What is an effective traffic pool?

So far, we have given corresponding methods for evaluating the value of business models at almost every stage: when the business model shows a growth trend, it is necessary to identify the authenticity of this growth; when the business model begins to be built, it is necessary to evaluate traffic assets, ecological assets and conversion capabilities; when the business model is completed, it is necessary to analyze its financial and human resource efficiency data... But this leaves a gap - how should the business model of an "early-stage" project be valued?

The Internet boom is gradually disappearing, and coupled with the difficulty in fundraising brought about by the macroeconomic winter, capital has become extremely cautious and sensitive. The history of using PPT to raise funds in the early days of start-ups is gone forever. “Early stage” projects have no data, only stories. Even if there is data, it is incomplete and the only thing you can look at is the logic. In the coming period, capital will inevitably become more stringent in its calculations of business logic.

From another perspective, for a long time, investors have tolerated the fact that the business plans (the entrepreneurs’ ideas or stories) in “early-stage” projects are very different from the actual projects that followed. Some even use the excuse that "strategy is gained through fighting" to excuse this situation. However, entrepreneurship inevitably requires the basic logic of the business model. If we can identify this logic, we can avoid those "pitfalls".

In the "early days", for the Internet business model, the most important logic to pay attention to is whether the traffic pool is truly effective.

No matter which Internet business model, it is based on traffic. The general logic is to introduce various online supplies based on traffic demand, form transactions, and obtain profits.

However, the most common mistake made by "early-stage" projects is to "grasp traffic from both ends." This will cause entrepreneurs to waver in business logic, unable to focus on either end, and the business model will become increasingly divergent. In the end, they will lose competitiveness in every segment.

For example, if you are doing a B2C business model, you must determine whether your traffic pool is B or C. If the traffic pool is B, matching Class C users should be introduced based on the demand for Class B traffic; conversely, if the traffic pool is C, matching Class B merchants should be introduced based on the demand for Class C traffic. A typical example of the former is Alibaba, whose vision is to "make it easy to do business anywhere in the world." Obviously, the traffic pool they paid most attention to in the early days was Class B merchants. As long as there were B-end merchants, C-end users would definitely follow. A typical example of the latter is Xiaohongshu, which has formed a large number of Class C traffic pools through social networking. As long as C-end users are interacting, there will be demand, and naturally, B-end merchants can be accurately introduced.

Just imagine, if a business model advocates focusing on both the B-end and the C-end in the "early stage", it may not be able to form a focus on the track. Because both ends must have their own requirements for the other end, it is naturally impossible for the two ends introduced into the platform to match seamlessly. Entrepreneurs must introduce matching C-end users to satisfy existing B-end merchants, and vice versa, they will also introduce matching B-end merchants to satisfy existing C-end users.

As a result, the two ends are getting longer and longer, the corresponding traffic diversion costs are getting higher and higher, the operation difficulty is getting higher and higher, the retention data is frighteningly ugly, and the traffic diversion costs are further increased. In the end, the unprofitable business model became a hodgepodge and had no competitiveness at all. Even if you spend money to expand your business to a huge size, a slightly more precisely focused business model can still snatch a piece of the pie from the hodgepodge.

Countless examples can prove the delusion of enterprises to “have this and that”. A typical phenomenon is that Internet entrepreneurs reflect their ambitions on mobile apps. An app has countless secondary interfaces and buttons, which is more PC-like than PC applications. The user experience is terrible and the bounce rate is extremely high. In addition, a large number of Internet companies do not have operation departments that have established traffic pools, and the imported traffic is automatically lost or even lost at an accelerated rate. In the end, they can only use high-priced traffic diversion and do the past work again.

In fact, another meaning of determining the traffic pool is to make entrepreneurs aware of the limitations of their own abilities, resources, and time, and realize that they are not omnipotent. They should invest their limited resources into a focused track and try to break through it! The choice of traffic pool determines the genes of the Internet business model.

On the other hand, if capital encounters an eloquent entrepreneur who describes a pie that cannot be any bigger and believes that he can do this and that, that he has advantages on the supply side and the demand side; that he has advantages on the B-end and the C-end, then most of the time you can just smile and refuse.

