart Company and AWS, and Startup Victoria’s Health and Wellbeing pitch night. Follow Nikki Tugano and SeenCulture on LinkedIn to keep up to date with their journey!

Do you ever get the feeling that your phone and Facebook are monitoring you? Until recently, that was actually the case. For the past 10 years, Facebook’s ability to track us made it an unstoppable force in digital advertising at the expense of consumers and content creators.

But Apple's new privacy changes have shaken things up. Learn about this and the $10 billion opportunity it has created for Beehiiv and its content creators.

Key Points

For investors* and content creators with only a few minutes to spare, here’s why now is the time for Beehiiv and its content creators:

• Beehiiv’s recent Ad Network launch comes just as Apple’s privacy changes have unlocked a $10bn opportunity in digital advertising.

• What’s changed? Apple’s new privacy standards have empowered consumers. Advertisers can no longer track us across the internet without our permission.

• Successful advertising now requires transparency and providing consumers valuable content in exchange for our attention. This requires a genuine partnership with content creators.

• Beehiiv’s Ad Network connects its content creators with premium advertisers while allowing them to own their audience relationships. With a business model that succeeds along with its customers, it will become a destination for star content creators and their valuable audiences.

• Topics covered: Digital Advertising and Facebook’s dominance, App Tracking Transparency (ATT), email newsletters and platform models.

*All opinions are personal. This is not investment advice.

John Wanamaker and the Problem With Advertising

Advertising pioneer John Wanamaker

John Wanamaker was widely considered an advertising genius. Born the son of a brickmaker, he eventually created one of the first department stores in 1877. Powered by advertising, John grew this into one of the largest retail chains in the country. Eventually, it formed part of the Macys department store chain.

John was most famous for this quote:

“Half the money I spend on advertising is wasted. The trouble is, I don’t know which half.”

John Wanamaker

John was describing the perennial issue with advertising. There were 2 parts to this problem:

• Determining if his advertisements were being seen by the intended audience and

• Measuring the impact his advertisements had on his audience's behaviour, such as whether it led to a purchase or other desired action.

How did John overcome this?

At that time, retail stores offered an aggressive, Wild West shopping experience. They haggled with customers on every piece of clothing to get the highest price and the phrase ‘Buyer Beware’ was a shopper’s best friend.

In contrast, John treated his customers with respect. He introduced fixed price tags and money-back guarantees.

John was the first retailer to advertise regularly in newspapers. His honest advertisements and transparent business principles drew in the crowds.

This was advertising done right. Consumers were happy to give their attention in return for something they value.

Facebook would change all of this.

Mobile Advertising and the Rise of Facebook

"Facebook Ads represent a completely new way of advertising online. For the last hundred years media has been pushed out to people, but now marketers are going to be a part of the conversation. And they're going to do this by using the social graph.”

Mark Zuckerberg

Facebook founder Mark Zuckerberg made this comment during the launch of the Facebook Ad Platform in 2007. He was right – advertising (and our privacy) would never be the same.

The launch highlighted 3 important benefits for advertisers:

• Audience Reach: Advertisers would get access to Facebook’s enormous user base.

• Targeting: Facebook’s social graph charts its users’ relationships and interests. Every ‘like’, comment or photo helps Facebook build a detailed profile on its users. Advertisers can use this information to target specific users.

• Measurement: Advertisers will understand what their audience does, buys on Facebook, as well as on other websites. 

The result was a platform with an audience reach that rivalled the largest media organisations combined with precise targeting and measurement. It was the solution to John Wanamaker’s problem and then some.

Apple’s iPhone and the use of mobile apps took Facebook’s ability to target and measure advertisements to frightening levels.

Since 2012, every iPhone user has a unique identification number called an Identification for Advertisers (IDFA). If you are an iPhone user, your unique IDFA allows advertisers to track you across all your apps. This is best illustrated with the online sales funnel for a pair of shoes:

• Discovery: You are scrolling through your Facebook feed and see an advertisement for a pair of shoes. You don’t tap on the advertisement, but those shoes look good!

• Consideration: Days later, you use the Google Chrome browser to do research on the brand advertiser’s website. Through Facebook’s Ad Network, the advertiser notices your IDFA and realises you’re the same person that saw their Facebook advertisement. Yes, you’re being watched!

• Conversion: You can’t resist those shoes any longer! You purchased the shoes on the retailer’s website. Your IDFA is shared with Facebook which can precisely attribute your purchase to the advertisement you originally saw on Facebook’s app.

Facebook’s combination of Audience Reach, Targeting and Measurement was simply irresistible.

Facebook Digital Advertising Revenue. Source: Statista

Facebook’s rise was meteoric. But like many aggregators, Facebook wasn’t sharing the wealth with other participants like content creators or consumers.

Facebook owns the audience relationships and therefore the advertising income

Content creators had little incentive to create authentic, valuable content. As consumers, we felt like we were in a constant state of surveillance. Advertisements followed us everywhere on the internet.

It seemed like technology and surveillance had replaced John Wanamaker’s principles of transparency and value. This wasn’t sustainable. Something had to give, and it did.

App Tracking Transparency - Apple’s Privacy Control Changes the Game

"The profits are all based on the user’s info, but the users get none of the profits back. Apple makes its money off of good products, not off of you. As they say, with Facebook, you are the product."

Steve Wozniak, Apple Co-founder

Silicon Valley legend and Apple co-founder Steve Wozniak made this quote in the wake of the Cambridge Analytica privacy scandal.

The scandal itself did little to improve the privacy Facebook offered its users. A Pew study in late 2018 found 74% of Facebook users did not know it maintained a list of their interests and traits to target them with ads.

By early 2021, Apple decided it had enough. It introduced a game-changing privacy feature called App Tracking Transparency (ATT). The feature made it easy for users to opt-out of being tracked by apps simply by tapping a button labelled “Ask App Not to Track”.

We believe users should have the choice over the data that is being collected about them and how it’s used. Facebook can continue to track users across apps and websites as before, App Tracking Transparency in iOS 14 will just require that they ask for your permission first. https://t.co/UnnAONZ61I

— Tim Cook (@tim_cook)
Dec 17, 2020

Opting out prevents apps and advertising platforms like Facebook from tracking the user’s IDFA. Unsurprisingly, around 75% of users opted out of being tracked. This greatly diminishes Facebook’s tracking and measurement capabilities.

“Apple created two challenges for advertisers. One is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes. The other is that measuring those outcomes became more difficult.”

Mark Zuckerberg, Facebook 4Q21 earnings call

Advertisers saw a significant reduction in their return on investment from their Facebook advertisements and therefore, reduced their spending with Facebook. Facebook estimated this impact to be $10bn.

Advertisers are desperate for a solution. For example, loose tea-leaf seller Plum Deluxe saw a 10x increase in its customer acquisition costs.

Apple has essentially raised the bar for audience engagement. Users must choose to give advertisers their information. 

It’s back to the reality that John Wanamaker discovered nearly 150 years ago. Successful advertising requires consumers to get something valuable in exchange for their attention. For platforms with high quality content and engaged audiences, this is an opportunity.

Email Newsletters and the Value of High Quality Content

“Email is the only place where people (not algorithms) are in charge.”

Ann Handley, MarketingProfs founder and best-selling author.

Ann highlights an important point. With emails, people get to choose what they read. It’s about giving them valuable content, rather than relying on opaque algorithms.

Email newsletters have 4 main metrics to measure audience engagement:

• Open rates: The proportion of subscribers who choose to open the email.

• Click rates: Clicking on links in the article is an indication that the reader is engaging with the content and finding value.

• Unsubscribe rates: A low unsubscribe rate over time implies subscribers are finding value in the content.

• Webpage Views: Email newsletter platforms like Beehiiv simultaneously publish the newsletter content onto the writer’s website. A website gives writers a space to publicly display their content and capture engagement from a wider audience.

Apple’s privacy changes may make measures like open rates less dependable. However, valuable content makes readers take deliberate actions that are strong indicators of engagement. For example, high click rates give potential advertisers confidence that readers will click on their advertisement.

Additionally, newsletter writers have highly targeted audiences. As discussed previously, successful writers see their audience as their greatest asset and take steps to understand them. Below is the level of detail Young Money author Jack Raines has on his audience:

“The average Young Money reader is a late 20s male, living in the US, making $100k+ working in finance.”

Young Money newsletter by Jack Raines

Email newsletters can therefore be a valuable advertising alternative to Facebook’s watered-down Ad Platform. Underpinning their success is the quality content produced by star writers. These writers have the valuable audience relationships that advertisers are desperate to reach.

Morning Brew showed how valuable a newsletter audience can be. In late 2020, Business Insider acquired Morning Brew for an estimated $75m. At the time, Morning Brew had amassed 20m subscribers and was making $15-20m in advertising revenue.

Technology can help more writers achieve this level of success. This time, they won’t have to give away their content for free.

How Beehiiv’s Ad Network Is Built for Its Content Creators

“If you want to be cool, go join someone else. If you want to make others cool, join Microsoft.”

Satya Nadella, Microsoft CEO

Satya made this comment in front of a crowd of eager Stanford Business School students. It is a vivid description of the alignment platform businesses have with users.

Platform businesses like Beehiiv succeed along with their users. They provide the infrastructure that allows their users to build direct relationships with their audiences and succeed.

This contrasts with aggregators like Facebook. Its Ad Network was a great solution for advertisers as it combined strong audience targeting and convenience.

With a single point of access, advertisers could reach the audience of the individual creators and get all the reporting and services they need to run an advertising campaign.

Content creators paid the price for Facebook’s ‘convenience’ because Facebook owned the relationship with their audience.

Beehiiv’s new Ad Network offers the best of both worlds, enabling content creators to maintain control over their audience while providing the necessary tools and services for advertising success.

Beehiiv's Ad Network

With a business model that succeeds along with its writers, Beehiiv will become a destination for star content creators. Their valuable audiences will make Beehiiv’s Ad Network irresistible to advertisers.

Conclusion

Apple’s privacy changes have created a $10bn opportunity.

For the last 10 years, Facebook has used technology and surveillance in place of providing consumers with valuable content. It was incredibly successful and kept all the gains for itself.

Apple’s privacy changes have swung the pendulum back to consumers. Once again, it’s about John Wanamaker’s principles of transparency and giving consumers something valuable in exchange for their attention.

This means there has never been a better time to be a content creator. It’s quality content that creates the authentic audience relationships that advertisers desperately want.

By aligning itself with its customers, Beehiiv’s platform model will create a hub for star content creators. Their valuable audiences will make its Ad Network a magnet for Advertisers.

That’s 10bn reasons for investors and content creators to pay close attention to Beehiiv.

What's the secret to amassing over 26,000 subscribers and a six-figure newsletter writing income? To find out, I'm so excited to sit down with star writer Jack Raines. Jack will show us how embracing our personality is the key to successful writing.

Preserving its writers' personalities is what separates the strategies of Beehiiv and Substack. Like Shopify, Beehiiv succeeds with its writers.

Discover how Jack became a successful writer, how writing can be your superpower and what makes Beehiiv his platform of choice.

Have you ever dreamed of turning your writing passion into a successful career? Meet Jack Raines, the mastermind behind the Young Money Newsletter – a publication that has amassed over 26,000 subscribers and earned him a six-figure annual income in just two short years. How did Jack achieve this level of success? By leveraging the power of content-based platforms like Beehiiv and Substack. 

In a previous article, I discussed the potential of these platforms. ‘Star’ writers like Jack account for the majority of success in writing. Attracting them is crucial for any writing platform. In this article, we sit down with Jack to delve into his journey as a writer and find out why he chose Beehiiv's platform. His insights show how important their unique personalities and audience relationships are to becoming a successful writer. 

For investors and writers alike, learn how Beehiiv's alignment with these writers positions it for long-term success.*

Jack Raines, Author and Founder of Young Money

* All opinions are personal. This is not investment advice.

Stand Out by Finding Your ‘Zone of Genius’ – Jack’s Journey to Young Money

All of us have the power to be writers. First, we need to decide what we want to write about. I initially met Jack in his Business of Newsletters course that he ran with Nathan Baugh, another successful writer. To stand out, Jack hammered home the need to find your ‘Zone of Genius’. Think about this as your sweet-spot where your passion meets your expertise. 

