Replacement02 Mar 2016
When I see a company trying to enter an existing market, I will consider if it has potential to build a “replacement” product.
Most products or services have two major factors: the price and the experience. What I mean by replacement is simply fixing one of the two factors to be market average, and improving the other. I.e. offering a standard service at a very low price, or with a standard price, your offer a extraordinary experience. In this way, the product or service will be absolutely better than the old solution, and will encourage people to use it as a “replacement” of the existing solution, but not as one “option” of many. If you trade off experience for price, or the other way, your product is not a replacement.
A good example I can give here is Uber. The company is now offering cheap and convenient ride service. It’s usually 10~20% cheaper than taxi, and you can get hop on a ride whenever you want without making a reservation like most taxi company does. Think it in this way: if Uber is just 10-20% cheaper, but you still need to make a reservation, you might still use it; or, if you can get a ride whenever you want, but paying the same price as taxi, you might still use it. This is because it is a net gain, and there’s no reason to go back and use taxi any more.
Now think Uber vs buses. In this case, Uber is more expensive than bus, but more convenient. You are trading off price for convenience, so Uber and bus can both be your travel options. Depending on your situation, you might go with one or the other.
Now let’s take a look at some startups currently in the market. Let’s analyze DoorDash and Luxe.
DoorDash is a food delivery service. You order your food online, pay a delivery fee, and the DoorDashers will pick up the food at restaurant then send it to you. This service is growing pretty rapidly in last two years, but I think it is hard to become a huge unicorn. The reason is, with paying a extra fee, food delivery service can hardly become your go-to option. I only want to trade off my money for convenience when I have to. However, if the delivery fee is similar or lower than the tip I need to pay at the restaurant, I might start using this service more often because I don’t have a money loss. Even in this case, there’s still a limit, because eating at home is not always better than eating at restaurant because of the environment. So at most DoorDash will always be an option rather than a replacement.
Luxe, an anywhere valet parking service, will park your car for you and send it back to you wherever whenever you need it. This experience is clearly better especially in big cities because you don’t have to find parking spot any more. The service used to charge $5/hr with a maximum of $15, but now the price goes up to $8/hr. I use this service sometimes only when I am in a really big hurry, and more often I still try find a spot myself because Luxe is generally a bit more expensive than street parking. If Luxe can reduce its price again to $3-5 per hour, it will become a go-to choice for me because that’s cheaper or the same price as parking lots.
So, it’s important to know who you are competing with, and try offer a absolute better solution rather than a trade-off solution. Don’t become an option, become a replacement.