Wednesday, March 24, 2010

Facebook, Twitter - Vitamin or Pill?

Image representing Facebook as depicted in Cru...Image via CrunchBase
So I had an interesting discussion today with a startup coach who mentioned to me that he loved investing in companies which were pills and not vitamins and that in his opinion Facebook and Twitter were both vitamins. I strongly disagreed with this assessment and felt I must write this blog post to detail out my views on why.

Firstly I want to write a bit about this business of investing in Pills Vs. Vitamins. I have never categorized nor do I look at companies and whether they are in the business of selling Vitamins or Pills. I believe from my experience that this is an oversimplification and categorizing something as a vitamin or a pill means that the target audience has not been segmented or identified clearly. Instead, I think of products with this viewpoint - will the product drive consumer change?- there will always be a section of consumers who adopt early or for whom the need is most - can these be targeted cheaply and made to buy the product at a higher cost? Can the money generated be used to further drive marketing that will precipitate a change in consumer behavior - effectively ensuring that the product crosses the tipping point and becomes a must have for a larger audience who then flocks to the product thus reducing customer acquisition costs and ensuring that the company can reduce the price of the product and thus ensure widespread adoption and hence become a part of everybody's lives. With widespread adoption can the company then enjoy a monopolistic position and create an entry barrier through brand, network effects and R&D? To sum up: I look at products not as vitamins or pills - I consider them all as drugs and look at whether there is a real strategy to ensure that the pill becomes widely popped over time.

Coming to the question of facebook / twitter being Vitamins or Pills - I will restrict my thoughts to Facebook as I am still studying twitter and so will restrict my comments on them till I have had some more time to firm up my views. I consider Facebook a pill and not a vitamin by my friends definitions.Why so?

I consider man a social being. Human beings live in society and meeting others, socializing, being parts of groups and communicating are in my opinion part of the very fabric of being human. Being social is not a choice that most people have. How social is a choice but being social is not one. I truly believe facebook is the future of society. It is inconceivable to me that in the future a human being will be able to live in the world without a facebook account and without socializing on facebook. It is also a business with very strong network effects. As such, it is in my opinion a true pill by my friends definition.

Now coming to some more complicated examples of two products I feel illustrate how smart business people create drugs and ensure that their pills are popped.

The first is mobile telephony. In the initial phases mobile telephony was what my friend would have considered a vitamin. If you were a pill Vs. vitamin investor you would never have invested in a mobile telephony company - after all no one really needed a cell phone. It was just an indulgence for the rich who wanted to spend 20Rs. per min when the landline could do the same job at 1 Re a min. A smart entrepreneur instead would have decided to segment his audience - go after the audience for whom mobility and urgency was a must and then slowly target other market segments before the tipping point was crossed and the masses flocked to get a cell phone. In the interim, smart entrepreneurs used marketing to hasten the arrival of the tipping point. Today of course mobile telephony is a basic necessity of life - a pill for sure but for a small section of India for whom it still is a vitamin by my friends definition.

The second and a not very Indian example is Viagra. I am sure most people would consider it a vitamin. However, I would not. Again I am sure the very smart people at Pfizer recognized the huge opportunity that this drug was and decided to do the right thing - segment the market - they went after the audience that needed it most and addressed them through the right channel - the doctors. However, with time and growing awareness, I am sure that today probably less than 1/10th of the viagra being sold is for people who really need it and the rest is for people for whom it is an enabler of a better 'lifestyle'. This in my opinion is a valid reason to buy something and in my books makes it a pill that people are popping. Even in a young country like India I am sure every person in the target audience has already heard of Viagra and when and if they need it, they will be consumers of the product. This is without Pfizer having spent any advertising or marketing dollars to promote the product in India. This is what smart marketing has caused - a shift in behavior making a huge number of people - pop this pill.

To sum up:- The trick is not to look at things and decide whether they are vitamins or pills. This is a strategy that does not demonstrate gumption. Instead the things I ponder and I ask other advisors, investors and mentors to ponder: Is there value that this product is delivering? Can the target audience be segmented and targeted at a reasonable cost? Can the company precipitate a change in consumer behavior and take the product mass market in time? Do I have the vision to see far enough and see how people, companies, communities will change by adopting this product? Is that a scenario I think is likely or one I think smart marketing can precipitate in the near future? Making money is never easy and simplistic and creating markets and blockbuster products require many things to fall in place most importantly luck. What definitely does not make money is watching from the sidelines.

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