Zone of Genius

Jack began his career as a financial analyst with plans to “climb the corporate ladder and make as much money as possible.” No finance degree could prepare him for what came next.

Shortly after starting at UPS, the world experienced the COVID lockdowns and Jack’s real financial education began. He began trading in high octane finance products like options and SPACs. 

“Physically, I was "training" to be UPS's finest financial analyst. Mentally, I was thinking about becoming the next Michael Burry.”

Jack Raines

He came closer to this goal than you might guess. At its peak, Jack’s trading turned $6,000 into $400,000. Such a spectacular amount “shouldn’t have been possible for a dumb 23 year old.” He details his wild ride here. 

Surprisingly, his success wasn’t making him happy. All he could think about was making more. He spent every waking moment thinking about the market and it was stressing him out. 

When he lost nearly $150,000 in a single trade, Jack walked away from trading with the rest of his gains. He had experienced something in his early 20s that most people never would in their entire lives. He realised there is more to life than money. Jack had found his ‘zone of genius’.

“Your money. Your career. Your time. Three variables that will forever be intertwined. Yet we rarely take the time to stop and think about them … I write stories to help you think about those whys.”

Young Money Newsletter by Jack Raines

How Writing Can Become Your Superpower

I started writing during the seemingly never ending COVID lockdowns in Melbourne. It was a way for me to break the isolation and connect to the world around me. Jack’s experience shows how writing can also be a superpower. How? By improving your decision making, building your network and turbocharging your ability to learn. 

Writing requires building a fluid narrative that your audience can follow. It forces you to really think through concepts which changes the way you make decisions. 

“Being able to write something out gives you a huge advantage. You have a well-thought-out rationale for any decision you make.”

Jack Raines

Jack is currently an MBA student at Columbia University in New York. Even in such a pretentious, Ivy League university, Jack’s writing has made him one of the most networked students there.

“One of the biggest benefits is how it has turned into a gateway for meeting people. They take an interest because of my content. This opens the door to meeting them.”

Jack Raines

He has been interviewed by  Rachel Braun in Jason Calacanis’s leading venture show, This Week in Startups, and has formed personal relationships with award winning finance authors like Morgan Housel. Imagine how you could turbocharge your learning by talking directly to experts in your chosen field. 

Rachel Braun and Jack Raines on This Week in Startups

Like most superpowers, there is a catch. Being a successful writer takes courage and resilience. 

How Personality and Distribution Determine a Writer’s Success

Remember the ‘Passion’ part of the ‘zone of genius? It gives your writing its personality. The problem - it’s scary putting your views out there because you leave yourself open to criticism. Yet, good writing is all about personality and having a point of view. 

Jack doesn’t shy away from showing who he is. His post below says it all. 

Jack Raines Linkedin Post

It also takes time to be a successful writer. Jack took 9 months, 90 articles and nearly 2,000 hours of consistent writing before he started earning money as a successful writer. It wasn’t just about content either. 

“You can write good stuff but if no one sees it, it doesn’t matter.” 

Jack Raines

Jack estimates nearly 60% of his time was spent on distribution. His biggest tip – build relationships with well-known experts in your field and leverage their audience. 

Jack reached out to people on social media, commented frequently on their posts and shared his work by directly messaging them. Eventually, these experts began to share his work with their audiences. Their influence helped Jack reach a point of ‘escape velocity’ where his audience began generating subscriber growth on their own.

With a newsletter publishing twice per week, a large 26,000 subscriber base and a 6-figure income, Jack is a core customer for content publishing platforms like Beehiiv and Substack.

Jack’s reasons for choosing Beehiiv show why it will become the dominant newsletter publishing platform. 

How Beehiiv Turbocharges Jack’s Audience Growth

Newsletter platforms like Substack and Beehiiv took off during the pandemic which led to Substack raising $65m in March 2021. Founded just 18 months ago, Beehiiv has been growing rapidly. Both Beehiiv and Substack give writers tools to build an audience around their newsletter publication. It’s how they do this that makes all the difference. 

Beehiiv Founding Team as profiled on Social Leverage: Jake Hurd, Tyler Denk and Benjamin Hargett

Beehiiv was founded by Tyler Denk, Benjamin Hargett and Jake Hurd. They are the engineering and product team behind the Morning Brew newsletter. The content and growth tools they built enabled Morning Brew to grow to 2 million subscribers and achieve a reported $75m acquisition exit by Business Insider. 

With Beehiiv, the founders are democratising the custom technology and analytical tools that made Morning Brew successful. They turbocharge a writer’s audience growth.

For example, Jack highlighted audience analytics as an area where Beehiiv shines. 

“Substack’ s analytics is a lot more barebones especially on audience acquisition, which is one of the most important data points.”

Jack Raines

To grow, writers need to understand where their audience is coming from to focus their effort on the right acquisition channels. You can see the level of detail Beehiiv provides below.

Young Money Analytics

Another popular feature is Beehiiv’s new Recommendations feature which allows Beehiiv’s network of writers to cross promote newsletters. Writers select other newsletters to recommend to their new subscribers. New subscribers can subscribe to these newsletters with a few clicks during the sign-up process. 

Beehiiv’s Recommendation feature. New subscribers simply click to sign up to recommended newsletters.

“I probably get 80-100 subscribers per day without me having to actively promote my work.”

Jack Raines

Jack described this as a ‘game changer’.  The catch is this system works on reciprocity. To be mutually beneficial, writers typically need at least ‘5,000-10,000’ subscribers.

Therefore, recommendations introduce a virtuous cycle of successful writers attracting more successful writers. It signals Beehiiv’s evolution from a pure SaaS provider into  a platform benefitting from network effects. 

Beehiiv Platform network effects – Successful writers attract more successful writers.

Substack has a similar recommendation engine and other powerful features. There is an important difference that is a deal-breaker for successful writers like Jack.  

“Substack has a lot of this stuff too but I don’t like how they are trying to funnel everything into their app.”

Jack Raines

What’s the problem with an app? It dilutes the very thing that make writers like Jack successful – their personality.

The Amazon vs Shopify Comparison and Why It’s Different for Writers

Does every brand look the same to you on Amazon? Building a brand on Amazon is hard. Amazon wants its enormous customer base to make as many transactions on its marketplace as possible.

To make the customer buying decision efficient, Amazon groups their eCommerce sellers into common categories and features. Customers build a relationship with Amazon’s seamless shopping experience and brand. Meanwhile, every seller on Amazon looks alike and without personality.

This is in contrast to Shopify’s approach to provide their sellers the tools and infrastructure to sell online. Shopify CEO Tobias Lütke famously said,

“Amazon is trying to build an empire and Shopify is trying to arm the rebels.” 

Shopify CEO and Co-founder. 

Tobias draws the distinction between 2 classic business models in technology, Aggregators and Platforms. 

By providing the relevant software and infrastructure, Platforms like Beehiiv and Shopify enable their users to build direct relationships with their customers. Their business models are more transparent and aligned with their users who use more features as their businesses grow.

In contrast, Aggregators position themselves between users and their customers. This is the business model Substack has chosen with its app strategy.

This isn’t inherently ‘bad’. Substack’ s app is a great customer experience with all your Substack subscriptions in one place. Features such as ‘Discover’ also make it a powerful customer acquisition engine.  

The trade off is readers are building a relationship with the app experience instead of individual writers. This positions Substack to capture more of the value from its writers’ work.

Aggregator Network effects: Audiences build a relationship with the app instead of individual authors

Here’s the thing about writing. Writers are in the business of content, where it’s all about ‘star’ writers like Jack.  

How Attracting the Best Writers Is Only the Beginning for Beehiiv

The power law is used to describe relationships where a small number of participants receive the majority of the gains. You hear it often in venture capital where a small number of ‘star’ investments make up the majority of the investment returns.  

After analysing data from the New York Times and other sources, Facebook engineer Michael Tauberg found this relationship in a variety of written content. 

Percentage of success (revenue, weeks on charts, units sold etc) held by the top 20%.

In writing, success tends to breed more success. As their audiences grow, writers get more feedback and recommendations. Jack sees his audience as his greatest asset. 

“You become a better writer by seeing what pieces people like and dislike … As your audience grows, more people reply to your emails. That’s how you know you’ve written a really good piece.”

Jack Raines

Successful writers like Jack are a rare commodity. They attract the bulk of the audience and deserve a greater share of the rewards. The problem Substack will face is the growing incentive for their successful writers to churn as they grow.

Churn Risk: An audience is a key asset. Writers want them to identify with their personality, not an app

These writers will be drawn to Platforms like Beehiiv where they have control over their brand personalities and audience relationships.

Gathering successful writers is like assembling The Avengers from Marvel’s superhero series. Their passionate audience act as the beacon attracting more participants onto the Platform through a series of network effects. Therefore, we’re only seeing the beginnings of what’s possible on Beehiiv. 

Conclusion

Successful writers like Jack understand that their personality and audience are their greatest assets. Their daring might invite criticism but attracts a passionate audience that spread their work far and wide. These ‘star’ writers are few and far between – but they will account for most of the audience. 

By aligning with these ‘star’ writers, Beehiiv's platform approach gathers their audience onto one platform where they act as a beacon for other writers, readers and advertisers.  We're just beginning to see the potential of Beehiiv which could become a leading platform for writers.

For investors and writers alike, I suggest you check out Beehiiv's platform to see what these ‘star’ writers are excited about. 

And if you want to learn about how to become a successful writer, I highly recommend checking out Jack's newsletter Young Money (think finance with an attitude) and his Business of Newsletters course, which he teaches with Nathan Baugh. These resources will help find your unique voice and build a passionate audience of your own.

I'm really excited about what I learned in this article. In today's uncertain environment, engaged users are a business's greatest asset. Why? Engaged users are more likely to accept price increases or stick to your product as customers slim down their subscriptions.

Harry Hamilton is the founder of Minnow and former Group Product Manager at fast growing unicorn SafetyCulture. Harry's reflections show how simplicity is key to maintaining an engaged user base as a business scales. For investors and Product Managers, we get a rare glimpse into the tactics and strategies behind SafetyCulture's rapid growth. In this article, discover Harry's journey into product, how SafetyCulture prioritises user engagement at scale and how he is giving back to the Product Management community with his education platform Minnow.

“SafetyCulture is truly the most customer centric company I’ve ever seen.” Harry Hamilton is the founder of Minnow and a former Group Product Manager at SafetyCulture

Safety Culture is a fast growing unicorn with a valuation of over $2bn serving 65,000 businesses in 180 countries. Its workplace safety app is powerful but what I love is how easy it is to use. I never felt lost while navigating the app. In this article, Harry’s reflections show how this simplicity is the result of deliberate product strategy decisions. The user engagement it generates is key to SafetyCulture’s rapid growth. 

Harry played an important part in growing SafetyCulture’s user base. For investors and product managers, this is a rare opportunity to learn the tactics and strategy behind SafetyCulture’s Product-Led growth. 

Since leaving SafetyCulture in June 2022, Harry continues to give back to the Product Management community through his education startup Minnow. It shares Harry’s strategic approach along with the views of other Product Managers from leading Australian startups like Canva. You can learn more here.

Harry Hamilton, founder of Minnow and former Group Product Manager at Safety Culture

How Harry Created His Opportunity in Product Management

Is there a clear career pathway in product? I don’t see many ‘Bachelor of Product Management’ degrees out there. Harry’s journey to Product Management is a case study of how anyone has the power to define her/his career. 

Like many of us, Harry did a commerce degree and chose the consulting route with Deloitte. Consulting taught him to look at a business strategically. For example, is the size of the new opportunity worth pursuing? If so, what capabilities does the organisation need to pursue it? 

Harry enjoyed the challenge and working in high-performing teams. However, he wanted to go beyond PowerPoint presentations. 

“It was a great place to learn but I worked out pretty quickly that I wanted something where I was tied to outcomes in a meaningful way over the longer term.”

Harry Hamilton

What excited him was coming up with ideas and bringing them into the world. The startup world beckoned, and he started having conversations with people in the space. The problem was, he had no experience in startups or product. 

Despite this, his enthusiasm got him an audience with SafetyCulture. Here, he found an organisation willing to turn the traditional hiring process on its head. To them, Harry was a strong cultural fit and his enthusiasm was exactly what they were looking for. Two years and a day after he began in consulting, Harry left for a new role SafetyCulture created for him in ‘Product Strategy and Commercialisation’. 

