Ben Thompson at Stratechery has been describing something he calls Aggregation Theory.
It goes like this:
Consumer value chains are composed of three parts: supply, distribution, and consumers/users. In the past (before the internet) consumer companies achieved above average profits by controlling distribution and supply. Consumers had no choice but to accept the bundled product from the distributor. Think newspapers, cable/broadcast, hotels, and taxi companies.
The internet turned this model upside down by making it free to distribute digital goods and to conduct transactions.
In this market new players could modularize supply (since distribution is free). This freed them to focus on earning more customers with a great user experience.
Google did it by crawling all websites, modularizing the pages, and distributing them to everyone. Since they didn’t need to control supply, they spent their energy on making it fast and easy for users to search for information. Soon everyone was using Google for search.
Uber did it by modularizing the supply of unused seats in cars. They didn’t have to buy the cars or control the supply. This freed them to create a great user experience for finding those seats and they attracted a huge consumer following.
In both of these cases the disrupting company created a virtuous cycle by aggregating consumers, attracting suppliers, which attracts more users and so on.
How would Aggregation Theory apply to the B2B world? Compared to consumer markets, B2B interactions are characterized by longer buying cycles, multiple players, and complex transactions. How can B2B startups disrupt entrenched players if they can’t bring distribution and transaction costs down to zero, if they can’t aggregate their buyers with a great user experience?
To answer the questions, let’s first break the B2B buying cycle down into three stages.
In the first stage the B2B company is essentially a media organization that distributes educational material about industry trends, problem analysis, and advice. The goal of this company is to attract lots of visitors, to educate those visitors, and to ask them to self-qualify and move forward on their journey.
In the third stage buyers have become customers and the company’s goal is to retain them. But once again, it’s essentially a media company. The content helps the customer with onboarding, implementation, and integration.
In both the first and third stage the distribution of digital goods is free and the transaction cost with the buyer is zero. Companies who provide a great user experience in the first and third stage will win. They’ll provide a great user experience and aggregate more buyers to their supply of education. HubSpot has done this. So has SalesForce.
The big question then is whether the second stage also follows this model.
It will if you meet Ben’s criteria.
1. Find a way to digitize the differentiator for the incumbent. Many SaaS companies are finding these differentiators and disrupting their market.
2. Create a compelling user experience.
3. When you win the user experience you can create a platform and attract more suppliers.
Ok, I admit it, my description of how to apply Aggregation Theory to B2B markets is sketchy. Ben makes a good case for Aggregation Theory in consumer markets. I look forward to finding ways to apply it in B2B markets.