Product Theater: competing on non-crucial factors

Over the last year, I’ve been fortunate enough to work for TechNexus VC out of Chicago. Largely, TNVC is still a project, ever-evolving as we continue to fine-tune our atypical venture investing model. As we interact with new entrepreneurs each week, kick the tires on new business models, and build frameworks for that evaluation, I continue to see a recurring theme across retail product categories. This theme seems enabled only by the context of our particular economic environment and the increasing adoption of the subscription model.

My hypothesis is straightforward: There exists a slew of undifferentiated products seeing success in today’s retail environment on the back of a strong (and likely unsustainable) consumer market in conjunction with a subscription operating model and marginally enhanced product aesthetic. Further, many of these digitally native offerings are non-critical, undifferentiated and thus, highly unlikely to compete favorably in an economic downturn. I call these businesses Product Theaters.

TLDR: glossy websites and subscription models are not defensible, long-term business strategies. If your brand doesn’t offer real, differentiated, functional value, you introduce new risks to the business.

Below I’ve noted a few examples of this phenomenon. A few of these ‘Product Theaters’ already have thousands of paying subscribers and have raised millions of $$ in venture funding from established financiers.

It’s important to note that I don’t believe all of these companies will fail. In fact, many will survive and even thrive in a recessionary context. The aforementioned hypothesis is meant to postulate that many of these businesses — if truly non-differentiated — face a significant existential risk that must eventually be mitigated through real, functional differentiation.

1. Electrolyte Powder

Across this category, I’ve seen marginal differences in product quality and almost no differences across ingredient lists. Having tried all three for these products, I don’t believe there is any reason to pay the significant premiums demanded by Skratch or Hydrant. These companies offer nothing simpler, better, or of higher quality than their commodity counterpart.

Emergen-C Electro Mix: 30 individual packets for $8.50 !!

Skratch Labs: 30 individual packets for approx. $50.00

Hydrant: 30 individual packets for $50.00

2. Toothbrush

I should be upfront in stating that I personally own a Quip toothbrush, and haven’t ventured to try other new brands. However, insight gleaned from product feature lists shows limited differentiation, particularly at the lowest tier of electric toothbrush offerings.

Quip: $25 toothbrush, $5 per brush replacement

Boka Brush: $75 toothbrush, $4 per brush replacement

Philips Sonicare: $25 toothbrush, $13 per brush replacement

3. Contact Lens

Personally, I’ve tried all three of these products. All are competing and marketing on the same handful of factors; all claim to be better than peer cos in comfort, hydration, and overall eye-health. Perhaps insensitive to the subtleties of the contact lens, I felt that these products were almost exactly the same in quality and experience. Given similar functional value at an equal price-point, the simplified purchasing process make Hubble and Waldo real, long-term contenders for marketshare; thus, they are slightly different than the other examples mentioned.

Acuvue one-a-day Contacts: $35/per month (as per 1800Contacts.com)

Waldo one-a-day Contacts: $36/per month, first-month free trial

Hubble one-a-day Contacts: $36/per month, first-month free trial

The Product Theater Formula:

  1. Take an existing, retail product which is sold today in “uninspiring” packaging
  2. Consider an increasing appetite for subscription models and current design trends
  3. Sell your (functionally) undifferentiated product through a glossy web front using a “first-month’s-free” sales trap and hook customers on recurring payment, getting them to give up buying a product they would otherwise buy in-store or through a common platform like AMZN.

This phenomenon is also referred to as ‘Millenialization’ by the folks at 2PM.

It’s important to note that this method of developing a business potentially de-risks product-market fit — with a tradeoff of increased commoditization. Perhaps this is not a bad thing. In the case of Hubble and Waldo, competing to sell an undifferentiated -but beautiful- commodity at the market’s equilibrium price may, in fact, be a great way to steal market share. However, what does this imply about the long-term strategy of a DNVB business? If aesthetic and brand become the only differentiators of product, and a similar aesthetic can be easily replicated, how defensible is each business? And, how can those businesses prevent pricing to the bottom?

The customer value chain above was developed by Jonathan Hey. The addition of the orange circle outlines where I believe these Product Theatrics brands lie strategically. These companies are competing on price at the beginning of their businesses — a place where other firms compete when they are mature in the lifecycle. Again, I don’t believe that this is a bad strategy, but one that comes with more risks to defensibility and sustainability. In the Harvard Innovation Lab provided hierarchy below (created by Eric Almquist), we can gain more perspective on product strategies through the stacked priorities of consumer needs. It’s clear that Product Theaters aren’t fighting at the base of the stack, instead choosing to compete on ‘Emotional’ or ‘Life-Changing’ factors.

The trend that makes this possible

Broadly there are primarily two trends that underpin the continued success of these Product Theatrics. The unparalleled consumer confidence in the market and, perhaps indirectly, the saturation of seed/early stage venture capital. I’ll leave deeper analysis of seed-stage capital over-flow to other writers, as the topic has already been picked apart and analyzed by folks at Battery Ventures, Bessemer Venture Partners, and several other firms.

Late-cycle, American Consumerism

With U.S. consumer confidence at its highest since 2000, there has been no better time to have started one of these online product businesses.

Recently, Target released Q2 earnings results, prompting an 8% surge in share prices. Outside of e-commerce sales, the retailer published their strongest same-store sales growth in 13 years, which CEO Brian Cornell credits to “the strongest consumer environment” he’s ever seen.

Supporting these figures is the Consumer Confidence Index, which details consumer attitudes and buying intentions. The CCI recently increased to its highest level since October 2000 (Score: 135.8). Currently, American’s believe business and labor market conditions will improve further, suggesting solid economic growth for the remainder of 2018.

Late-cycle Seed Venturing

Credit: Jason Rowley

As stated, I won’t get into this too much. This trend has already been deeply studied and picked apart by many venture firms. For more on the saturation of seed and early-stage investing, click through to any one of these articles:

Crunchbase, Institutional, and Jay Z launches Venture Capital Fund

Conclusion

I’d like to state once more that Product Theater businesses are not bad companies or unrealized failures. This overview is attempting to point out that many product businesses which have seen significant growth in the past few years are succeeding because of the consumer climate. And, many of these businesses remain undifferentiated while commanding premiums on aesthetic alone. When you fight on factors removed from the deepest functional needs of the consumer, you introduce existential risk to the business. Undoubtedly, I recognize that there are many intelligent, hardworking people at those firms that must be hyperaware of their reality. Surely, they are making moves to increase stickiness, entrenchment, and protect market share. If (when) the market corrects, I’m sure many of these companies will die, many will survive, and some will thrive.

Thanks for reading. I welcome any feedback! Please feel free to comment below or shoot me a note directly- amrit@technexus.com