Harry’s initial focus was building a new business unit that would complement SafetyCulture’s workplace safety app. As this business unit moved beyond the early proof-of-concept stage to commercialisation, Harry’s role transitioned from Strategy to Product Management. 

The learning curve was steep. Yet it took 3 years before Harry was sent for his first Product Management course. How did he manage in the meantime? Harry has 2 pieces of advice for anyone scaling steep learning curves. 

The first is to lean into your strengths. Stakeholder management is an important part of Product Management and Harry was well versed in this from his time in consulting. He led through collaboration and influence rather than exercising his authority as a Product Manager. 

“Everything you do, you’re working in a team, never in isolation.” 

Harry Hamilton

The second is finding mentors to develop relevant technical skills. For Product Managers, this includes understanding design fundamentals such as user experience concepts. Harry credits colleagues such as Brian Swift (now Head of Product at Dovetail) for his development in this area. 

As Harry grew as a Product Manager, he was given the responsibility to drive the growth of SafetyCulture’s core app (previously called iAuditor). 

It was a rare opportunity to work on such a unique and fast growing product. His insights take us behind the curtain of SafetyCulture’s remarkable growth. 

How Safety Culture Stands Out Through Its Customer Centricity 

“Why don’t I help people not have these problems? Nobody goes to work and wants to have an injury. The checklist was the tool that pilots were using since the 1930s.”

Luke Anear, Founder of SafetyCulture

SafetyCulture Founder Luke Anear as profiled in Business News Australia

Luke Anear worked as a private investigator verifying workers compensation claims for private insurers. He saw firsthand the impact of these claims such as a loss of self esteem and purpose from workers who weren’t able to work. 

What began as selling word documents for workplace training in 2004, evolved into a workplace safety platform that companies use to build checklists to improve workplace safety. SafetyCulture’s rapid growth resulted in it serving 65,000 businesses with over 600 million checks being completed. Not bad for a business initially funded by $10,000 that Luke borrowed from his dentist and a handful of investors.

The secret behind SafetyCulture’s success – customer obsession. 

“We have a value called ‘think customer’…the way that it was applied to SafetyCulture was absolutely next level.”

Harry Hamilton

At SafetyCulture, Product teams live and breathe the customer. Every member of the team including the engineers speaks to customers several times a week. Their office has rooms and even artwork designed around their customers.

SafetyCulture meeting room designed around their client Coles

Harry credits this obsession to the founder, Luke. Product teams needed to frame their presentations around the customer. For example, ‘Here’s a specific customer ‘x’ who has a real problem ‘y’ and we are going to build ‘z’ to tackle the problem.” 

Harry recalls a presentation where Luke rang a customer on the spot to see if a product idea made sense. Harry took this example to heart. 

“I always took the mark of a good Product Manager as having 5-10 customers that they are close enough to call their mobile at any time to ask questions. That’s how close you need to be to build valuable products.”

Harry Hamilton

The reason for this obsession – SafetyCulture employs a Product-Led Growth model which relies on highly engaged customers for its success.

Leveraging Your Users – How SafetyCulture Fuelled Its Product Led Growth Model

Recognise a few names? Source: Open View Partners

Venture capital firm Open View Partners, defined the Product-Led Growth (PLG)  business model where the product itself (rather than a big sales force) is the primary driver of user growth. Users get hooked on the product and recommend it to their colleagues who spread it throughout the organisation. 

There is a catch. Users aren’t known for their patience. The product must be easy to use and demonstrate quickly how it makes work life easier. 

This is especially true for SafetyCulture as most of its users came from a ‘pen and paper’ or spreadsheet environment and are not used to complex products. To be customer centric, SafetyCulture needs to be simple. 

“It’s very often the simple things done well that were the ‘wow’ features, rather than the things that were rich and complex.” 

Harry Hamilton 

You really need to try it to understand how easy it is to use. After downloading it for free, I created my first checklist in minutes. I also had great feedback from my fire alarm inspector.

“We use SafetyCulture for our fire and gas inspections. It’s so easy to use and to flag issues. The public library templates are great and help us design our checklists.”

Gabriel Sedacca, Founder of Guardian Smoke Alarms

As the name suggests, Product-Led Growth models are known for their rapid adoption by users. SafetyCulture’s strategy amplifies this model with a combination of product design and pricing. 

Firstly, it’s much easier to rely on a user to bring in members of her/his team rather than acquire them individually. How do you promote team expansion in your product design? At SafetyCulture, Harry and his team used the following tactics:

Priming the User: Set clear expectations during the product experience that this is a product for teams. “You should feel like your team is missing if you’re using the product by yourself.”

• Priming the User: Set clear expectations during the product experience that this is a product for teams. “You should feel like your team is missing if you’re using the product by yourself.”

• Respecting Context: The process of inviting team members must feel natural. For example, prompting the user to invite the team member that she/he is sharing a report with.

• Thoughtful Onboarding: All your users go through this process which makes it an essential place to promote team expansion. 

The SafetyCulture app experience. Left to right: Priming on the Onboarding Screen, Contextual Sharing of Inspection Reports and Inviting team members

The next step is to design a pricing model that leverages team expansion. SafetyCulture’s freemium pricing model gives away a large amount of value upfront, allowing for ten free users. In return, it magnifies SafetyCulture’s team expansion product strategy. 

“In a B2B SaaS freemium model, team expansion has incredible leverage.”

Harry Hamilton

SafetyCulture Pricing Page. The free plan allows for up to 10 team members.

SafetyCulture doesn’t stop there. As discussed in a previous post, sustainable growth often requires expanding the products offered to customers. This is always a challenge and requires thoughtful product design.  

Customer Centricity and SafetyCulture’s Product Expansion Model

“The journey from a fundamentally single product company to a platform company is incredibly hard.”

Harry Hamilton

SafetyCulture started as a simple checklist app but has evolved into a workplace safety and operations platform. Harry’s reflections show how customer centricity is the centre of SafetyCulture’s successful approach to product expansion. 

Respecting User Context

It starts with a deep understanding of how users accomplish their tasks. The goal is to make your products fit seamlessly into the user’s workflow. For workplace safety inspections, SafetyCulture creates a natural flow for the user to discover and adopt their Checklists, Actions and Reports products.  

Workplace safety user workflow and SafetyCulture products. Source: Venture Journeys

Managing Complexity

All multi-product platforms continuously manage a trade-off between additional functionality and complexity. Building more features makes your product more powerful but also makes it harder for users to understand resulting in a poor user experience.

“You end up with a laundry list of stuff, but customers don’t care about the features. They are looking for the product to solve their problems”

Harry Hamilton

• Team Communication: As your product teams grow, it’s important to create opportunities for them to communicate. Harry organised weekly meetings where the product, design and engineering leads of each team gave updates on their learnings, progress towards their goals and if they needed further support.

• Simplifying: Harry was continuously looking for ways to simplify the product experience. Particularly, keeping the navigation menus simple enough for users to find the features they needed. For example, Harry’s team integrated their numerous Help tools into the product experience itself. It’s done so intuitively that I never felt lost while using the app.

SafetyCulture in-app Help prompts act as a natural guide as users discover the app’s various products and features

Measuring Success and Sustainable Growth

For PLG companies, Net Revenue Retention is a key indicator of success. Why? Retained users continue using your product and invite new users. This is the reason PLG businesses tend to have Net Revenue Retention Rates of over 100%. The secret behind this metric is engagement. 

“It comes back to the customer centric approach. Everything we did was framed in customer value creation. The way you measure it in B2B SaaS is through engagement.”

Harry Hamilton

Engagement is at the heart of the Product-Led Growth model. At SafetyCulture, engagement was measured in Monthly Active Users (MAUs). 

Importantly, this wasn’t just users who logged onto the platform every month. They had to do some action of value. For example, opening the app and completing an inspection. As SafetyCulture launched new products, they actively measured the number of users who engaged in 2 or more products each month. 

What are the benefits of focusing on engagement? 

“You’re afforded many options if you have a healthy engaged user base.”

Harry Hamilton 

An engaged customer base gives your product strategic optionality. In the current inflationary environment and tech downturn, this could be your greatest asset. Engaged users are more likely to accept price increases or stick to your product as customers slim down their subscriptions.

Venture Journeys

Harry’s Next Chapter - Building a Product Management Community With Minnow

Customer Centricity is at the heart of SafetyCulture’s simple user experience and strong engagement. Engagement gives a business the flexibility to achieve its strategic objectives. Harry’s insights build on our understanding of how customer centricity can help businesses succeed.

Venture Journeys Customer Centricity Framework

SafetyCulture is one of a growing number of successful Australian technology companies. Yet, we don’t often hear from Product Management experts like Harry who have unique insights on the problems Australian companies face.  This is the motivation behind Harry’s new cohort based learning platform Minnow. 

Unlike most courses, learners are taught to apply strategy and structured problem solving to product management. This was Harry’s ‘super power’ throughout his career as he dealt with the daily emergencies product managers in startups face.  

Perhaps the biggest opportunity is to join a growing product management community from interactions with fellow learners and guest speakers from success stories like Canva, Atlassian and SafetyCulture. In true PLG fashion, you can learn more with a range of options:

• Preview Minnow’s course content with a 7-day free trial to watch any product leader session recorded in the course.

• Sign up for one of Minnow’s courses

• Join his Product Management 101 course with Startmate in February

It’s encouraging to see a generation of Product Managers giving back to the community. I’m excited to see the impact Harry and Minnow will have on the Australian startup ecosystem.

I've been a big fan of cohort based courses. These live, online courses allow us to interact with global experts who teach us how to solve real-world problems and progress our careers. They are the professors we wished we had.

After taking 2 of Sphere's courses, I knew I had to profile them. Sphere's focus on expert instructors democratises Ivy League university content and could disrupt postgraduate education. This article will make you think twice before enrolling at Harvard.

The marketplace business model has the power to redefine industries, as Google and Tinder have shown. For those of us trying to upskill in our careers, postgraduate education is certainly an industry that requires change. 

Marketplaces are powerful but challenging to start. While Tinder famously got its start by registering everyone at a USC College party, Sphere’s magic moment required more resilience. Turns out career progression is less viral than getting a date. 

Founded by Nicholas Rudder and Adrian Sarstedt, Sphere provides live, cohort based courses that help learners upskill in their careers. They made the most of their entry into Y Combinator by building relationships with 800 leading technology companies like Stripe and Tinder. Such an audience allows Sphere to attract expert instructors and develop highly relevant courses. My interest in Sphere began after attending 2 of their courses. How I wish they were there earlier in my career!

Sphere has processed 1,500 learners so far, and recently raised US$4m in seed funding. Notable investors include Felicis Ventures, Y Combinator, and the founders of Go1, Lyft, Betterup and Flexport.  

EdTech investors can’t afford to ignore Sphere. It is building a new kind of postgraduate university that could disrupt even Ivy League colleges and their $200,000 degrees.  

Sphere Co-founders Nicholas Rudder and Adrian Sarstedt. Image sourced from Business Insider. *All opinions are personal. This is not investment advice.

How Sphere is the Expert Resource That Our Careers Need

Most of us will never forget the early days in our career. For me, there was no ‘textbook’ on how to become an investor and what I learned at university just wasn’t sufficient. 

Over desperate nights and weekends in the office, I put together a collection of resources that helped me understand what we were doing. It was tough! I recall the hit-and-miss nature of the internet. For example, what was relevant information that I could use in my analysis? I had to get it right, mistakes would only highlight my inexperience

Upskilling is a high-stakes game. Our reputations are on the line. We need real-world insights, from industry experts.

Eventually, I was included in the team and had the privilege of learning from some of the best investors in the country. My experience isn’t unique. With most major businesses admitting to a skills gap in their workforce, upskilling is something most of us will go through in our careers.

Sphere is building a platform where industry experts teach courses to help you find the answers you need at every step in your career. 

Upskilling redefined: From trial-by-error searching to 1 portal to learn from industry experts

Sphere uses the cohort based learning format discussed in a previous article. These are live, online courses where learners progress through the material in ‘cohorts’ or learning groups. While they are expensive (US$750-5,000), they deliver strong learning outcomes and the opportunity to build relationships with like-minded peers. Exactly what we need!

