Co-Opetition - Adam M. Brandenburger [48]
America Online understood that it had to lose money early on—effectively paying people to play—in order to build up a customer base. Likewise, Intel is subsidizing ProShare. The good news is that they don’t have to pay everyone to play; once there’s a critical mass of customers, others will follow of their own accord.
Getting a party going isn’t very different from starting a network. No one wants to go to an empty nightclub, so nightclubs often start out with free admission, even free drinks, early in the evening to get things started. Nightclubs pay some people to play to ensure that the rest will pay them to play.
Newspapers and magazines also subsidize some of their customers. That’s because they have two sets of customers: readers and advertisers. The greater the number of readers, the more advertisers are willing to pay. To boost circulation, publishers usually sell their papers below cost. The increased advertising revenue more than offsets the subsidy to readers. Many publishers would be willing to give their product away, or even pay people to take a copy—but only if they could be sure people would read it. The problem is that if the price gets too low, subscribing is no longer evidence of any real interest or commitment, and advertisers worry that the publication will be thrown away without being read.
Yet another way to bring in more customers is to identify and stimulate complementary products. Developing complements naturally attracts more customers into the game. We introduced this idea in the Co-opetition chapter, and we’ll talk more about it below, in the “Bringing in Complementors” section.
Finally, consider becoming your own customer.
After World War I, U.S. airplane manufacturers Boeing and Douglas were struggling. There was no more demand for military planes, and civilian aviation had yet to take off. The best opportunity came when the U.S. Post Office put out a bid to deliver airmail. Would the winner buy Boeing’s planes or would it buy those of Douglas? Boeing didn’t take any chances. It bid for the Post Office contract itself, and won. Boeing built the planes and then created what later became United Airlines to fly them and deliver the mail. To ensure a market for its planes, Boeing essentially created its own captive customer.
Likewise, it’s not a coincidence that the automakers own car rental agencies. Ford owns Hertz and part of Budget. Chrysler owns Dollar and Thrifty and has an investment in Avis that requires Avis to buy 20 percent of its fleet from Chrysler. GM also owns part of Avis; in return for GM having taken a 25 percent equity stake, Avis agreed to buy 60 percent of its fleet from GM. For seven years, GM also owned National. Although GM sold the business in April 1995, National’s new owners have a long-term agreement to continue buying GM cars. Finally, Mitsubishi owns part of Value Rent-a-Car.
Developing the car rental business helps the automakers sell more cars. It also gives each automaker control over which cars the rental agencies will use. And it’s a great way to get people to test-drive the latest models.
Becoming your own customer is a way to develop the market, assure demand, and achieve scale.
Bringing in Customers
1. Educate the market.
2. Pay them to play.
3. Subsidize some customers, and other full-paying customers will follow.
4. Do it yourself: become your own customer to develop the market, assure demand, and achieve scale.
Bringing in Suppliers
Just as bringing in more customers is a good idea, so is bringing in more suppliers. With more suppliers, no one supplier is as essential and that puts the buyer in a stronger bargaining position. How do you bring suppliers