Micro disruptions

A key benefit of being the co-owner of an operating business is that sometimes you get very interesting investing insights from the coal face.

The service my company provides is a niche waste disposal service targeted at SMEs that is as staid and boring as they come and typically comprises a tiny proportion of our customer’s cost base (e.g. for a small cafe their annual servicing costs would be less than $300 – typically less than their daily COGS spend).  Our service is not a direct input into our customer’s products or services. There is almost no product differentiation in our industry – it’s a truly back of mind product.

Our business therefore represents a great “control” experiment and case study on SME sales channels because our sales channel effectiveness is minimally impacted by marketing, branding or product differentiation.

To successfully acquire a new customer in our industry you need:

1. Timing – there is only a tiny “window” where a potential customer would be open to buying your product, either when the customer starts the business (or a new site), or when the customer’s contract is up for renewal (typically every 2 years)
2. Incentive – it is very difficult to be front of mind for a service that is by definition back of mind. Even when a customer’s contract comes up for renewal, typically the only incentive to for a customer to switch providers is cost savings (note: we don’t like to play this game)

In pursuit of growth, we aggressively invested in and experimented with every single sales channel conceivable. These included everything from cold calling to targeted flyer drops to good old fashioned door knocking.

After 18 months, we concluded that search advertising was far and away the only sales channel that proved to be cost effective. Google Adwords had the unique ability above all other sales channels to reach potential customers at exactly the right time in their purchasing cycle at a cost per lead that is both predictable and measurable.

We have no reason to believe that our competitors, large and small, are currently using any other sales channel (at least not successfully) to sell to SMEs aside from search advertising.

What’s interesting is that we pay exactly the same dollar amount per customer lead (i.e. click) as our multinational competitors. In fact, we’re able to place our advertisement above those of our larger competitors providing we pay slightly more to Google. Then, it’s just a matter of how good we are in managing our sales funnel to maximise our conversion rate.

Now, for less than $100 I can have an off-the-shelf website optimised for lead generation that is as good as my multinational competitor’s, if not better. And once customer quote requests come through, our lead convertors (i.e. our sales staff) are as fast and as responsive as any of our competitors – underpinned by our off-the-shelf SaaS CRM that are, for our purposes, as good as our competitor’s multi-million dollar custom CRM.

It’s analogous to operating a small retail shop where I occupy exactly the same high street location as my largest competitors, paying exactly the same amount of rent per customer (and only paying when there is real foot traffic through the door). My shop fitout is comparable to my largest competitors and my visual merchandising has been optimised by the best in the business globally. Additionally, my sales staff have access to the best sales tools available.

In other words, large multinationals have no inherent scale advantage over us when it comes to selling to SMEs.

If we take one step back and look at the bigger picture, the implications are quite staggering given SMEs contribute around 33% of Australian private sector GDP.

It is no secret that traditional facilitators of reach into the SME space (think Yellow Pages, Direct Mail, SME sales people) are in secular decline (and as an aside it’s also interesting to reflect on how wasteful these traditional channels have been with respect to societal resources – all those discarded pamphlets, unsuccessful sales calls achieve literally no net economic value-add to our economy).

A more nuanced, and no less important, consequence is that if the sales channel is indeed being commoditised as a result of search advertising, how many large incumbents, no matter how staid, boring and “bricks and mortar” their industries are, now have minimal sales channel advantage – where savvy SMEs or even individuals can now compete with them head-to-head?

We sometimes look at “disruption” in terms of high profile “big bang” upheavals of entire industry value chains (e.g. taxi industry vs. Uber, television networks vs. Netflix etc) and these investment themes have certainly been played exhaustively. However, there is actually more nuanced “disruptions” happening along specific sections of industry value chains that are under the radar but will have real impacts on future industry structure and performance – with real investment implications and opportunities we can take advantage of.