If Sphere is successful, it will redefine post graduate education. 

A Business Model With the Power to Create a New Kind of University

Like most learners, I couldn’t afford Ivy League schools like Stanford University. Yet this was the level of expertise I needed to succeed in my role.

Sphere is building a new kind of learning institution, where learners can be taught the skills they need from industry experts. Its challenge is the high cost of building the large number of courses required to meet all their different needs. 

To solve this, Sphere is using a business model used by iconic companies like Google and Uber. A marketplace connects buyers and sellers in exchange for a fee. In Sphere’s case, the ‘buyers’ are the learners and the ‘sellers’ are the expert instructors. 

Marketplaces are powered by network effects that make them more valuable as more people use them. For example, 

• More learners make Sphere’s marketplace more valuable to expert instructors. 

• More instructors increase Sphere’s value to learners.

The result is a virtuous cycle where learners and instructors grow the marketplace themselves! This is why network effects are estimated to account for 70% of the value created in technology businesses. 

Marketplace network effects: More buyers will attract more sellers which will attract more buyers etc.

“Network effects have accounted for approximately 70% of the value creation in tech.” 

James Currier, Founder of NFX

There is a catch. Marketplaces are extremely difficult to start. Which side comes first – learners or instructors? This is the ‘chicken and egg’ dynamic for marketplaces.

It also illustrates an important marketplace concept called liquidity, or how efficiently the marketplace can connect buyers and sellers. Marketplaces need to build a critical mass of buyers and sellers to kickstart their network effects. Failure to achieve sufficient liquidity is the reason most marketplaces fail. 

“Liquidity isn’t the most important thing… it’s the only thing.” 

Simon Rothman, Partner at Greylock Partners

In the past, startups like Uber spent huge amounts of capital subsidizing both sides (riders and drivers) to achieve this critical mass. Today, startups don’t have this luxury. They need a clever ‘liquidity hack’. For Sphere, discovering this has been a combination of the journey and resilience of the founders.

Nick’s Journey and the Need for a Better Postgraduate Experience

I recall my volunteer work for a charity during university. We were dropped off in the middle of the city and told to fill a big tin can with donations by the end of the day. It was exhausting work but taught me resilience as I persevered through hundreds of rejections for the elusive ‘yes’. 

Nick took this to a whole other level by co-founding a social impact startup (Pledger) that facilitated thousands of dollars in transactions between corporate donors and charities. It was his first taste of entrepreneurship. 

After university, he worked in prestigious roles in consulting and investment banking. These are roles with steep learning curves. New hires need to build their expertise to advise clients on solving real problems. 

Nick’s problem – he wasn’t satisfied on just advising businesses, he wanted to run one.  He believed an MBA program would give him the skills to build a startup and enrolled in The London Business School. 

Nick’s London Business School introduction page

The experience was underwhelming. Nick felt that many Professors lacked the relevant industry experience and that academic ’strategy 101’ courses weren’t what the next generation of builders needed. There was remarkably little content on contemporary topics like technology and entrepreneurship skills that could be applied in real life. 

COVID added insult to injury when many universities continued to charge full fees for hastily organised Zoom classes. 

Nick knew there had to be a better way. He reached out to Adrian Sarstedt whom he had known for years. With a software engineering and machine learning background, Nick described Adrian as a ‘technical guru’. 

Together, they co-founded Sphere (initially called ScholarSite) and set out to build a better postgraduate experience.

How Sphere Got Into Y Combinator Through the Power of Focus

Sphere was founded in early 2021 as the creator economy was taking off. Initially, the idea was to build online profiles for professors and industry experts that showcased their experience and research. They would earn revenue by charging them for ‘creator tools’ such as the technology tools to run online courses. Through hustling and reaching out to their contacts, the founders amassed 4,000 expert profiles.

Encouraged by their progress, the founders pitched their ‘creator tools’ idea to Y Combinator. The Y Combinator accelerator program has produced industry giants like Airbnb. Their entry standards are demanding and they don’t mince their words.

Instead of a business that could redefine postgraduate education, Y Combinator saw Sphere as a social media startup. Only a few of Sphere’s expert profiles had an audience which meant that the likelihood of material monetization was slim. Instead of profiles, Y Combinator wanted paying customers. 

Nick and Adrian were down but far from out. They took another look at what they had built and zeroed in on what was working. They focused on their best experts and consolidated their ‘creator tools’ around one thing – running cohort based courses.

One of these experts is Steve Tadelis, a professor at UC Berkeley with experience at eBay and Amazon. The founders worked with Steve to produce the best course they could.

Focusing on what is working – Launching Steve Tadelis’s popular cohort based course

It worked! Steve’s success helped them launch other courses and got them into Y Combinator. 

How Sphere is Unlocking Content From the Best People In Their Industries

Y Combinator pioneered the accelerator concept in 2005. It has since built close contacts with well-known companies like Stripe and Flexport. For example, Stripes co-founders were Y Combinator alumni.  

Nick and Adrian made the most of the Y Combinator’s cult status in the technology industry. They built a presence in the Learning and Development (L&D) departments in 800 technology companies which gave them access to thousands of learners. This was the ‘liquidity hack’ they needed to kickstart their marketplace. 

Sphere’s marketplace liquidity hack – Learning and Development departments in 800 technology companies

This is a great example of how a marketplace’s liquidity hack can define its strategy. 

As my previous article discussed, Maven relies on its popular instructors to attract learners to its marketplace. In contrast, Sphere can provide prospective instructors with a ready audience in leading technology companies. These instructors earn 80% of the course earnings and build an audience in companies that could advance their careers. 

Sphere is an attractive proposition for instructors who have focused on being the best in their respective fields.

Not bad for a few hours of teaching!

The result is a marketplace being built around expert, specialised content tailored to corporate L&D needs. You can see this in how Sphere is organising its courses into ‘functional tracks’ such as Data Science and Machine Learning.

Sphere’s corporate relationships attracts specialised, expert instructors.

An Efficient Distribution Strategy Designed Around Their Customers' Needs

With around 80% of learners being sponsored by their employers, Sphere works closely with its corporate customers to understand their upskilling needs. Instructors then design their courses around these needs. As a result, learners are attracted to the highly relevant content. Think about it this way – wouldn’t you want to learn something that Apple thinks is important?

Additionally, Sphere uses a product-led sales distribution strategy. Professionals sign up to courses on a self-serve basis through the Sphere platform (i.e. a product-led model) and once they reach 12-15 learners in a company, Sphere will approach the L&D decision makers for a team/enterprise contract. These contracts promote Sphere’s courses to employees within the company.

The combination of high-priced courses ($1000 per student average) and a product-led sales distribution strategy (shorter sales cycles and lower cost of customer acquisition) results in strong unit economics. 

Unlike many EdTech providers, their courses are profitable from the first cohort. Their average cohort size of 100 learners is more than double the amount they need to break-even. Subsequent cohorts are even more profitable as most of the course design work has already been done. 

How Sphere Is Building Its Competitive Advantage and Disrupting Postgraduate Education

Sphere has found a way to kickstart its marketplace. How can it build a competitive advantage to avoid the brutal competition we’ve seen in ride-share markets with Uber and Lyft? By becoming a brand and building industry-recognised credentials into their courses. 

Longer term, the value of cohort based businesses will depend on their brands, not just content. Course credentials from Sphere could carry the same weight as Ivy League postgraduate degrees costing $200,000.

Sounds far-fetched? Think about the purpose of a degree certificate. Employees want their degrees to advance their careers. A degree credential can be unbundled into the ‘signals’ they provide to prospective employers. Employers want to know:

• What you learned (Domain Expertise): Are the skills taught relevant to the job or promotion the employee is applying for? Sphere’s courses are designed around specific corporate objectives and taught by leading experts in their fields. 

• How you learned (Conscientiousness): How have you shown initiative, can you work in a team? Sphere’s live, cohort based format is well-suited to evaluate this. 

• How capable have graduates been (General Horsepower): How have graduates performed in their roles? Sphere is working with their corporate clients to develop benchmarks for learner performance during and after the course.

Unbundling degree credentials

For example, the Sales Course was designed around specific corporate KPIs such as conversions. Sphere worked with their corporate clients to measure learner performance during the course as well as how the learner’s conversions improved after the course. 

These analytics and performance benchmarking will be specific to Sphere’s platform. Over time, they allow Sphere to build a brand with a track record of successful learner outcomes.

Nick and Adrian have an ambitious vision to build the world’s ‘largest decentralised corporate university’. Sphere will offer courses taught by leading experts across multiple job functions and levels of seniority. 

Sphere’s Corporate University – The ‘Harvard’ of cohort based courses?

This means you could get unstuck in your career by enrolling with Sphere instead of desperately searching on the internet. If you knew that Sphere’s courses could get you that promotion, would you enroll in Harvard? That’s the power of what Sphere is building.

Learning live from world class instructors makes online cohort based courses worth their high prices. What incentivises instructors to teach these courses? It can't just be about the money - they are global experts and have lots of other options. To find out, I interviewed my cohort based course instructor Eva Keiffenheim. Eva shares her journey to becoming a self-employed writer and thought leader. Her reason for choosing to teach cohort based courses - it's the most effective and engaging way for her audience to learn online. This bodes well for cohort based startups. 

This is a prelude to an upcoming article on cohort based EdTech Sphere.

What makes short cohort-based courses worth hundreds or thousands of dollars? It is the opportunity to learn from instructors who are world class practitioners. After completing 3 courses, I can attest to this. What is the motivation for such successful individuals to teach these courses?

To find out, I interviewed my writing course instructor Eva Keiffenheim. Her cohort based course is hosted on Andreessen Horowitz-backed EdTech Maven. Eva has over 27,000 followers on Medium and her articles have over 2 million views. 

Experts like Eva are a growing class of ‘creators’ who are beginning to monetise their expertise. What matters to them is the ability to build authentic relationships with their audience by providing valuable content. Eva’s insights show that cohort based courses are an ideal way to achieve this objective. 

In this article, learn about the effectiveness of cohort based courses, how Eva became an instructor and why cohort based courses will grow in importance. For EdTech investors*, learn how cohort based learning startups like Maven and Sphere are well-positioned to unlock the large amount of valuable content that industry practitioners like Eva have to offer.

* All opinions are personal. This is not investment advice

How Cohort Based Courses Are a Big Opportunity in EdTech

My previous EdTech article described how companies are facing a growing skills gap. For example, 80% of enterprises in the Global 2000 have a skills gap and see lack of talent as their primary business risk.

Our jobs are changing and we can no longer rely solely on our university education. We need to complement this with shorter online courses to ‘plug’ our skill gaps. This is where cohort based courses shine. 

Cohort based courses are live online courses where learners progress through the material in ‘cohorts’ or learning groups. They are expensive, costing US$750-5,000 compared to pre-recorded courses at US$10-50. To justify their cost, they are laser focused on outcomes. The learner leaves the course ‘transformed’ with a skill that can be applied immediately.  

How do these short 2-8 week courses achieve such impactful outcomes? By combining targeted learning objectives with a highly effective teaching methodology. 

Mastery of a skill can be broken down into its skill tree with various learning ‘branches’. For example, customer centricity is a big topic. When I started Venture Journeys, I hardly knew where to begin! I’ve since broken the ‘skill tree’ into the following ‘branches’. 

Building mastery: Venture Journeys’ customer centricity skill tree

Similarly, cohort based courses target a ‘branch’ for the learner to master. 

Their ‘live nature’ allows them to have a highly effective teaching methodology which is described below:

• Community: Learners get to collaborate with their peers and the instructor. Working towards common goals improve learning outcomes and builds relationships that continue beyond the course. For example, I’ve collaborated with 2 of my instructors after my courses. 

• Active Learning: Learners are constantly encouraged to use the concepts taught. Examples include answering in-class questions, participating  in break-out groups and providing feedback on projects. The best learning outcomes happen through doing, not passive listening. 

• Accountability: Learners are highly motivated due to the high cost and live nature of these courses. For example, I prepared for every class so that I could fully participate in the discussions. Courses are bi-directional (learners can talk back!) which makes accountability an even bigger feature for instructors. Their courses need to be in-depth, well designed and interesting. 

