Deep dive into the unknown industry specifics
Over the past decade, we have seen the emergence of new online tools that have revolutionized the way people meet. Just recently, the global covid-19 crisis has reminded us to which extent online is becoming the main channel to get to know people beyond our IRL networks (friends, family, work) that this time couldn’t even be considered as in some cases we couldn’t even meet any of them.
While social networks and more widely software services have tremendously evolved over the last decade, the dating industry has been stuck at the launch of Tinder and its basics (the revolutionary “swipe & match” feature at that time). All the other significant apps that have launched using the same UX innovation have adapted their product to a more specific marketing positioning (Bumble with “women make the first move”, Happn has focused on localization, etc.). Nothing that has stopped Tinder from growing further and to become the dominant player globally reaching $1.2bn in 2019.
The future of online dating is the matter of an entire future generation, including our kids. There certainly is a challenge to make this place more positive but no one can dispute the fact that meeting online is inherently part of the new lifestyle and all the adoption figures can support it.
However a large majority of investors have kept a distance from this industry. But why is this market perceived as complicated? Why investors believe that any exit is tighed to one player? Is there a general resignation? What are the root causes?
And more importantly, why has it been so complex to overthrow Tinder? Users are highly dissatisfied and according to Match group have in average 3.9 dating apps in the US on their phone and are constantly looking for new services. Why do they end-up back on Tinder (70 to 80% of Tinder downloads are re-downloads)? Why has no other apps managed to bring something new and successful over the past 8 years?
There is certainly a “timing” part to this answer but not only. I think the time has come for a major disruption. There is no doubt that by the end of this decade, Tinder will step down as the number one player globally. As an entrepreneur in the industry myself, I have thoroughly reviewed what has been done in the past by benchmarking other players and their product (there is a large cemetery of dating apps). I looked at how they have been competing and performing (downloads, P&L, fundraising, market dynamics, etc.). I have listened to investors, entrepreneurs and their experience in this industry. This is how I came up with this shortlist of most important reasons for failure.
Chances are high that I need to add further reasons to this list in the future. Maybe mine. At least it will serve potential future disruption.
They are two main reasons for failure, (1) there is a lack of strategic considerations of what can truly brake network effects, and (2) tactically the approach of most entrepreneurs ignores key metrics to follow
Lack of strategic considerations of what can truly brake network effects:
- Reason #1: New products are designed as a marketing concept based on the “swipe” concept that ultimately reinforces Tinder’s position
- Reason #2: New launches are done with the same acquisition playbook on a city by city basis, which is capital intensive on a global scale
Tactically, the approach of most entrepreneurs ignores key metrics to follow
- Reason #3: Regular consumer app metrics are applied without considering specific user behaviors
- Reason #4: An overall blended acquisition cost is measured instead of a granular frequency-based acquisition cost
- Reason #5: First (and most decisive) marketing budgets are poorly spent
Reason #1: New products are designed as a marketing concept based on the “swipe” concept that ultimately reinforces Tinder’s position
Call it “swipe”, “Like vs. dislike” or any other superficial binary decision on the basis of a physical aspect on what makes a person “attractive” or not eventually disregards user’s identity.
I wrote in The future of online dating that dating apps will need to initiate a transformation towards a platform that will look more like a social network than a stack of profiles without any contrast . More emphasis needs to be put on the profile and what makes each user unique, original content. This step-by-step transformation requires an iterative and product-focused approach.
A good marketing concept can easily attract many first-time users, a great marketing concept can make the user come back 2, 3 times but on the long run they will come back to the product that has the highest marketing spending, the most users and the strongest brand, i.e. Tinder. There is a good reason why Tinder is continuously growing not only in users but paid subscribers. Each time a user comes back, chances that he switches to a paid subscription increase. If your product doesn’t offer something truly different than a marketing concept, users will end up back on the initial trendsetter.
