In a virtual marketplace, only the strongest brands will survive

Going online not only cuts costs, but also lowers competitive barriers and removes physical distance from the purchase decision, playing to the strengths of the biggest, strongest brands.

My wife has a private yoga instructor. A tall, very calm dude called Gary who turns up once a week in spandex and puts her through the positions, while I work downstairs trying – mightily –  to avoid invasive thoughts about them going at it like beavers in the master bedroom.

In truth, that first paragraph tells you more about me than Gary. He is far too evolved and 21st-century to have sex with any of his clients. Despite the spandex, he is the real deal. Gary spends his week driving around my local region working personally with dozens of clients in one- and two-hour personal sessions. He has become a welcome addition to our weekly rituals. Proper yoga helped my wife through childbirth and has become an essential part of her general approach to life. She gets some peace and clarity. I get a happy other half. Everybody wins.

So, imagine the chaos in my household last week when Gary announced he was going to be ‘Virtual Gary’ from now on. He kept his practice going during the Covid-19 lockdown by replacing physical sessions with Zoom consultations. It took a week or two for Mrs R to get the laptop working properly and adjust to stretching through a computer screen. But, after a few bumps, it has worked just fine and she has had almost three months of online yoga.

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Fortunately, my little corner of the world – thanks to God and a rural community that has been socially isolated since 1850 – has enjoyed a completely Covid-free existence for two months now. Almost all the restrictions have been lifted and Gary can start his weekly visits again. But Gary has developed a taste for the online life. He emailed all his clients last week to announce that he will continue with the Zoom sessions and no longer offer physical visits. His hourly pricing will stay the same.

You can see his point. The side of his van might say “Soothing Yoga” but most of his time is spent driving around some very unsoothing rural roads avoiding tractors. For every downward dog there must be a dozen three-point turns and no-one pays him for travel time. Now that his clients have adjusted to both the virtual sessions and the idea of paying the same price for them, Gary’s potential revenues and gross margins might grow exponentially.

Except Mrs R is not so sure. As much as she likes Gary, the idea of paying the same amount of money for Virtual Gary does not quite stack up. It’s not that she is against online yoga; her Zoom sessions have convinced her of the potential. It’s that Gary is not the only one opening his mind to virtual possibilities.

Companies see better profit margins and an almost unlimited customer base but miss the drastic reduction in barriers to entry.

We live in the middle of nowhere and finding anyone with yoga capabilities within reach was always, ahem, a stretch. In the old, pre-Covid world of yoga my wife was limited to Gary or an elderly woman who creaked a lot and smelled of cheese. But with the opening of this new virtual yoga window, she now has a dizzying array of practitioners keen to work with her from all corners of the globe.

She has assembled what appears to be a technicolor army of gurus and yogini ready to get to work with her. They might look like the global fan club for the Village People, but they know how to operate. All of them are on Zoom. All of them have simple payment plans. And all of them are looking for clients.

My wife’s options have grown just as exponentially as Gary’s. He cannot see this at the moment. His clients all pay an annual fee for their weekly sessions so – for now – they are all locked in for a few more months. The only calculation going on in Gary’s head is one based on a naive incremental assumption that he gets to keep his current customer base while expanding it with his new-found capacity. Triple the client potential at double the profitability and – the best bit – he never needs to leave the house again! Nirvana.

Virtual Gary might be set for a big pay day. He can serve more clients, in more places, more of the time. This is the big upside of going totally virtual, embracing the death of distance and turning the marketing mix knob marked ‘P’ for place all the way up to 11. But, crucially, he is missing the downside that also comes with the death of distance: the lowering of barriers to entry and a drastic and permanent increase in competition.

Lowered barriers

For me, Michael E Porter’s famed ‘Five Forces’ model had always been a clunky, overly-macro framework that was hard to successfully apply to actual businesses. Until, that is, Virtual Gary came along. There he was, bobbing along in the middle of that safe little circle of local yoga instructors with Smelly Pam as the only existing competition.

Michael E Porter’s ‘Five Forces’ model (Graphic: Denis Fadeev)

But, with the sudden move to virtual yoga, he has lowered all the barriers to entry with a single high lunge and activated all four of Porter’s external forces. His market is threatened with a panoply of new entrants and substitute products, which will lead to significant buying power for local yoga customers like my wife and introduce enormous bargaining power from bigger, less expensive, more famous alternative suppliers.