An example of active learning during Eva’s writing course

Combining targeted learning outcomes and a ‘learning by doing’ course design has resulted in course completion rates of 70-90% and high customer satisfaction scores. 

A cohort based course is a great product for learners which is why it attracts instructors like Eva. 

The Journey of a Creator - Eva's Growth From Teaching to a Global Thought Leader

Eva’s writing has given her the freedom to be self-employed. I previously wrote an article about the creator economy. It describes a growing trend where ‘creators’ like Eva earn a living through authentic relationships with their audience. How are authentic relationships built? It’s all about providing value. 

“It’s not about building a ‘brand’. It’s all about showing what you know in a way that’s helpful to others. You provide value with what you know.” 

Eva Keiffenheim

Providing value for her audience has been a consistent theme for Eva. She had a frustrating experience as a high school student. Armed with a Degree in Education and Masters in Innovation, Eva became a teacher. She was determined to improve the education system for her students. Her students clearly felt her authenticity. How many of us receive such appreciation when we leave our jobs? 

Eva’s farewell organised by her students

Eva aspired to connect with global experts in learning and education to create the change her students needed. She saw writing as a way to achieve this. She began writing daily in March 2020 on the writing platform Medium and began to attract an audience. Within 5 months, she was publishing 15-20 blog articles per month. The income she earned from her audience allowed her to leave teaching and become a full-time writer.

To a writer, blog posts are analogous with a software engineer’s GitHub profile or an architect’s portfolio of work. Eva’s frequent posts made her a thought leader in learning and education. Opportunities such as paid research projects, speaking engagements and consulting work soon followed. 

She is currently working on a policy paper on the future of education for a UK think tank and has just returned from a United Nations conference on transforming education systems. I was struck by how fulfilling her work is. Her thought leadership allows her to contribute and drive change to education on a global level. 

These opportunities illustrate a creator’s perspective on the nature of work. To Eva, it’s not about earning a single source of income from an employer. Instead, it’s about finding the best way to add value to her audience and having different income streams. 

A creator’s view of income. Checkout Eva’s landing page listing her offerings here

As her expertise and audience grew, she began to consider teaching online courses. 

How Cohort Based Courses Support the Growth of Creators

Teaching cohort based courses is demanding. Learners have high expectations and can spontaneously question the instructor on the material. Instructors must put considerable thought into the course design or risk being exposed. As Maven co-founder Wes Kao describes, there is no room for bulls**t. So why do instructors bother? Remember, these instructors or creators are global experts with lots of options. 

The reason – cohort based courses build authentic relationships with learners through live interactions and high learner outcomes. 

Authentic relationships are the lifeblood of any creator. Eva chose Maven to host her courses because of its focus on learner outcomes. Maven’s founders previously founded online education startups like AltMBA and Udemy. They know how to design successful, engaging live courses and provide these learnings to their instructors via a 2 week accelerator course. 

To be successful on Maven, instructors must rely on their own audience to attract learners to sign up for their course. For Eva, this is especially true as 70% of her learners pay for her US$997 course themselves instead of being sponsored by their employers. Building the trust needed for someone to pay that amount online is a process best illustrated with a customer acquisition funnel:

• Discovery: Building awareness of her expertise through blog articles. Readers are directed to Eva’s landing page built with Convertkit. On this page, readers are shown Eva’s other offerings such as her weekly newsletter.

• Consideration: More in-depth content such as Ted Talk videos, weekly  newsletters and longer blog articles. Readers build trust in the value that Eva can provide and her ability to ‘transform’ them. Eva includes a link to sign up to her cohort based course. 

• Conversion: Learners are directed to Maven’s signup page which has an outline of her course and testimonials. Maven handles signups, course analytics and payment. 

Eva’s customer acquisition funnel. Note how instructors on Maven must source learners themselves

The personal, in-depth nature of these courses creates authentic relationships with learners. These result in referrals and other opportunities for instructors to grow their audience. For example, I really benefitted from Eva’s course and reached out to her to collaborate on this article. Sharing this article introduces Eva to my audience which includes many aspiring writers. The 19 other learners from my course will be promoting Eva in similar ways. 

What keeps Eva on her current cohort based learning platform? She finds the 10% commission Maven charges reasonable given the value its platform provides. Additionally, the time she invested in learning and setting up her content on Maven’s systems, makes starting new courses easy. 

Nevertheless, her main reason for staying on Maven remains its focus on learner outcomes. She expects Maven to continue to innovate in online education and give instructors the tools that give the best learner outcomes. Creators like Eva realise that they only succeed if their learners do. 

Conclusion

Eva’s journey demonstrates how rewarding the life of a creator can be. Her thought leadership in education now enables her to drive the change she passionately believes in. 

Her experience also demonstrates how aligned the cohort based learning format is to the goals of creators. Content creators can build authentic relationships while getting paid for it. As an indication of this, Eva is looking to expand her cohort base courses from 20 to 50 learners twice per year. At that stage, these courses will be a major part of her income. 

For EdTech investors, this alignment supports the long term growth of cohort based learning startups. By attracting these creators, startups like Maven and Sphere unlock world class content that learners are paying hundreds of thousands of dollars to Ivy League universities to access. Their journey has only just begun.

This is a follow-up to my last article on content focused platforms. Storipress benefits from 2 growth trends- disrupting WordPress and the rising value of written content. It was my conversation with Storipress co-founder Alex Pan that initially got me interested in this area.  While Substack and Beehiiv focus on newsletters, Storipress’s website builder enables entire newsrooms to succeed online. 

Becoming a writer has been an important part of my investor journey. However, it was only after speaking to Alex Pan, co-founder of Storipress, that I truly began to understand the opportunities for writing online. With startups like Storipress, Beehiiv and Substack, we are finally seeing website builders that are focused on the needs of writers. By doing so, they stand to benefit from 2 growth trends - disrupting the incumbent website builder WordPress and the rising value of written content. 

Alex co-founded Storipress in 2020 after experiencing frustrations running an online student news publication. He was using WordPress which was introduced way back in 2003 and isn’t suited for prolific content producers. While Substack and Beehiiv focus on newsletters, Storipress’s website builder is more ambitious. It is built for news publishers and enables entire newsrooms to succeed online. 

I first met Alex during the Startmate Media Fellowship program. He impressed me with his long-term vision and customer centric approach. To date, Storipress has raised $500,000 in pre-seed funding from Startmate, Tim Duggan (founder of Junkee Media) and Boson Ventures. Their product is currently in Beta and I encourage writers and investors interested in this exciting space, to try it. 

This article will explore Alex’s journey, Storipress’s unique solution and the opportunities for long-term growth.  

* All opinions are personal. This is not investment advice

How Alex’s Publishing Journey Led to Storipress

Alex has been passionate about media from an early age. Do you know many people who leave high school to study media? This was what Alex did and eventually, his path led him to Macquarie University where he started a student newspaper called Polity.

Polity was a social enterprise news publication with over 45 volunteer writers and 2000 followers on social media. 

What do news publishers do? Running a news publication is more complicated than writing a blog. For example, instead of writing a weekly article, news publishers can publish several articles per day. It’s about quality, collaboration and consistency.                           

• Quality: Independent publishers are known for their unique perspectives. It’s important that their articles maintain high standards. To do this, they have editors to review article submissions by writers. 

• Collaboration: Teams of writers and editors collaborate during the above review process.

• Consistency: Planning and publishing articles to a schedule to generate audience growth.

News Publisher Workflow

With no specialised solution, Alex had to cobble together several systems including ‘sophisticated tools’ such as Google Docs and Google Sheets as shown above.

There had to be a better way. Alex teamed up with technical co-founders David Peng and Yu-Sheng Chang to build an all-in-one solution for news publishers. This starts with building a website. 

Why Storipress Is in a Fast-Growing Market That's Ripe for Disruption

How do you create a website? In the past, you had to write the code for the website yourself. In 2003, WordPress popularised Content Management Systems (CMS), which are platforms to build websites. 

Led by WordPress, CMS became a fast-growing category as it replaced the older custom code websites. However, like any incumbent, it wasn’t perfect. Some examples are: 

• Plug-ins: WordPress required additional plug-ins for important features like SEO (getting found on search engines like Google Search) and security.

• User Experience: It can be intimidating for some users to install and manage numerous plug-ins. Additionally, these plug-ins and coding that began in 2003 are making the user experience slow and clunky. 

To address this, SaaS CMS providers like Wix and Shopify came on the scene. These are all-in-one systems that appealed to a mainstream audience. WordPress still dominates the category. However, it is being disrupted by SaaS CMS providers which have grown at nearly 2x the rate of WordPress from 2011 to 2021.

Sources: CMS January 2022 Market Share. Active website growth rates estimated from Wix Investor Day Presentation  - WordPress estimated growth at 23% pa and SaaS CMS at 37% pa. Wix targeted long term revenue growth at 15% pa.

There is a significant opportunity to disrupt a legacy player (WordPress) with more specialised, user-friendly solutions

Wix and Squarespace are easy to use website builders that build everything from blogs to eCommerce websites. Their ‘jack of all trades’ approach can detract from the user experience. For example, Venture Journeys uses Wix. While Wix is easy to use, I find the website slow and clunky. I try to avoid including videos and Gifs (all those cool memes *sigh*) in my posts to speed up the experience. 

In contrast, Storipress is built for writers. 

How Storipress’s Unique Solution Is Empowering News Publishers to Succeed Online

Storipress’s target customers are independent news publishers or writers that have over 30,000 monthly views on their website. As a former publisher, Alex understands their need for a specialised solution. Storipress’s website builder combines the functionality of the 5 different providers he used in Polity into one platform. 

As a result, Storipress’s early customers have been able to reduce the steps taken to publish an article from 70 to 20. This allows writers to spend more time creating content and building their audience. 

I spoke to Storipress customers, Edge of the Crowd and Sub 11. They highlighted 3 key benefits – Speed, Audience Growth and Collaboration. 

Speed 

After transitioning from WordPress, Edge of the Crowd saw a noticeable increase in speed which made for a better user experience. 

WordPress was introduced in 2003. By contrast, Storipress has built its own infrastructure (i.e content delivery network) around modern code called Jamstack, first presented by Netlify co-founder Mathias Biilmann Christensen in 2016. 

Using Jamstack results in faster, more secure websites. It became popular and resulted in Netlify raising US$105m in late 2021 at a US$2bn valuation. 

Storipress further innovated around Jamstack to increase its flexibility and ease of use. The result is user friendly websites with class leading speed. 

Audience Growth

Storipress helps audience growth through an engaging user experience. Its speed allows its websites to have infinity scrolling. This recreates the experience on social media where new content loads automatically when the reader scrolls to the bottom of the screen. Readers consume 20% more content which makes it a great feature for news articles and blogs.

Both Edge of the Crowd and Sub 11 highlighted how Storipress made SEO easy with intuitive in-built tools. 

Collaboration 

Storipress’s inbuilt workflow tools such as editorial control and scheduling make content production more efficient. 

Sub11’s director highlighted Storipress’s word editor which allows him to type drafts directly into the editor and publish from there. I reflected on my own experience of managing and transferring drafts from Microsoft Word to Wix. I’m jealous! 

Edge of the Crowd complimented the Kanban board (see below) which makes collaborating between writers and editors easy. 

Storipress’s built-in Kanban board where article release schedules can be planned

Pricing That Is Aligned to the Value Customers Receive

WordPress’s open-source nature means it starts off as free. However, as users add plug-ins, pricing can vary widely.

In contrast, Customer Centric businesses align their pricing to the value that customers receive. Storipress’s pricing is based on the number of editors using the platform. Editors are seen as indicators for content published and therefore, the value customers are getting. 

Storipress pricing page

The feedback I received from his customers reflect this. For example,  with 4 editors, Edge of the Crowd is paying a similar amount to what they used to pay WordPress. However, co-founder Dan Coppel was satisfied due to the value they are getting. Articles are being published more efficiently and audience growth has increased since transitioning from WordPress.

How the Growing Value of Written Content Positions Storipress for Long Term Growth

My previous article described the opportunity for content focused platforms like Storipress. Bringing together writers and their audiences on 1 platform unlocks opportunities for monetisation and audience growth. This gives rise to a virtuous cycle of monetisation and content as shown below:

Virtuous Cycle of Content and Monetisation

We are seeing the start of a promising trend. Longer term, written content will be seen as a product that writers can expect to be paid for. Content focused platforms like Storipress will be the place to create, market and sell this ‘product’. They will be obvious beneficiaries as the value of written content rises. 

