Running sales for FameBit in 2015 was a rude awakening into the reality of Porter’s five forces, and the perils of building a company in a market with low barriers to entry. When I started as the head of sales in late 2014, the market was on fire. In my first month of running sales, we closed $300K in new business, and the company continued to grow rapidly. Heading into 2015, more and more competitors entered the market, and it became exponentially harder to close deals and continue scaling. To make matters worse, we continually increased the minimum deal size to decrease demand because we were unable to hire fast enough to keep up with fulfillment. So when the market flooded with competitors, the drop in demand was pronounced. If I had understood the five forces at the time, I would have seen this coming a mile away.
Before we dive into a five forces analysis, I want to provide some background on FameBit in 2015. FameBit capitalized on the growing trend of influencer marketing in the mid-2010s by building the first open marketplace platform to connect YouTube content creators with brands for the creation of sponsored content. The timing of the launch was perfect because thousands of up-and-coming creators were struggling to build their channels and were hungry for brand deals. Our business was segmented into two types of clients: self-service and VIP. Self-service clients would deploy campaigns and receive bids from interested YouTubers, paying as they go by ordering one sponsored video at a time. VIP was an agency model — a full-service offering where our team would handle the execution of a single campaign, including a bundle of creators, making it easier for brands with larger budgets. Here’s what our website looked like Circa 2015:
Originally VIP deals started at $10,000 per campaign, and we would include a mixture of 10 to 15 branded content videos, each with a different creator. VIP was essentially a value-driven offering. Advertisers were used to working with MCNs (Multi-Channel Networks) with $100K+ minimums for one or two videos. We offered scale: ten times the content for a fraction of the price. Our typical sales pitch can be boiled down to “it’s much better to cast a wide net then to put all your eggs in one basket.” Our VIP agency team, leveraging our platform technology, was able to deliver high volumes of content in a relatively short period, delivering incredible results for brands. Over 70% of the companies revenue came from VIP, so it was critical to remain competitive. Unfortunately, this business model was not very defensible.
Now let’s dive into the five forces analysis of FameBit circa-2014/2015:
- The Threat of New Entrants – It was incredibly easy for anyone to copy our VIP agency model by building a nice looking website with pictures of top YouTube talent and some fortune 500 brand logos. The web makes it difficult to determine the legitimacy of a company. It is also relatively easy to copy a marketplace platform. It’s not easy to get traction from both sides in a marketplace platform, but the basics of a two-sided platform business model are well known. Strength Rating = High
- The Power of Suppliers: In this case, the suppliers are the YouTube content creators. By mid-2015, we had 25,000 creators signed up for the platform, and it was growing daily. We never ran out of creators to hire. We also added additional channels outside of YouTube: Facebook, Twiter, Instagram, and Tumblr, so the social media channel was flexible and interchangeable through the platform interface. Overall our suppliers had very little power and were not able to influence overall rates. Strength Rating = Low.
- The Power of Buyers: In this market, buyers had many options, and the switching cost was low. Any buyer could hop on Google and search for “YouTube influencer marketing” and find a cornucopia of options. As a buyer, it wasn’t straightforward to tell which option was superior by face value, making it likely that a buyer would experiment. The variety of options and low switching costs meant that buyers could afford to negotiate aggressively, making it difficult to close profitable deals. Strength Rating = High.
- The Threat of Substitution: A multitude of digital marketing channels were available at this time: Facebook, Twitter, Instagram, Google, Native advertising, etc.. The list goes on. Advertisers interested in influencer marketing could substitute YouTube dollars for Instagram or Pinterest. Although YouTube had the leading video platform (and still does), there was no shortage of options for buyers. Strength Rating = High.
- Competitive Rivalry: The competitive dynamic in the market became extreme toward the end of 2015. Many firms had entered the market, and they were responsive to changes. For example, we would adjust our pricing model, and within a few months, competitors would have copied it. It was also difficult to develop and maintain a competitive advantage because everyone was relying on the data that was obtainable through the public YouTube API. High competition meant that obtaining leads through both outbound and inbound marketing became increasingly difficult and expensive. Strength Rating = High.
From the above analysis, you can see that four of the five forces were strong, which meant that the industry was highly competitive. As more competition entered the market, we noticed the following changes to the VIP business:
- The average number of deals closed per salesperson declined.
- Our sales cycle increased as buyers began to ask more difficult questions and scrutinize the deal terms — due to both better education and confusion in the marketplace.
- Our margins declined as we decreased rates to stimulate demand.
- Acquiring leads through outbound prospecting became more difficult.
- Our churn rate increased as buyers decided to try new partners.
The overall changes lead to rising sales and marketing costs and declining margins. So how did we survive? We had excellent timing because we launched our platform before everyone else, and at precisely the right “tipping point” in the market. As both sides of the marketplace grew, we built significant momentum, which made it difficult for competitors to catch up. On top of this, we executed very well. Although we survived the exponential growth in competition, and Google ultimately acquired us, it was a tough fight for survival. In hindsight, there are MANY things we could have done to improve our outcome had I understood Porter’s Five Forces.
In my next post on February 27th, I will explain how I would do things differently if I could travel back in time to my first day at FameBit in 2014.