And Gary sees none of this because he is wearing the blinkers of new-found virtual expansion. He sees only the green grass of the new fields opening up to him and ignores all the other massive pedigree bulls roaming those meadows and looking his way. Potential upsides in business usually blind most managers to the much bigger threats that come with them. Gary is almost certainly about to get smashed by the very thing he thought was about to make him rich.

This is, of course, not just the story of regional Tasmanian yoga. It’s a narrative currently occupying a host of businesses grappling with the Covid catalyst and the virtual implications bestowed by lockdown. Companies see better profit margins and an almost unlimited customer base but miss the drastic reduction in barriers to entry, and the gigantic range and frightening potential of the competitors now stepping across those formerly restrictive thresholds towards their once-protected customers.

Scott Galloway’s continued criticism of the American university system is a prime example. Galloway is shooting at numerous targets with his ongoing predictions of doom and decay for the overpriced, disgracefully debt-ridden operations of American academia. And it’s an argument made all the more powerful in that it comes from a professor working within the American university system.

But at the heart of his critique is the identification of the same strategic error that Virtual Gary is currently guilty of. Galloway predicts that hundreds of universities will be forced to close in the coming years as what presented itself as an online opportunity turns into a “flight to quality” and results in “a concentration of power among a small number of brands”.

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Right now, every second- and third-tier university on the planet is migrating their students to crappy online learning while pocketing the spectacular margins that come with it. They are doing this because Covid-19 is forcing them to, or because they were already on the journey thanks to a strategic naiveté that is matched only by their unrealistic ambitions for continued growth.

What these universities are missing is that once this online model becomes established and distance is removed from student decision-making, there will be no demand for second- or third-tier universities. There won’t even be a remit for them to exist anymore.

Why study at any of these schools online when a small cabal of global universities offers better quality education, from more famous professors, belonging to more prestigious universities, populated by more notable alumni, with more advanced tech? And better college sweat shirts.

Galloway points to a potential marriage between the big brands of MIT and Google, and suggests the two could generate billions from online, certified courses. He is (eventually going to be) right. And his veracity should trouble every university not in the top 10. I don’t mean the national league tables. I mean if you are not Harvard or Cambridge or Stanford – you are super fucked.

Competition makes marketers essential

Remember How about Webvan? Beautyjungle? eToys? Me neither. They were among the thousands of perky etailers set up to enjoy the unlimited potential of online trade 20 years ago. And all of them were royally screwed by a handful of bigger, better, mega-brands starting with Amazon and eBay. These brands got to the top of the mountain first, sucked up most of the market next, and destroyed these smaller brands in the process.

Sure, you want global access to markets and the lower operating costs of online business, but are you ready for the subsequent attack of the 800lb gorillas that come with them? That’s an especially important consideration for formerly offline, regional businesses like Gary’s Yoga or provincial universities, because they could not compete if their lives depended on it. They have grown within and are therefore used to a captive market. They think they want to escape that captivity and grow. But they fail to see the big apex predators out there in the jungle waiting for fresh meat once the gate is opened.

All you initially need to succeed in business is a product and some sales. It is only with competition that companies start to worry about the customers.

All the businesses that have gone from physical interaction to virtual engagement are in this same boat. Tax advisors, lawyers, conference organisers – the list goes on and on. They all have dollar signs in their eyes as the costs to serve go down and the potential market grows by a factor of a bazillion. But those dollar signs obscure the dark side of virtual business and the sudden arrival of global competition where once only a few local players battled it out.

As marketers, none of this should surprise you. In fact, you should welcome it. One of my earliest insights about marketing was that companies, and indeed whole industries, do not automatically care about customers or marketing. All you initially need to succeed in business is a product and some sales. It is only with competition that companies start to worry about the customers behind those sales and start their marketing journeys. Competition creates market orientation, which, in turn, kick-starts the marketing process.

That being the case, the lowering of the classic barriers to entry in the industries now embarking on a virtual path will mean two things. First, a blood bath in the near term as companies are killed, acquired and diminished. Second, a refocus on consumers, marketing and brand. Not because marketers are super important or the secret of every success. But because we’ve just been elevated about three levels up the corporate totem pole, as competition has just made us essential.

I guess what I am really saying is that Virtual Gary is going to need a marketing expert. The good news is that he can reach me on Zoom. The bad news is that my prices haven’t changed either. Nirvana.