A while ago I wrote a post where I argued that it can be a good idea for entrepreneurs to go for a transformation instead of grinding it out. But that post was a generic consideration of risk/reward. Recently I have noticed a trend though that at first seems to perfectly illustrate this idea. A number of consumer sites that were trying to build their own brand and destination are switching to a whitelabel business model instead. This transformation is motivated by slow growth of the consumer business or insufficient monetization of the consumer business. Whitelabel is seen as as a way to get to a faster revenue ramp.
It does illustrate the idea of transformation, but for most of these businesses it will turn out to be the wrong kind of transformation. First, I should explain what I had in mind when I wrote the original post. I had in mind serving the same kind of customers but with a different proposition. For instance, Feedburner originally was operating under a fee-for-service model and was adding publishers quite slowly. When they switched to providing their service in return for having access to ad inventory, publisher sign up went through the roof. Similarly, Tacoda originally was generating revenues by offering audience segmentation as a paid service for publishers. It was only when Tacoda switched to operating a network for the publishers that growth took off.
Now let’s return to the case of consumer sites trying to transform themselves by going to a whitelabel model. That is a much harder transformation because they will no longer be serving the same customer. In a whitelabel model the primary customers are the whitelabel partners. They will have many demands on how the solution is supposed to integrate with their own businesses, which will often run counter to what would be best for the actual enduser. It also requires substantial organizational changes. The companies suddenly need sales teams and development needs to be focused around partner demands and ability to integrate easily into many different environments. This either means a reorientation of priorities for the existing development team (from adding enduser features) or actually having to hire additional staff.
In my experience, most companies that start live as a consumer play don’t actually have the DNA required to execute on a whitelabel model. As a result, the organizational changes fall short of what they would need to be and the company winds up with neither a successful consumer business nor a successful whitelable business but instead stuck uncomfortably in both. Finally, I should add that faster revenue ramp as a rationale for transforming to a whitelabel business, is generally an illusion to begin with. Most whitelabel businesses actually fall into the grinding out category because they are sales driven and tend to lack network effects.
Bottomline is that if you are consumer site that is not succeeding as quickly as planned, think twice before embarking on the whitelabel route. Instead consider whether you can’t take your burn down far enough so that you can look for a transformation of your value proposition to consumers.