The traffic pool is the foundation of the Internet business model and the main basis for project valuation. However, in an era where traffic is extremely commercialized, using capital to buy traffic, generate data and then introduce capital seems to have become a magic weapon for some entrepreneurs. Faced with such sexy traffic pool data, how do we judge its effectiveness?

Here are four major criteria:

First, traffic based on satisfying pain points is effective traffic.

Pain point = degree of demand × frequency of demand, so effective traffic must be extremely demanded and demanded at a high frequency. If it is not based on pain points, and traffic is only obtained through some marketing means, this traffic will have no stickiness at all and the activity will be extremely poor.

In reality, many entrepreneurs think that their products are great, but what they lack is marketing ability, and they hope to find a marketing expert to make their project take off. If the product really hits the pain point, then marketing capabilities can indeed magnify the advantages and activate the project; but if the product is not that important for traffic, marketing capabilities may instead be a disaster.

Second, only the traffic that does not simply consider the price is effective traffic.

In the Internet business world, spending money in exchange for traffic has become the norm. In order to attract traffic, companies have to offer discounts (low prices), give away products (zero prices), and subsidize products (negative prices). Traffic has become extremely cold, and people are even more picky about prices, as if it is abnormal not to give away or subsidize them. Companies under pressure will naturally enter into the game of burning money, starting a vicious cycle.

In fact, if entrepreneurs agree that traffic should be considered in conjunction with product prices, they have gone completely astray. There are only two possible reasons for calculating the price based on traffic: one is that the wrong traffic target (customer group) is chosen; the other is that the product is not good enough.

From the perspective of traffic goals, the target customers always choose between comprehensive price and quality. Therefore, if companies do not identify and focus, they will generally encounter four types of customers (as shown in Figure 1):

● Low-end customers: highly sensitive to price, but indifferent to quality. They change with the wind and may leave at any time. Price is the only signal. Therefore, this kind of traffic is not the goal, and people should keep a calm mind and take it easy.

● The picky customer group - they are highly sensitive to prices and have high requirements for quality. They do not understand the market conditions but are extremely pursuing "good quality and low price" and their demands are irrational. Therefore, you can keep in touch with this type of traffic and wait for opportunities. When they have been educated by the market, their demands return to rationality, and they are willing to pay a reasonable price, they will also become effective traffic.

● Rich customers – They are not sensitive to price and do not care about quality. Their needs have not yet emerged and they do not understand the good of the products. They buy just because they have money. When facing this type of customer group, you can focus on contacting them and give priority to responding when their real needs emerge. After all, they have the ability to pay.

● Target customer group: They are not sensitive to price but highly sensitive to quality. They have rational demands, know what is good about the product, and are willing to pay a reasonable price. This type of customer group is the "lighthouse" for building a traffic pool. Companies should do everything they can to establish connections with them and make every effort to deepen their stickiness.

From a product perspective, as long as the customers are rational, they will be willing to pay a corresponding price for quality. In the long run, the market is inherently fair, and even if there is temporary unfairness, it will be corrected by the market mechanism (as shown in Figure 2).

On the one hand, when the quality is high and the price is low, the super high quality will attract traffic to grab the product, which will naturally cause the price to rise; on the other hand, when the quality is low and the price is high, the inflated price will squeeze out the traffic, which will naturally force the product to be shipped at a reduced price. Therefore, if a company chooses a rational target customer group but still complains that they care about price, it is essentially because the product is not good enough. To put it bluntly, it is a bit pretentious like "blaming the tofu for being hard when the knife is blunt".

Third, only traffic that can be monetized continuously is effective traffic.

If we choose good customers and provide them with good products, will they definitely be retained? This is not the case, because the demand for traffic is dynamic, and they are calculating their "sense of gain" every moment. Their satisfaction today does not mean retention tomorrow.

The so-called "sense of gain" refers to the degree of satisfaction that traffic perceives from the product. There is a bell-shaped curve pattern in the relationship between traffic and product satisfaction (as shown in Figure 3).

Simply put, as users or merchants of traffic continue to grow, they will have a strong demand for certain product functions at a certain stage. Once the product provides such functions, the sense of gaining traffic reaches its peak. But then, the demand level of users or merchants will drop rapidly, and they will take the functions provided by the company for granted, and their sense of gain will drop rapidly (until a turning point, and then slowly drop). The decline in demand is due on the one hand to the fact that people are used to it and don’t know how to cherish it, and on the other hand to the fact that new demands are beginning to emerge and attention is diverted.