Happn is probably the best example, although it became a great success with a terrific marketing message “find the people you crossed path with”, the product reality is catching up and the company is probably hitting a glass ceiling in terms of paid subscriptions uptake. The marketing message can resonate in everybody’s life and experience. Indeed it supposedly offers a solution to one of the greatest frustrations we can feel as a human being.
Judgment = reality — expectations
Reality of the product catches up, it is actually not different from Tinder, you still see the people around you and the app is not able (more than any other location-based dating apps) to show you this very person you have crossed path with. A different reality combined with high expectations and you get a worse judgment than with another app.
Although Happn can’t be called a failure, this is not a surprise if the company seems to have more difficulties to monetize it’s audience. According to AppAnnie, globally Happn has 8 times less MAU than Tinder, but generates almost 30 to 40 times less revenues. And looking forward I don’t see how this could be any better, with no product differentiation combined with the fact that Happn remains a “stand alone” company . Tinder as part of the Match group will rely on other apps to drive future growth, when Happn will only be able to observe a declining trend.
Reason #2: New launches are done with the same playbook on a city by city basis, which is very capital intensive to rollout on a global scale
To better understand why dating apps usually roll out on a city by city basis, Sameer Singh writes in The Network Matrix: Bridges & Identity that local network effects of dating apps lack of network bridges, in the sense that additional users in different cities do not add value to the usage in one specific city. The problem is even more important from a country to another, movements between cities within a country being more frequent than movements between countries.
It is indeed capital intensive to grow globally on a city by city basis but unlike Uber or Lime that require local assets and operational team deployment, the growth of a dating app is ultra scalable.
In fact, the dating app growth relies exclusively on digital channels, however a large part of what makes the success of a dating app is its ability to drive organic word of mouth.
The key success driver relies on (1) the ability of new generation apps to find and master a new distribution channel. The opportunity comes once in a while with the development of new large-scale social networks. The window of opportunity closes as incumbent players start copying but too late for the new frontrunner and (2) the quality of the product which comes back to Reason #1.
In an ideal case, acquisition costs should reduce over time to let word of mouth take over a large part of it. This should also coincides with marketing budgets shifting to branding instead of performance.
Reason #3: Regular consumer app metrics are applied without considering specific user behaviors
“What are the KPIs that you follow?”, in 95% of cases people who ask this question expect to hear the same regular consumer app KPIs (i.e. 30-day and 3-month retention, DAU over MAU or WAU over MAU, etc.).
Only a limited number of people would actually drill down to the reasons why some other KPIs would actually make more sense in a specific industry.
Yes, x-day/month retention or DAU/MAU do carry a meaning but bluntly looking at these figures as primary KPIs disregards the specific user behaviors and a better understanding of the underlying trends.
Online dating is an industry of its own. You can qualify dating app users as ultra-high-frequency users. The same way ultra-high frequencies work, users’ line of sight is very short (they want immediate result) and their intensive efforts quickly fade away.
In fact, the typical dating app persona uses the app very intensively until finding a potential partner then stop using it, and eventually comes back at it again and so on.
Dating apps are often compared in terms of metrics to gaming apps, but the logic of usage and behaviors are way different for two reasons, (1) you don’t necessarily need network effects to enjoy a game, your computer can take over, and (2) it makes sense to bring a friend to play with you, it adds value to the value proposition (while it can feel even contradictory to bring a friend to meet new people).
Dating apps are in a league of their own, you need the network effects of social networks (however not to the same level of liquidity as two-sided marketplaces, see below), and the specific usage that is made out of them, makes them more suitable to a subscription-based business instead of an advertising-based business like social networks.
In fact, in comparison to two-sided marketplaces the right liqudity can be achieved faster for an online dating business and product innovation in that case can beat network effects. At the level of a city, there is only a limited number or profiles that you can scroll as a user over a 1-week intensive usage and this number is enough as long as the profiles are fit for you (this is why niche dating apps can sometimes work). To break the network effects of Airbnb or Uber is a different kettle of fish. To compete with Airbnb you need be able to offer an exhaustive supply of homes accross multiple areas and users might switch from an area to another just to find the best home. For Uber, the whole value of their network effect lies in the “time to pickup”, if the supply isn’t enough in comparison to Uber and your pick up time is even only twice higher, users will directly switch back to Uber and might never download your app again.
