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Kept waiting for him to drop the phrases "network effect" and "economies of scale" but it never happened. AKA burn to acquire users until you're so big that you

Kept waiting for him to drop the phrases "network effect" and "economies of scale" but it never happened. AKA burn to acquire users until you're so big that you can throw your weight around to reduce costs ala Amazon. The holy grail of software startups. Given this post, I think it makes sense that YC is pivoting to include more hardware startups in its portfolio. Software is so saturated that people are starting to regard the majority of it as free. The people who do pay for services like Twitter & Facebook are the advertisers and business owners who have probably observed questionable ROI on average for the past few years. I don't expect a bottle of coke to be free, and I don't expect a condom [1] to be free. So the "unit economics" make more sense in hardware (tangible/consumable product) land. Network effects are still important, but shipping a product and collecting revenue from each sale even if you still have negative margins lengthens your ability to stay in business, giving you valuable time during which you might hit critical user mass or achieve economies of scale. [1] http://techcrunch.com/2015/08/09/y-combinators-l-condoms-provides-safe-sex-on-demand/ http://techcrunch.com/2015/08/09/y-combinators-l-condoms-pro...

_sentient 11y ago
If you have negative contribution margins, scale only accelerates your demise. Driving toward scale with those economics is exactly what it means to "lose money on every sale, but make it up in volume". Is selling something at a unit loss better than shipping something for free? Maybe, but in the case of software the marginal cost per unit is near zero, so scale can be achieved without huge amounts of capital. Hardware doesn't quite enjoy quite the same leverage.
- roymurdock 11y ago
  > If you have negative contribution margin, scale without an appropriate reduction in total cost only accelerates your demise. Which is the hallmark of a non-viable business. I agree that it's easier to scale software, but I'd be interested to hear whether or not you think software is a saturated space that has engendered a sense of entitlement in many would-be customers. If you can't convert/monetize your userbase, nothing else really matters.
  - _sentient 11y ago
    I agree with the last premise, but we already have a way to get people to pay for products they are used to getting for free. It's advertising. And while I would personally avoid the model, it has spawned/supported many of the greatest tech companies over the last decade.
dirtyaura 11y ago
> Software is so saturated that people are starting to regard the majority of it as free. This doesn't match my experience at all. To me it seemed that throughout the 00s both consumers and small businesses were unwilling to pay anything for the cloud software, but tide has definitely turned. Now, all smart small companies I know don't blink an eye to spend hundreds of dollars per month for various cloud subscriptions and consumers are starting to pay for software both on mobile devices and cloud SaaS.
- nostrademons 11y ago
  I get the sense that small-business SaaS companies can usually charge (after a short free-trial period), but consumers are still very reticent to pay for software. There are some services that are the exception (eg. Spotify/Netflix), but generally those are industries that were very large before software came along, and they replace incumbents (eg. RIAA/cable) that people used to pay for as well.
  - dirtyaura 11y ago
    Yes, consumers are much more willing to pay for content-driven services - after all they are mostly consuming, not creating. But if you observe niches and prosumers (who are creators), they are already paying for software. And niches can be huge on global scale: think about running, cycling, gym training. Or pets, dogs, horses. Investing. Knitting. Photography. You are totally right that they are currently much more reticent to pay for software than businesses but based on my anecdotal observations, I think that the trend line is growing and accelerating. I also think that for consumer businesses, you have to be a bit more creative with your monetization models. Cost/benefit calculation of subscription model is an easy task for small businesses, but consumer spending has always been much more erratic in the physical world also, thus subscription models are not necessarily the best fit for consumer space.
  - Illniyar 11y ago
    Consumers pay for software all the time - games, outlook/office, dropbox, phone apps. (And if you put netflix on the list, then tons of content such as ebooks, music, paywalls and such are bought all the time) We tend to dismiss these because they aren't bigshot modern startups. Consumers don't buy alot of services, since frankly most have good free alternatives, but they buy software that sits on their hardware and they buy content.
saosebastiao 11y ago
Economies of scale exist but they aren't a given. You can't just grow your sales and automatically have a lower cost structure. Amazon actually learned this the hard way, and they've had to relearn the same lesson multiple times. It is extremely common for people to overestimate how much they can lower their cost structures at scale, and to be caught off guard when they actually achieve that scale. Amazon Fresh tried the "scale your way to cash neutrality" approach, but ultimately it was price increases that made it sustainable enough to roll out to other cities.
flashman 11y ago
> The people who do pay for services like Twitter & Facebook are the advertisers and business owners who have probably observed questionable ROI on average for the past few years. Demonstrating ROI on Twitter/Facebook advertising is one of the hardest things to do for clients that don't sell their products online (e.g. breakfast cereals). It leads to backwards behaviour: because you can't prove that advertising lifted sales, you start thinking, "What promotions result in trackable performance metrics?" and do them because they're trackable, not because they're good ideas.