There are many opportunities for Storipress to introduce additional product features like audience analytics, referral programs or its own ad network for long term growth and retention. This is why Alex often refers to his business as the ‘Shopify of Media Companies’.

Conclusion

It’s been a long time since written content featured on any growth investor’s radar. Startups like Storipress are changing this by providing writers with the tools to grow and monetise their audience online. Current solutions like WordPress are built on dated code and are ripe for disruption. 

Alex’s customer centric approach stood out to me. He is building Storipress’s product and pricing around what customers care about - producing content. I encourage content producers and investors to experience his website for themselves (here). 

What's behind the rise of these platforms and what do they mean for writers? For decades, Google and Facebook have commoditised written content. This article explores the Advertising Technology (AdTech) landscape and how these startups are helping writers raise the value of their content. The article is for writers interested in learning how the value of their content is set to increase and for investors interested in the opportunities for growth in these startups.*

Bill Gates said, ‘Content is king’ in 1996. After nearly 3 decades, this is finally coming true for written content. Startups like Substack, Beehiiv and Storipress allow writers the creative freedom to publish online and build their audiences. I’ve been impressed with the quality and passion of the writing. Newsletters such as Packy McCormick’s Not Boring have influenced my thinking on companies and investing. 

In this article, I describe the AdTech ecosystem and how these startups can help writers succeed. They are helping writers discover the value of their content and will be the beneficiaries as the value of written content grows.

As a writer myself, I appreciate the joy of connecting through writing and the opportunity to collaborate with founders on my investor journey. This is an area that I am passionate about. However, it’s only after speaking to Alex Pan, founder of Storipress that I began to understand the opportunity in this space. Look out for an upcoming article on Storipress.

*All opinions discussed are personal. This is not financial advice

Why an Authentic Point of View Is Needed Today and Why It Is So Hard

Journalism used to be about having a bold point of view backed by facts and objectivity. We could trust what we read and it had a huge impact on us. An example would be the determined reporting by journalists Bob Woodward and Carl Bernstein that eventually forced US President Richard Nixon to resign in the Watergate scandal.

What quality journalism looked like – Washington Post reporters Bob Woodward and Carl Bernstein in 1974

Great journalism (and therefore content) is expensive and back then, news publishers could afford to pay. Over the past 20 years, the internet changed all that. The US Census Bureau found that newspaper publishing revenues declined by 52% from 2002 to 2020. Similar trends have been seen globally.

News publishers had to cut back on high quality journalism to survive. They prioritised quantity over quality. Journalists lost their independence and were forced to write stories that were popular. The result has been a significant loss of trust. People want authentic content, not sensationalist ‘click bait’. 

This has led to the rise of Substack which helps independent writers monetise their writing through newsletter subscriptions. However, relying on subscription income alone can limit growth. It’s a big decision for readers to pay for a subscription and many will not do it. 

This is why advertising is an integral part of how quality written content is funded. For example, in 1999, the Australian newspaper publisher, Fairfax, derived 80% of its revenue from advertising.

If we want to see more quality written content, we need to make online advertising viable

Unfortunately, it’s tough getting paid for online advertising. The reason – Google and Facebook.

How Google and Facebook Make Advertising Online Hard for Everyone Else

Advertising's goal is to acquire customers. They craft their message to target a specific audience. In an offline world, advertisers could be confident of reaching their audience as nearly everyone in a geographic area would be readers of one of a handful of newspapers.  

With the internet, this audience is spread across thousands of websites. Publishers need to show that they have the specific audience that advertisers are targeting. Therefore, what matters is audience data. 

It’s hard to find anyone with more audience data than Google and Facebook. They dominate global digital advertising spending as shown below.

Digital Advertising Marketshare. Source: Statista

It’s not just their popular websites (e.g Google Search, YouTube, Facebook, Instagram etc). It’s also how they control the technology that everyone has to use. 

Most online advertising is done via auctions. Here, online intermediaries match buyers and sellers of advertising. A simple description looks like this: 

• Advertising Buyers - Brands such as Gucci that want to reach a specific audience online. These brands submit their preferences (e.g. target audience, how much they are willing to pay/bid) to the online intermediary.

• Advertising Sellers - Publishers and websites such as my humble blog Venture Journeys or your own websites. We will be competing with Google Search, Instagram etc. To participate in the auction, our websites submit our audience data to the online intermediary.

Auctions can be won or lost based on audience data. However, Google and Facebook effectively control the online advertising intermediary space. As a content writer, you are giving your most powerful competitors the audience data that you’ve worked so hard to earn. You can see this in the AdTech diagram below where Google and Facebook combine this data with their own to create Super Audience Profiles.

AdTech Ecosystem: Google operates open AdTech platforms while Facebook/Meta operates a closed (owned and operated by Facebook) platform

Their superior targeting means that advertisers will give their best deals to Google, YouTube, Facebook etc. Everyone else fights over the remaining scraps. 

Being part of Google and Facebook/Meta’s ecosystem commoditises a publisher’s audience and results in low advertising rates

Writers of quality content have built trust with their audience. The ‘reward’ for this trust is detailed audience data such as email signups. They could get better rates by engaging advertisers directly.

What’s needed is a content focused platform that combines these individual content writers and connects them directly with advertisers.

We are finally seeing specialised solutions like Beehiiv, Substack and Storipress that have the potential to do this.

How Content Focused Platforms Are Poised to Grow the Value of Written Content

I started Venture Journeys during the extended COVID lockdown in Melbourne. It’s hard to describe the joy of connecting through writing and how important collaborating with founders has been for my investor journey. 

The pandemic has sparked the same interest in many others. This led to Substack raising $65m led by Andreessen Horowitz in March 2021. More recently, Beehiiv and Storipress raised $4.2m and $500,000 respectively. 

These startups provide a user friendly, all-in-one solution for writers to publish online and build their audience. 

The opportunity for these startups lies in aggregating the individual writers on their platforms and dealing with advertisers directly. For example, Beehiiv can build: 

• Detailed Audience Profiles: In return for quality content, readers provide writers with detailed information on themselves such as their email addresses. Beehiiv can build a profile of these readers based on the different newsletters they read on the platform. Advertisers get access to a highly targeted audience and writers benefit from higher rates.  

• Scale: Aggregating writers and their audience allows Beehiiv to engage with advertisers directly and negotiate better rates. Additionally, Beehiiv helps writers build their audience with referral and recommendation tools. Increasing the audience on their platform attracts more advertisers.

You can already see this playing out with Beehiiv’s recent launch of its advertising network.

Unlocking advertising - Beehiiv’s new Ad Network

I believe this is only the beginning. Beehiiv has introduced calculators for subscription and advertising income to estimate the value of a writer’s content.

Content focused platforms are finally bringing transparency to the value of written content, and I expect higher prices to follow.

We are seeing the start of a promising trend. Longer term, written content will be seen as a product that writers can expect to be paid for. The increasing monetisation will lead to the virtuous cycle seen below:

Virtuous Cycle of Content and Monetisation

Content focused platforms will be the place to create, market and sell this ‘product’. They will be obvious beneficiaries as the value of written content rises.

Conclusion

As a writer myself, this is an area I am passionate about. We are finally seeing startups such as Substack, Beehiiv and Storipress focus on the value of written content. 

For decades, writers have seen their work commoditised by the dominance of Google and Facebook. By bringing writers together, these startups can enable a virtuous cycle of quality content and monetisation opportunities. 

I became aware of the opportunities in this space after speaking to Storipress co-founder Alex Pan. Storipress is building a solution for entire newsrooms and is at the forefront of this trend. 

 I'm excited to be collaborating with the person driving Dovetail's sustainable growth. Dovetail is a great example of how innovative pricing can complement customer centric product design.

If you've been forwarded this, and are curious about how successful long-term businesses are built, subscribe below.

After 20 years, there are now tens of thousands of SaaS tools in the market. How can customer centricity help startups stand out in such a crowded market?

As a follow-up to my articles on building customer centric products and pricing, I spoke to Emlyn Gavin. Emlyn has prior experience sustainably scaling high-growth businesses like Dropbox and New Relic. As Dovetail’s Head of Revenue and Operations, he is perfectly placed to lead the sustainable growth that it is known for. 

Dovetail’s product and pricing strategy do two things- they provide customers with a great experience and help them promote their views. Giving people a voice is a deeply human approach to customer centricity. The customer advocacy this creates will form the basis for years of continued growth.

In this article, learn how Dovetail succeeds by:

1. Picking an Underserved Market that’s About to Take-off

2. Building Customer Centric Products – Making a ‘Bet’

3. Innovative Pricing that Customers Can Understand

4. Dovetail’s Sustainable Growth – The Power of Customer Centric Pricing

5. This is Only the Beginning – Building a New System of Record

6. Conclusion 

Picking an Underserved Market that’s About to Take-off

The SaaS industry is getting crowded. In the past 20 years, tens of thousands of new SaaS tools have come onto the market. In 2018, there were 34,727 software products listed on G2 Crowd across 745 vertical industries. 

How can a SaaS startup stand out? By finding a segment of users who have been largely ignored.

Sample of SaaS products - a crowded space

There is currently a lack of specialised user experience research (UX) tools. This is because user research involves qualitative, unstructured data. The benefits can be hard for senior stakeholders to quantify. UX researchers are forced to use many different tools.

However, products like Netflix have created an expectation of a great software experience (see my article on product led growth). 

Therefore, the importance of UX research is set to grow. In 2017, there were 1 million jobs in UX. By 2050, that number is expected to reach 100 million. 

This underserved customer segment is set to take-off and is a great space to build a SaaS business. 

Building Customer Centric Products – Making a ‘Bet’

My previous article (here) describes how customer centricity can help companies build and launch great products. User experience researchers have an important role to play in this. 

A strong customer understanding is the first step before decisions such as product features or design can be made. What are customers’ underlying needs? How can we improve their lives? To answer these questions, UX researchers use various methods such as user interviews, surveys etc. 

These methods result in a large amount of qualitative, unstructured data, which must be turned into insights that can be used to improve the product. This is a time-consuming process requiring a variety of different tools. Dovetail’s products simplify this process.

• Markup: Helps researchers find actionable insights from qualitative data like user interviews. 

• Playback: A searchable research repository, or home for existing and future raw research and insights. These insights can be viewed by other stakeholders or people leading the product development process (e.g designers and product managers).

• Backstage: A research participant management solution. It works like a CRM to track customers participating in the research process.

Learn more about the research process and how Dovetail’s products help here. 

Despite their importance, user researchers are under-appreciated. It’s hard to communicate customer needs if you’re not frequently working with customers. Slideshow files and presentations can’t always build the trust that decision makers need to act on the researcher’s insights. User research is often the sacrificial victim when it comes to budget cuts.  

Great products are built based on a ‘bet’ on the future direction of the market. Dovetail’s founders came from Atlassian. Developers loved Atlassian’s early products because they:

• Made their work easier by giving them all the tools needed to manage software projects in one place. 

• Gave them tools to collaborate.

Similarly, Dovetail’s growing suite of products and features allow UX researchers to: 

• Conduct and store all their research in one place: A single provider gives UX researchers a seamless and consistent experience across all their tasks. 

• Collaborate and share their insights with decision makers:  Researchers get the tools to organise their insights and easily build professional, interactive reports. The result is that decision makers have an ‘audit trail’ of their thought process. This builds trust and increases the likelihood of the researcher’s insights influencing product development.

For UX research to become a key function in any business, it’s not enough to provide a great software experience. Dovetail’s ‘bet’ is that UX researchers can build an audience with decision makers through collaboration. 

Clearly linking UX research with successful product development helps companies quantify an ROI for UX research. This results in a flywheel effect as shown below: 

Dovetail's Flywheel Effect

I’ve previously spoken about the leverage that products can have on an organisation. By providing a clear link to this crucial function, UX researchers are finally given a seat at the table with senior leadership. This is the underlying need that Dovetail’s founders are betting on. 

The next step is designing a pricing strategy that compliments this ‘bet’ - one that customers can understand.