In fact, as users or merchants grow, new demands will continue to emerge, and bell curves will overlap, challenging the product's delivery capabilities. Only products that can consistently provide delivery and maintain a sense of traffic can establish real stickiness.

The real rule is that only when the user's (merchant's) sense of gain is greater than the user's (merchant's) ability to use the product, will the traffic not leave and such a traffic pool will be valuable.

To give a simpler example, if an ordinary young man from a small town (enterprise) falls in love with a white, rich and beautiful aristocrat (traffic), the ending will most likely be tragic, because the young man from a small town may initially make the white, rich and beautiful woman feel the freshness of another life by being clever, but he cannot continue to provide her with a sense of gain. If we compare the relationship between the two to that of a business and traffic (of course this example can also be reversed), then only if the young man from small town continues to provide new deliveries and makes the beautiful, rich woman's sense of gain exceed her ability to use the product, will she continue to recognize his charm, be fascinated by him for a long time, and the relationship will become more and more stable.

Therefore, there is a red line in the sense of gaining traffic, which is the essence of sustained stickiness. Companies must continue to innovate to ensure that they gain a sense of traffic at a high level rather than falling below the red line. If the products provided by an enterprise are free, whether there is a sense of gain is a false proposition, just as the traffic retention of a large number of Internet products is a false proposition, because there is no acquisition cost, and retention cannot measure sincerity. When the products provided by the company are valuable, retention at this time is because the traffic really needs the products. Therefore, considering this principle, if the company can always maintain delivery above the red line of sense of gain, the traffic will not only be retained, but also continuously developed and monetized. This is an effective traffic pool.

Fourth, only traffic with barriers is effective traffic.

To make valuations based on the logic of traffic pools, we also need to make the so-called "effective" standards more stringent. Because even if the above three conditions are met, the company may not necessarily avoid encountering super rivals. We believe that an effective traffic pool can resist super rivals based on barriers.

The real barrier to the Internet business model lies in the network effect. As mentioned in previous articles, there are two types of network effects: one is the positive effect of the same-side network; the other is the positive effect of the cross-side network.

The former means that a network-like connection is formed on one end of the platform (the traffic network on the demand side or the resource network on the supply side). Therefore, with each additional node, the value output is greater. For example, every time a node is added to a social network, the value added increases. Therefore, Internet companies take the lead and are far ahead.

The latter is the "two-sided market theory" proposed by Nobel Prize winner in Economics Oliver Tirole and others. This means that because the network on one end of the platform is strong, it attracts nodes on the other end, making the network on the other end stronger, which in turn feeds back to the network on the original end. As a result, the two ends reinforce each other and become stronger and stronger. Just like on e-commerce platforms, an increase in users will lead to the entry of merchants, and an increase in merchants will lead to the entry of users.

The Internet business model is a system that is an organic combination of several elements, including IP, marketing capabilities, operational capabilities, computing power, policies, funds... Fragments of any one element are not enough to form a sustainable barrier. The real test of whether there are barriers is the two network effects and whether the exponential growth formed by these two effects is obvious enough. So, from this perspective, even though many projects have received five or six rounds of financing, they have not yet "landed".

In fact, this article talks more about strategy than business model.

According to Amit and Zott, pioneers in business model research, a business model is a "transaction activity system" designed to create value by leveraging business opportunities. To put it simply, a business model is to design multi-role transaction relationships based on value creation; and the so-called strategy includes competitive strategy and cooperative strategy. Cooperative strategy tends to be a business model, while competitive strategy originates from war, is based on opponents, and is about how to attack and how to defend. It can be said that the business model defines a "new market", while the (competitive) strategy guides how the company competes in this "new market".

Professor Wang Jianguo of the Guanghua School of Management at Peking University believes that there is an alternating and ascending relationship between business model and strategy (specifically competitive strategy). In the strategic competition in the same market, if an enterprise can innovate its business model, it can jump out of the competition and enter the blue ocean; if the business model is imitated (although it is difficult), the new market will have a large number of entrants, thus turning it into a red ocean, and strategic competition will come again until the next enterprise innovates its business model and jumps out of the red ocean.

