Jens Bäckbom Business Ideas About

How we beat existing network effects and got 900 customers from day one

In 2011 my company Benchmarking Alliance outmaneuvered a competitor that – in theory – couldn’t be outmaneuvered due to network effects. Through a combination of the right organization, product features, pricing and negotiation, we took over the Nordic market for hotel KPI benchmarking.

Late 2009, I was doing consulting work for the Pricing and Distribution team at one of the largest hotel chains in the Nordics. When the project was finished, the team mentioned that they were dissatisfied with one of their software suppliers. “If you would build something better”, they said, “we’ll become your customer tomorrow.” The supplier was a US company (let’s call them “FTR”) which had recently acquired a Swedish company (let’s call them “The Bunch”) in order to enter the European market. Our US competitor was founded in 1985 and provided competitor benchmarks on a monthly basis to most hotel chains in the US. Every month, hotels would send proprietary data such as last month’s audited revenue figures to FTR and in exchange receive aggregated KPI benchmarks (occupancy, average room rate and revenue per available room) for a selected group of competitor hotels. Over time, FTR had become the de facto standard for hotel industry metrics and the numbers were regularly used by financial institutions when assessing M&A deals or expansion plans.

The Bunch, on the other hand, was a Swedish company founded by hotel operators wanting to optimize daily pricing decisions. Inspired by the success of yield management (dynamic pricing based on customer demand) in the airline industry during the 1980s, hotels had started to adopt their own version called revenue management during the late 1990s. In order to measure the outcome of their pricing endeavors, they would need daily feedback on whether they were accurately capturing customer demand. By launching a daily benchmarking survey online in 2001 – using the same KPIs as FTR – The Bunch helped hotels understand their daily performance and the company soon had customers all over Europe.

In 2007, The Bunch was acquired by FTR. However, merging the cultures of a company operating on a monthly cycle (FTR) with one helping customers on a daily basis (The Bunch) turned out to be hard and the Nordic customers (having all been early adopters of the Swedish company) soon became dissatisfied with FTR’s lack of responsiveness to daily operational questions.

I did some further research and quickly found out that several Nordic hotel chains indeed felt dissatisfied with FTR. However, the major problem was the network effects of the benchmarking platform. As everyone was using the platform to get benchmarks based on each other’s inputs, I kept hearing the same story from all hotel chains: “Sure, we would also happily switch to another supplier, but only if everyone else switches too.” This called for a bit of creativity.

I managed to convince a friend with a legal degree and experience from the real estate industry to join me and together with two former employees from The Bunch we co-founded Benchmarking Alliance in June 2010. Our strategy to take over the Nordic market for hotel KPI benchmarking involved a number of activities:

  • We first created an MVP version of the platform based on interviews with key customers, and made sure to focus on an attractive user interface as our competitor’s product was fairly outdated. We paid special attention to requirements involving KPI definitions - if we could get a critical mass of hotel chains to agree on new local definitions, our competitor would probably not be able to respond since they were a global company and required consistency between countries. Even though they weren’t yet customers, we managed to persuade several hotel chains to try out the service and start sending us numbers in parallel to our competitor. We also prepared for system integrations with all major property management system providers.
  • During our initial talks with customers, we came up with a pricing model where hotels paid a yearly fee related to their number of rooms, which would attract independent hotels that were typically smaller than chain hotels. Our competitor had been charging a fee related to the number of hotels per customer, favoring hotel chains. By presenting a model that was attractive to independent hotels, we could convince the chains that we would be able to present better benchmarks (i.e. including more competitors) over time.
  • Finally, we established a network of resellers in the Nordic countries, who spoke the local language and would actively work to expand our market coverage. Even though these resellers hadn’t begun selling yet, their very presence would strengthen our case a lot. With these things in place, we invited the ten dominant hotel chains at the time to a roundtable meeting in Oslo, where we told them: “You have all said that you will join our service if all other hotel chains are on board as well. Can you say that again?”. Believing that we had everything in place for a successful rollout of our service going forward, they all confirmed their interest again. As they all now believed everyone would join us, we could proceed with individual contract negotiations after the meeting. We were also able to tell independent hotels that the chains would be leaving our competitor, more or less forcing them to switch suppliers if they still wanted benchmarking data.

The result was a zero-to-one launch of our business in Sweden, Norway and Denmark with approximately 900 hotels becoming customers from start. We proceeded to secure independent hotel participation in several small cities in order to get better benchmarks for our biggest customers (a hotel in Stockholm doesn’t about the market in Stavanger and vice versa). This would make it increasingly hard for our competitor to take the market back.

Our strategy has changed somewhat since then, but I think this shows that you can actually start a company in a market dominated by a competitor even though there are network effects. I guess the generic strategy is to focus on a local niche (like Facebook did for Harvard graduates), a new platform (like Instagram did) or a new customer behavior (like Snap and TikTok did), and hopefully we can serve as an example that you can actually do it in a seemingly boring B2B niche market too.

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