Innovative Pricing that Customers Understand

A pricing strategy needs to be aligned with how customers want to purchase. UX research software is a nascent market. Researchers have to be a resourceful bunch, often trying different tools to see what works best. They need flexibility and choice. Therefore, free trials and product demos are the main ways to evaluate software. 

UserInterviews State of User Research 2022 Report

However, there is a trade-off between choice and simplicity. This is why similar software providers like Miro and Figma have pricing packaged into a handful of ‘free, good, better, best’ bundles. This 

• Forces their customers to make a purchase decision before experiencing the full value of their products (e.g. all of the features in their ‘best’ bundle)

• Limits their choice on what features they want to pay for.

How does Dovetail offer customers more choice while still being simple to understand? 

Dovetail’s Pricing Table. Free Tier includes all three products. Source: Dovetail and Venture Journeys.

The above choices look complex. However, Dovetail’s simplicity lies in its thoughtful ‘free’ option. Unlike competitors who limit the functionality in their free tier, Dovetail’s free tier includes all its major features and products.

Researchers have a low risk (free forever!) way to experience and evaluate the value of all three products. Dovetail then allows them to choose individual products that best suit their needs. 

This is where Dovetail’s customer centric pricing becomes clear. 

Dovetail’s Sustainable Growth – The Power of Customer Centric Pricing

A customer centric pricing strategy:

• Aligns the value of what customers get with what they are willing to pay.

• Complements the product strategy by promoting the ‘bet’ the company is making on the future direction of the market.

• Is built sustainably by balancing the lifetime value of customers with their costs. 

Dovetail’s thoughtful pricing strategy is a case study on how all these criteria can be achieved. 

Priced to Value

Customers often compare the prices for the SaaS tools they are using. However, at over 90% gross margins, Dovetail’s pricing is predominantly value based. 

There are three key levers to the value Dovetail provides and, therefore, the amount customers pay:

• Number of Users: More users mean more research, resulting in more insights and value. See the flywheel diagram. 

• Complexity: Markup is the most complex product but also provides the most value (e.g. productivity gained). The Business and Enterprise bundles are for customers that have more complex buying requirements. These bundles provide additional administrative controls and customer support. Examples include custom invoicing and contracting, priority support (e.g. dedicated success manager) and HIPAA compliance (private health data).  

• Collaboration: Dovetail distinguishes between users and viewers (can view but not edit the data) in their Playback and Backstage products. Allowing collaboration across the organisation is a huge part of Dovetail’s value. More viewers equal more value. Despite this, Dovetail’s paid tiers allow unlimited viewers. This is the product ‘bet’.

The Product ‘Bet’ - Built for Collaboration

Research by nature has a high failure rate. Typically, most product ideas do not work to expectations. Those that do can have a huge impact on the business. How can researchers convince decision makers to invest in their idea? 

Many founders can identify with this. Dovetail understands that the UX researcher is like an entrepreneur undertaking a fundraising process: 

• The more people that can understand the researcher’s point of view, the higher the likelihood of success. i.e. successfully influencing the product roadmap

• The more successes the researcher achieves, the more people are interested in her/him.

Allowing for unlimited viewers introduces more people to Dovetail’s products and highlights the value of research (and therefore the researcher) in the organisation.

Giving away this value upfront promotes the adoption of Dovetail but is it sustainable?

Sustainable Growth

For a business to be sustainable, the lifetime value of customers needs to be balanced against the cost of acquiring them. 

Providing so much value upfront (comprehensive free tier, unlimited viewers) increases Dovetail’s sustainability due to:

• Efficient revenue growth: Typically, selling to existing customers is more efficient than selling to new ones.  Customers love Dovetail’s products after trying them. Take-up of their products increases sharply after 12-18 months. This is the flywheel at work which was illustrated previously. 

• Low Churn: Churn rates are low, thanks to the value that Dovetail’s products provide and the support customers get from the company and its active community.

Dovetail sets its marketing budget based on a healthy Lifetime Value to Customer Acquisition Cost ratio of 5x and achieved 200% revenue growth in the 12 months to January 2022. 

Dovetail is proof that a great product experience and growth do not have to come at the expense of sustainability. 

However, the SaaS space is getting more competitive. How can Dovetail maintain its sustainable growth?

This is Only the Beginning – Building A New System of Record

The SaaS space is getting increasingly competitive with rising customer acquisition costs and tens of thousands of software products. How can Dovetail create a platform to launch new products and sustainably grow?

A system of record is a software system that stores key data relating to a business function. Ownership of this data storage system effectively means that the business function cannot be done without this software. Iconic companies have been built from the ownership of a system of record, such as:

• Sales and Marketing: Customer relationship management systems like Salesforce

• Administration: Enterprise resource planning (e.g. HR, Finance) systems like Workday 

• User/Customer Research: ???

A system of record is more than a place where important data is stored. It’s about the standardised practices and business processes built on top of it.  This is where Dovetail’s product and pricing ‘bet’ on collaboration come together. 

With Dovetail, researchers are empowered to build an audience towards their way of thinking. Dovetail then helps these users organise around common standards through its community and content initiatives. The screenshot below is an example of a discussion in their Slack community around tagging. 

Screenshot from Dovetail's Slack Community

Thanks to Dovetail, researchers will become increasingly linked to successful product development. This elevates them to become powerful advocates in the Product team. As my previous article explains, the Product team is a powerful platform that can build relationships across departments. This is because a better product makes everyone’s job easier, as shown below.

Great products make everyone's job easier

Dovetail will then have a platform to build products for other business functions, such as marketing. This greatly increases their addressable market and makes their product stickier with customers. 

As such, Dovetail’s progress to date is just the beginning of what’s possible. By betting on collaboration, Dovetail’s founders are following in the footsteps of their famous alma mater, Atlassian. 

Conclusion

With thousands of tools out there, it’s tough starting a SaaS business today. However, Dovetail shows how startups can still succeed by deeply understanding their customers. This understanding has allowed them to:

• Identify and target a segment of underserved users (UX Research).  

• Understand their underlying needs and make a product ‘bet’ around building an audience through collaboration.

• Create an innovative yet simple pricing strategy to promote this ‘bet’.

My favourite part is the deeply human element in their approach. Giving people a voice is one of the best things you can do for them. This creates a level of advocacy that will form the basis of Dovetail’s growth for years to come. 

To learn more, I’m grateful for the opportunity to collaborate with Ibrahim Bashir. Ibrahim was my cohort based course instructor. He has a 20yr career in software engineering and product. This includes product leadership roles in global companies like Box, Twitter and Amplitude.

We explored how customer centricity can help companies build and launch great products. This is a complex process but a necessary muscle that successful high-growth companies have built.

This is my second cohort-based course with Sphere. I continue to be impressed by the quality of the experience. The live discussions around real-world experiences made this course unique. I highly recommend people to check out Ibrahim’s (here) and Sphere’s courses (here).

Table of Contents

• The Power of a New Product

• The Product Org and the Leverage it Creates

• Building a Successful Product with Customer Centricity

• Customer Centricity and the Second Act

• Case Studies with Ibrahim

• Conclusion

• Appendix – Cohort-Based Learning with Sphere

The Power of a New Product

I love my iPhone. It’s so intuitive to use, yet powerful enough to run many aspects of my life on it. How did Apple create such a well-designed and successful product? Former Apple designer Mark Kawano described how the entire business was involved in the product’s design.

“It’s not just the interface piece. It’s designing the right business model into it. Designing the right marketing and the copy, and the way to distribute it. All of those pieces are critical.”

Mark Kawano, Former Apple Designer as quoted in Fast Company

What makes product so important that it can bring the whole business together? Strategically, a new product can:

• Increase growth by targeting new customers or getting existing customers to spend more

• Increase retention as using multiple products makes customers more reliant on the company

• Increase margins through charging for premium features or economies of scale

As the chart shows, a new product can significantly impact a company’s success. The iPhone’s impact on Apple is a famous case in point.

However, what is the Product Organisation and how does it interact with the rest of the business?

The Product Org and the Leverage it Creates

Unlike most other departments, it’s hard to quantify what the Product Organisation does. However, it can be a force multiplier for the entire business.

In general, the Product Organisation consists of the following areas:

• Product: Planning and ensuring the commercial feasibility of the product. For example, ensuring customers will buy it and the business can deliver the product as advertised.

• Engineering: Delivering the product. For example, ensuring the business has the technical skills to build the product, maintaining stability etc.

• Design: Doing customer research and designing a product that is easy for customers to use.

A business has finite resources and must decide on which department to invest in. Most departments have measurable metrics which are used to justify this investment. For example:

• Sales: Investing in sales reps should increase revenue and therefore Growth.

• Marketing: Investing in Marketing improves lead quality and generates demand. This improves customer acquisition costs and therefore Margin.

• Customer Success: Investing in customer success reps increases Retention.

The Product Organisation does not have any directly measurable outcomes. How can it justify investment and help the business succeed?

As Ibrahim describes in his blog, investing in the Product Organisation can have an outsized impact on the rest of the business. For example, a better product can help every sales rep sell more or make it easier for Marketing to generate demand. This is leverage.

Ibrahim recommends Product Organisations use this leverage to build partnerships with other departments. This should increase collaboration and make them advocate for increased product investment.

Close collaboration is essential to building a customer centric product, as described in the next section.

Building a Successful Product with Customer Centricity

The previous section discussed how the Product Organisation can amplify the success of other departments. However, this requires building a product that customers love. How can a business do this?

I discussed this with Ibrahim after the course ended. From his experience, he suggested the following 3 step framework, which places the customer at its centre:

Step 1: Segmentation

Having a clear idea of the customer and the problem she/he faces. This consists of 2 parts:

• Target a specific, detailed customer persona. For example, Bob is in industry (_), works in company (_), has job title (_) and struggles with problem (_).

• Validating that there are enough of these customers to create a viable market

Step 2: Insight

Identifying the underlying problem that the customer is facing. In interviews, customers will describe a problem and solution that is specific to them. This can lead to building fragmented or niche solutions.

A deep customer understanding is required to identify an underlying, pervasive problem that can create a reasonable Addressable Market.

Step 3: Environment

Understanding the prospective customer’s operating environment and her/his workflow. For example, what are their daily activities? What other technology systems do they use? How do they collaborate with partners and teams?

Building a customer centric product is all about the detail. Understanding the above will increase the chances of a successful product ‘bet’.

This understanding requires a close relationship with the other departments.

In class, a guest speaker showed us the importance of this relationship. Due to miscommunication, the company nearly lost a client when the sales team pitched a different product to what was being built. After this episode, Sales and Product worked together on client demonstrations.

Working together helps the Product Organisation build a well-considered product that will bring joy to customers and build trust.

This creates a solid foundation for launching additional products.

Customer Centricity and the Second Act

Congratulations! With a lot of thoughtfulness and work, you’ve launched a product that your target customers love. However, any successful product will eventually hit a ceiling- you can’t keep growing at 10x when you already have a double-digit market share. This is especially true in startups which initially target a niche segment to stand out.

Eventually, leading indicators for growth, retention or margin will deteriorate as the product expands further away from its initial core customers. At this point, it’s time for a second act.

A successful second product complements the first. This creates a virtuous cycle that can increase growth, retention and margins.

Customer centricity is key to achieving this. The same 3 step framework of segmentation, insight and environment is used. However, there is a focus on understanding the workflow or ecosystem around the initial customer. Why?

Most products are part of a larger ecosystem of adjacent customers and workflows. For example, most customers collaborate with co-workers or use multiple systems to complete tasks.

A successful second product simplifies the workflow for these customers. I.e. allowing customers to skip a step in one of the following ways:

• Automating a previously manual step for the user. Box provides secure content collaboration to enterprise customers. Users can store their documents in Box’s cloud platform. Box automatically takes care of security settings (e.g. selecting the right sharing permissions), greatly simplifying the user’s workflow.

• Unifying two different products into one solution. eSignatures create the digital equivalent of handwritten signatures. This allows digital documents to be legally binding. Box customers were using DocuSign’s eSignature product as part of their workflow. Following customer feedback, Box added its own eSignature offering. This means their customers have eSignatures included in Box’s content management platform.