_sentient 11y ago

If you have negative contribution margins, scale only accelerates your demise. Driving toward scale with those economics is exactly what it means to "lose money on every sale, but make it up in volume". Is selling something at a unit loss better than shipping something for free? Maybe, but in the case of software the marginal cost per unit is near zero, so scale can be achieved without huge amounts of capital. Hardware doesn't quite enjoy quite the same leverage.

roymurdock 11y ago
> If you have negative contribution margin, scale without an appropriate reduction in total cost only accelerates your demise. Which is the hallmark of a non-viable business. I agree that it's easier to scale software, but I'd be interested to hear whether or not you think software is a saturated space that has engendered a sense of entitlement in many would-be customers. If you can't convert/monetize your userbase, nothing else really matters.
- _sentient 11y ago
  I agree with the last premise, but we already have a way to get people to pay for products they are used to getting for free. It's advertising. And while I would personally avoid the model, it has spawned/supported many of the greatest tech companies over the last decade.

dirtyaura 11y ago

> Software is so saturated that people are starting to regard the majority of it as free. This doesn't match my experience at all. To me it seemed that throughout the 00s both consumers and small businesses were unwilling to pay anything for the cloud software, but tide has definitely turned. Now, all smart small companies I know don't blink an eye to spend hundreds of dollars per month for various cloud subscriptions and consumers are starting to pay for software both on mobile devices and cloud SaaS.

nostrademons 11y ago
I get the sense that small-business SaaS companies can usually charge (after a short free-trial period), but consumers are still very reticent to pay for software. There are some services that are the exception (eg. Spotify/Netflix), but generally those are industries that were very large before software came along, and they replace incumbents (eg. RIAA/cable) that people used to pay for as well.
- dirtyaura 11y ago
  Yes, consumers are much more willing to pay for content-driven services - after all they are mostly consuming, not creating. But if you observe niches and prosumers (who are creators), they are already paying for software. And niches can be huge on global scale: think about running, cycling, gym training. Or pets, dogs, horses. Investing. Knitting. Photography. You are totally right that they are currently much more reticent to pay for software than businesses but based on my anecdotal observations, I think that the trend line is growing and accelerating. I also think that for consumer businesses, you have to be a bit more creative with your monetization models. Cost/benefit calculation of subscription model is an easy task for small businesses, but consumer spending has always been much more erratic in the physical world also, thus subscription models are not necessarily the best fit for consumer space.
- Illniyar 11y ago
  Consumers pay for software all the time - games, outlook/office, dropbox, phone apps. (And if you put netflix on the list, then tons of content such as ebooks, music, paywalls and such are bought all the time) We tend to dismiss these because they aren't bigshot modern startups. Consumers don't buy alot of services, since frankly most have good free alternatives, but they buy software that sits on their hardware and they buy content.

saosebastiao 11y ago

Economies of scale exist but they aren't a given. You can't just grow your sales and automatically have a lower cost structure. Amazon actually learned this the hard way, and they've had to relearn the same lesson multiple times. It is extremely common for people to overestimate how much they can lower their cost structures at scale, and to be caught off guard when they actually achieve that scale. Amazon Fresh tried the "scale your way to cash neutrality" approach, but ultimately it was price increases that made it sustainable enough to roll out to other cities.

flashman 11y ago

> The people who do pay for services like Twitter & Facebook are the advertisers and business owners who have probably observed questionable ROI on average for the past few years. Demonstrating ROI on Twitter/Facebook advertising is one of the hardest things to do for clients that don't sell their products online (e.g. breakfast cereals). It leads to backwards behaviour: because you can't prove that advertising lifted sales, you start thinking, "What promotions result in trackable performance metrics?" and do them because they're trackable, not because they're good ideas.