The IFTF Blog
From Apples to Apples to Oranges: Tech Disruption in Traditional Industries
Recently, Unilever acquired Dollar Shave Club, a direct-to-consumer men’s hygiene company, for $1 Billion. This might seem like another day, another dollar in the world of startups. Its valuation per employee (Dollar Shave Club had 190 employees at the time) wasn’t particularly high. But many saw this as a canary-in-the-coalmine warning that the status-quo organizational methodologies of startups had spread from the software-only field into the broader business landscape of manufacturing and distribution. After all, Dollar Shave Club didn’t do R&D. It didn’t manufacture its own razors or advertise through traditional channels. In fact, in many ways, it's not even a tech startup. Rather, here was a sleek, minimalist beast aimed at optimizing customer experience (and nothing else).
If this model rings familiar, that might be because airline aggregators work the same way (though with a greater emphasis on the tech). This fascinating article compares user satisfaction for consumers booking via aggregators versus directly through airlines. The outcome of this study? Almost 80% of consumers reported being satisfied with interacting with the calendar on flight aggregator websites, compared to under 10% on airline websites.
The threat for airlines here is the same as the threat for razor companies in the Dollar Shave Club example: the risk of being white-labeled. That is, the risk of losing the significance of their brand. If consumers purchase flights through an aggregator based on choice-points such as cost and number of layovers, does the airline itself even matter? If consumers can subscribe to a service that delivers razors on a monthly basis, does advertising and R&D for razor companies matter?
Also similar across both these case studies (airlines and razors) lie the diminishing cost of coordination. The use of APIs allows aggregators to pull flight costs directly from airline websites for free, while the ability for Dollar Shave Club to maintain a monthly distribution network for its unbranded razors is built upon the ease-of-use of online purchasing and decreasing coordination costs for shipping.
As the costs of coordination diminish, vertical integration seems to be losing its practical edge for all but the largest players. Coase Theorem explores the math of business partnerships amidst reducing transaction costs, and applies here perfectly. After all, why should Dollar Shave Club build razors and advertise when its goal is to focus on streamlined, low-overhead user experience? IFTF Distinguished Fellow Bob Johansen calls this ‘right-of-way’-- the focus area a company feels it has the right to innovate and specialize in.
But Coase Theorem can’t provide insight on the emerging consumer experience dimension. We need another model to explain what’s happening as tech companies with low- or no- overhead disintermediate and disrupt traditional players. I call the introduction of these low-overhead tech companies into traditional industries the ‘From Apples to Apples to Oranges’ problem.
In English, the phrase ‘comparing apples to apples’ refers to making a decision between two options that are, by and large, quite similar. Traditionally, purchasing a flight meant selecting between two airlines that were organized and operated similarly. Buying a razor meant picking between two brands stocked on shelves. Buying insurance meant comparing between companies with big office buildings and thousands of employees. But no longer. The introduction of new players into traditional spaces, whether Dollar Shave Club, SkyScanner (a flight aggregator) or MetroMile Insurance, introduces options that are fundamentally different. The English phrase ‘comparing apples to oranges’ signifies attempting to compare two options that are in essence incomparable.
So the phrase ‘From Apples to Apples to Oranges’ refers to a marketplace in which consumers historically have chosen between options that were similar, until new entrants fundamentally expand the options. Think Bic razors vs Gillette razors, and then Dollar Shave Club comes around.
The significance in ‘From Apples to Apples to Oranges’ scenarios emerge in how the new entrant (the orange) shifts how the market operates because of its articulation of value proposition. Historically, of course razor companies had to advertise. But as Dollar Shave Club puts it, “Do you like spending $20 a month on razors? 19 goes to Roger Federer” (for endorsements).
It’s the orange’s job to persuade people who have chosen between different kinds of apples that what they really want is a refreshing snack, not an apple (if you follow). MetroMile applies a similar kind of logic when it asks consumers why they’re paying for car insurance if they’re not driving. In this light, the new entrant puts forward a critique of all its competitors simultaneously. The apples, meanwhile, risk seeming old-fashioned as they continue to compete on traditional choice-points.
But the bottom line is still the bottom line. New tech entrants usually, if not always, tout far lower overhead as the crux of their advantage.
What’s an apple to do? Coincidentally, Apple (the company) provides an admirable case study: leverage your vertical integration to create products and services so clean and high-standard that they can only be the product of a single corporate entity, rather than a network of contractors glued together by APIs.