• Collaborating between users. Figma is a collaborative design tool. Figma’s browser-based solution provides great design tools. However, its unique insight is that design is larger than just designers. It has collaboration between designers, product managers, engineers and others involved in the process as a core goal. Doing so brings these adjacent users into their product. This increases the visibility of the designer in the process and elevates her/his position in the company.

As discussed, customer centricity is key to launching great products. In the next section, we’ll go through a few examples that Ibrahim has seen during his career.

Case Studies with Ibrahim

Ibrahim is a former product leader at Box. This is a great example of a company that has launched multiple products as shown below.

Our class benefitted from his real-world experience. Box’s product launches were used as examples for discussion in class. Some of them are featured below:

Box Governance – Where it all worked

Box Governance helps clients manage sensitive documents to comply with regulatory policies. At that time, this was one of their most successful product launches, with most clients taking up the solution. How did they achieve this? By fulfilling all three steps of the framework.

• Segmentation: Box worked closely with administrators who reported to Chief Security, Risk and Compliance Officers.

• Insight: Their underlying problem was a lack of visibility and control of the use of documents.

• Environment: Box developed an understanding of how these administrators worked. At that time, customers used fragmented solutions. This required content to be moved across different systems. Box Governance had user-friendly alerting and monitoring tools and allowed administrators to manage documents on one platform.

Box Skills and Box Platform- Multiple products is hard

Like most new ventures, there is a degree of experimentation in launching new products. Half of new product ideas don’t work to expectations. Here are some examples and key learnings Ibrahim has seen:

• Starting with a product: The idea behind Box Skills was to use available machine learning technologies to discover insights in content. I.e. start with a product and work backwards. However, the technology was still immature. There was no customer segment that was interested in the limited insights Box Skills could derive at that time and initial take-up was limited.

• Selling to a different customer: Box Platform allows developers to build an ecosystem of products which work with Box. However, developers were a different customer group from the executives that Box typically sold to. Box’s go-to-market (GTM)/distribution teams lacked the expertise to sell to developers at that time.

A key takeaway from these examples is that launching multiple products is hard. Guest speaker Adam Whaley described how companies needed to do 10x the level of marketing and customer education to get the same level of acceptance with the customer. The complexity increases as the company’s product suite grows larger. Guest speaker Jon Fan described how Box’s GTM teams could only handle 2 new products per year.

Conclusion

Building products that customers love can have a huge impact on a company’s growth and profitability. However, building customer centric products isn’t easy. It requires:

• Determining a strategic objective for the product such as increasing growth, retention and/or margin.

• Leveraging the Product Organisation’s force multiplier effect to build relationships with other departments like Sales, Marketing, Customer Success etc.

• Following a 3-step process- Targeting a specific customer segment, understanding their underlying problems and understanding the environment they operate in.

Founders should be aware of the growing complexity of launching multiple products. Even large organisations like Box can only do 2 new product launches per year.

However, it is well worth the risk. Successfully building this muscle will enable startups to maintain their high growth rates by continuously expanding their addressable markets.

Appendix – Cohort Based Learning with Sphere

This is my second cohort-based course that I’ve completed with Sphere. I continue to be impressed by the quality of the experience.

Ibrahim thoughtfully illustrated the content with real world examples, class discussions and breakout sessions.

These spontaneous discussions are the best part of the experience. My cohort consisted of real-world practitioners. It was insightful to hear about the problems they faced. These discussions and the practical solutions we came up with made the course unique.

The course also gave me the opportunity to collaborate with an experienced global practitioner like Ibrahim on this article. The learning never ends!

Yet many businesses underestimate what they can charge because they don’t understand their customers. Under-pricing reduces growth and the product’s customer appeal. Exactly what you want to avoid!

Being customer centric results in better products that customers will pay more for. This article explores how customer centricity can unlock a startup’s pricing power. This relationship is also true for larger companies like Spotify*. Serving its most valuable customers is the key to improving Spotify’s profitability.

Customer centricity is an important part of a business’s competitive advantage. It has been the key to some of my most successful investments. This is a topic that I am always passionate to learn more about.

*This is not financial advice

Table of Contents

• Pricing Strategy - Don't Leave Money on the Table

• Value Based Pricing - Customer Centricity Equals Pricing Power

• The Pricing Model - Packaging Matters

• Spotify's Customer Centricity and Potential Pricing Power

• Conclusion

Pricing Strategy – Don’t Leave Money on the Table

Pricing is one of the biggest levers for a business’s profitability. A Fortune 500 study found that a 5% increase in pricing increases operating profit by 22%. Pricing has an even greater impact on subscription-based companies due to its recurring nature. Improving pricing grows profitability by 4x more than customer acquisition and 2x more than retention.

Yet other areas like customer acquisition get the lion’s share of management attention. Some common reasons are:

• Customers: Raising prices can be scary for founders. How will customers react? There is a perception that pricing is a zero-sum game. Value gained by the business is value lost by the customer.

• Competition: The belief that the market sets pricing, and our focus should be on selling product and managing costs.

• Organisational Structure: Pricing involves many areas such as sales, marketing, and product. As a result, there is no natural ‘owner’ of pricing.

Therefore, pricing in many businesses lack direction. Product pricing is based on:

• What it costs to produce: Applying a standard margin on top of product development, marketing and other costs.

• What competitors are charging: Using competitor pricing as a guide to what the customer is willing to pay.

As a result, many startups leave money on the table. Pricing should be based on the value the product creates not its costs. Also, a startup needs to be delivering better value than existing solutions anyway. Its pricing should reflect this.

Why is under-pricing a problem? Growth and positioning.

Under-pricing results in less resources to reinvest. Areas such as product development, marketing, retention will suffer. This will result in lower growth.

It is also a lost opportunity to understand what customers value about your product. Over time, this could impact the product’s market positioning. Consumers will see it as a low-cost offering and lose interest. Exactly what you were trying to avoid!

Ultimately, a business should aim to price according to the value it provides. Doing so requires a strong understanding of its customers.

Value Based Pricing – Customer Centricity Equals Pricing Power

Value based pricing sounds like a great solution. However, it requires time, research and deliberate choices. These choices need to be based on customer needs and what they are willing to pay. This is why value based pricing is often called customer based pricing.

Subscription pricing intelligence firm ProfitWell recommends the following broad steps:

• Targeted Customer Segments: Learn about and identify your highest value customers. E.g. what industries they are in, typical company size, role within the company etc. This will be the segment to target.

• Customer Empathy: Understand the preferences (e.g. most valued features) and willingness to pay in the targeted customer segment. This involves customer surveys and marketing studies. The goal is to build a differentiated product that provides superior customer value.

• Beyond the First Transaction: Going beyond getting a sale. What is the cost to acquire the customer? How can we provide a great experience that can retain our customers and generate referrals? These are key inputs into the common ratio Lifetime Value/Customer Acquisition Costs.

Do these steps sound familiar? They are also the principles for customer centricity! Being customer centric results in better products that customers will pay more for. This is the link between customer centricity and pricing power.

A caveat is that value based pricing works best when competition is rational. Customers won’t pay more if competitors keep charging rock bottom prices. Picking the right industry matters!

The Pricing Model – Packaging Matters

This is where it all comes together. A pricing model describes how the customer will be charged. Examples of pricing models include charging based on features, flat rates, tiered etc.

A lot goes into designing this. I believe the most important piece is to align the value the customer gets with what she/he is paying.

Cake Equity is an example of a business with a well-designed pricing model. Cake Equity provides administrative software that helps pre-seed to series B startups manage their equity. The software simplifies the issuing and transferring of shares, options and notes.

I enjoyed my conversations with founders Jason and Kim who really understood their customers. Their pricing model has well-defined tiers and is simple to understand.

Cake Equity Pricing

Well-Defined Tiered Pricing

There are 3 pricing packages organised around:

• Number of stakeholders: The software provides more value as the number of stakeholders increase. For example, more shareholders or employee option plans require more administrative work.

• Feature Tiers: Clearly defined feature tiers according to specific customer segments. The Starter Tier is for earlier stage customers requiring standard administrative software. The Growth Tier is for growing companies that needs employee share plans or options. The Global Tier is for companies operating in multiple geographies.

Overall, there is a clear relationship between the price customers pay and the value they get from the software.

Simplicity

Cake Equity's pricing is easy to understand. Starter and Growth customers can sign up themselves. Global customers have clearly defined next steps.

We talked about the ability to improve a startup’s pricing power by being customer centric. I believe this is also true for larger companies like Spotify.

Spotify’s Customer Centricity and Potential Pricing Power

Who hasn’t heard of Spotify? It pioneered digital audio streaming as we know it today. Spotify dominates the global streaming market with double the market share of its nearest competitor Apple.

It’s easy to understand the value Spotify brings. I could live without my Netflix subscription, but I use Spotify throughout the day and will struggle without it.

Yet, you couldn’t tell by their pricing model.

The pricing model charges subscribers a flat rate which does not scale with the value that Spotify provides. Given its industry leadership position, why is Spotify leaving so much money on the table? The reason - its record label content suppliers.

Spotify sources most of its content from record labels. Three record labels dominate this industry. The record labels:

• Limit profitability by taking the bulk of the income from streaming.

• Limit differentiation by not allowing exclusive content. Having identical music libraries makes it hard for streaming providers to charge a premium.

However, Spotify’s greatest asset is the understanding it’s built around its 400 million users.

The music industry is characterised by the True Fan or Super Fan. These are fans who will buy anything that the artist puts out, such as vinyl records, concert tickets etc.

True Fans are the holy grail in creator economy areas like gaming where the top 1-2% of fans drive 80% of revenue. You can read more about True Fans and the music industry in my previous article here.

This is even more relevant for music artists as they must give up large portions of their streaming income to record labels. The key is finding and engaging these True Fans.

What if Spotify had a way to:

• help artists find their True Fans and

• facilitate these fan’s non-streaming purchases?

This is becoming a reality.

In terms of finding True Fans, Spotify knows more about you than you think. Here are some ways Spotify profiles its subscribers and helps them find songs/artists that they like:

• Taste Profiling: Spotify builds a taste profile on each subscriber based on their listening activity. This profile is used to create Playlists of songs. Playlists are an important way for subscribers to discover new artists.

• Playlist Profiling: Using Google-like Natural Language Processing algorithms to guess a subscriber’s tastes from the descriptions of songs in her/his Playlist

• Audio Models: Using AI/neural networks to break down songs into characteristics (e.g. tempo). This gives further insight into a subscriber’s music taste.

With this customer insight, Spotify is well positioned to connect artists to their True Fans. There is already a feature called ‘Today’s Top Fan’ which shows you your most played artist.

I’m slightly embarrassed to know that my top artist is The Weekend (why am I so mainstream?). Note how Spotify can rank me as the top 52% of the artist’s fans.

Spotify is also building features which will allow these True Fans to make non-streaming purchases. Examples include:

• Spotify Live: Live audio rooms where artists can connect directly with fans. Eventually, this could be a space to sell merchandise, concert tickets etc

• Spotify Fan Support: Allows fans to tip their artists. This feature was made popular by video game streaming platform Twitch.

At their recent Investor Day, Spotify spoke of several ways it could improve its average revenue per user (ARPU). I believe the ability to connect True Fans directly with artists is the most interesting component of their ARPU growth due to:

• The importance of the True Fan in the music industry. Spotify executive Alex Norström believes this ‘uncaps ARPU’.

• Loosening the grip of the major record labels. I believe this is the biggest issue for the industry and Spotify’s profitability.

Changing their pricing model is a great opportunity for Spotify. On an earnings call, CEO Daniel Ek spoke about his intention to move away from their current flat pricing model. He also talked about the Super Fan opportunity on an earnings call.

‘I think the evolution here will be about unlocking through Super Fans. That’s where the real dollars comes in.’ Spotify CEO Daniel Ek

Conclusion

This article is about pricing power. In these uncertain times, pricing can be a business’s most important growth driver.

However, fearing the impact on customers, many businesses leave money on the table. This underpricing actually hurts customers in the long run.

This article shows how customer centricity allows businesses to create products which customers are willing to pay more for. This is the link between customer centricity and pricing power.

This link occurs in startups as well as larger companies. Spotify provides a vivid example of customer centricity which will enable it to:

• Materially lift average revenue per customer by targeting its most valuable customers.

• Lift profitability by improving its industry position.

Look out for more case studies on startups and their pricing strategies!