In the Internet era, technology has brought a lot of opportunities for business model innovation, leading to the emergence of new Internet companies, which is a good thing. But at the same time, the neglect of strategy has reached an unprecedented level. A large number of entrepreneurs seem to believe that as long as they innovate business models by integrating resources, they can avoid competition and the winner takes all. Therefore, when faced with a bloody battle under the same business model, they will make a large number of low-level mistakes in their competitive strategy.

The so-called low-level mistakes are by no means intended to arbitrarily belittle entrepreneurs, but rather refer to behaviors that go beyond common sense. Throughout history, there are countless great books on competitive strategy, both in China and abroad. However, some common-sense principles, although mentioned repeatedly, are still forgotten at any time. Essentially, this is because the people who develop and implement strategy are not firm enough in these principles. For competitive strategy, the most important principle is undoubtedly "use strengths to attack the opponent's weaknesses to ensure victory." But is this principle upheld?

On February 14, 2017, Meituan launched a pilot taxi-hailing business in Nanjing, Jiangsu Province. On March 6, 2018, Didi launched its food delivery business in nine cities including Nanjing in retaliation. In an interview with Cheng Wei, when talking about the upcoming "war" between Didi and Meituan, he responded by quoting an anecdote from Genghis Khan: If you want to fight, then fight. This kind of "revenge" is typical irrationality. Meituan tried the taxi-hailing service after others had calculated it in advance. They wanted to see whether the existing "eating, living, playing" and "travel" scenarios could be connected. In comparison, Didi’s food delivery business involves more emotions.

So far, judging from the data, the cross-border cooperation on both sides seems to be unsuccessful, but the former is a good experimental cost, while the latter is a meaningless sacrifice. On February 15, 2019, Cheng Wei publicly announced at the company's monthly general meeting that he would lay off 15% of the company's employees and "close, stop and transfer" non-core businesses, involving around 2,000 people. Think about it, could this loss be avoided? Strategy is not about being brave and aggressive, but about deep cultivation based on tricks. There is no such thing as "great effort to create miracles".

Amazon's Bezos believes that strategy should be based on things that don't change. In fact, as long as you are in this market, you should see the end game, establish the coordinates of your thinking and formulate strategies (form principles) based on the end game. In other words, a strategy built on unchanging coordinates can be "anti-fragile", and neither a "gray rhino" nor a "black swan" can shake these coordinates.

Internet companies have four possibilities in terms of business model and competitive strategy (as shown in Figure 4):

First, “wrong business model – wrong strategy”.

The deficiencies in the business model design have resulted in the expected traffic pool itself being a false proposition, while the strategy of expanding territory through brute force has resulted in either death at the starting line or a false prosperity that cannot stand the test. These projects are the result of capital following up and burning money, such as automotive aftermarket maintenance and car wash projects.

Second, “wrong business model - right strategy”.

The deficiencies in the business model design have made the expected traffic pool itself a false proposition, but the competitive strategy ensures that one's strengths hit the opponent's weaknesses, which may win a battle but ultimately lose the entire war. This state is actually very dangerous. For a period of time, the company may even firmly believe that its direction is correct. In fact, it is not the direction that is correct, but the method that is correct. The two are very different.

Third, “Business model is correct but strategy is wrong”.

The business model is reasonably designed, and the logic of the effective traffic pool is tenable, but the strategy is not clever enough, which results in the business model being unable to be activated and always staring at a piece of "unreachable cake".

Fourth, "correct business model - correct strategy".

The business model is reasonably designed, the logic of the effective traffic pool is tenable, and the company can also steadily advance and activate the business model through the correct strategy. In this way, companies can quickly push their traffic pool to a certain scale, build barriers, and achieve exponential growth.

For early-stage projects, the effectiveness of the traffic pool is the only criterion for its valuation. To achieve this goal, entrepreneurs need to get rid of the delusion of “this, this, this, and more” and focus on a traffic pool based on their own genes. And this traffic pool must withstand the test of four standards. To achieve this effect, a reasonable design of the business model is only one of the conditions, and its importance may have been exaggerated; how to choose a "smart competitive strategy" within the territory defined by the business model is another condition, which may be the deciding factor in the competition.

Source: China Europe Business Review (CEIBS-CBR)