In addition, dating app users are using on average 3.8 apps in the US (2.9 in France) when using an online dating service, which means that the switching costs are almost non-existant as long as you get what you were looking for.
Misunderstanding the network effects impact can lead to poorly spending marketing budgets (see below reason #4).
Reason #4: An overall blended acquisition cost is measured instead of a granular frequency-based acquisition cost
The notion of acquisition cost is highly heterogeneous in an ultra-high frequency business. You can’t speak about a blended acquisition cost and judge whether it is good or not.
It highly depends on the historical data and type of users you are acquiring, the first, second, third, fourth etc. time. Customer acquisition costs should be split according to these segments. For a more granular view on the “quality” of acquired users, defining user personas based on their behaviors is fundamental, as paying users may have a specific behavior (also according to the acquisition channel) that differs from the power user persona of your app.
The reason why Tinder has been (and to a certain extent will continue to be) a strong player is that it managed to build a strong brand. And brand is the key intangible asset you need to build (and it takes time and early efforts) to avoid as much as possible acquiring the same customers each time.
In fact the more a business implies repetitive acquisitions/downloads, the stronger the role of the brand (in general the most powerful brands are FMCG products, and Coca Cola probably the best example of all).
Reason #5: First (and most decisive) marketing budgets are poorly spent
For any industry, each euro or dollar at the start of a business are determining. And what applies for other businesses should apply here as a rule: at the start budget should always be mostly focused on product development and marketing should serve as an enabler. But for some reasons that I can’t really explain, entrepreneurs and investors think that in the online dating business this is all about marketing spending to get noticed and gain initial traction.
This is where it can get ugly quickly. This was the case of Smartdate for example in France in 2010. Its strategy was to go acquire customers not only in France but also in multiple neighboring countries after they raised 3.5 million euros. This marketing race (surely done in a dramatic manner) has sent this company straight to the cemetery of dating apps/websites, while this money at that time could have been invested in developing an equivalent of what Tinder became.
Besides these spectacular cases, there are two ways of poorly spending a marketing budget at the start of a business. You can either (1) underestimate local network effects and acquire users from different regions at the same time, or (2) overestimate local network effects by acquiring too many users at the same time instead of privileging steady user growth vs. product development.
- In comparison to many other new services where you can question the ultimate need for it, for online dating services, the need has existed and will continue to exist as long as the internet is up and running.
When users connect to a dating app, they ultimately want to get in touch with other people and whether they meet or not is not really the question. Leibniz in the New Essays on Human Understanding (1765) thinks that a “virtual” thing, which is only a potential without any guarantee of becoming “real”, is not without effect on the “actual”: it has already set a foot in the real world by its possible “actualization” in the future. But possible “actualization” means somebody at an acceptable distance. Spending on advertisement in a wider area (including regions and countries) can discourage users from the start.
- Because money is a limited resource at the start of a business, overestimating network effects (for this specific business) can result in spending too much money sometimes only for the sake of getting new subscribers (which helps building self-confidence, or convincing investors). On the long run and coming back to reason #2, the more you spend at the start the less chances you have to get it right. What difference does it make for a user over a certain period of time to have 10,000 users, 100,000 users or 1m users connected at the same time if he is going to scroll only X profiles?
For this specific reason, it is important to find the right level of steady growth to support product development and improvement (reason #3).
Conclusion: dating apps are a business of their own, difficult to compare with any other consumer business, be it in terms of consumer behavior or defensibility metrics. While the market is still nascent (limited investors, limited potential acquirers) we can’t predict how the market dynamics will look like in 2030. However we can surely predict that the usage of these services becomes a key part of our lives, a tool that helps us connect but at the same time disconnect from our IRL networks. No doubt that in the future a tool of such importance for our lives will attract more interests and investments.