Use Value chain analysis to identify startup opportunity (with case study on PixelMe)

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In the last 5 years or so, product market fit has become THE most popular framework for startups.

However, it’s painfully insufficient for early stage startup founders because it largely only examines the neighboring areas of a niche that founders have already picked. It does not guide founder to where she SHOULD work on.

What startup founders really need is a full view of an ecosystem: who is providing and taking value from where in this system, and examine what’s missing.

Value chain analysis framework provides definitive direction and clarity: with it, founders are able to clearly identify the part of the eco-system or value chain that is weak or broken: only then, product market fit framework comes handy to help narrow down on an optimal solution.

Imagine the entire human society is starved and the only food available on earth is a piece of tomato, along with natural resources like sunlight, water and a bee.

What would you do to survive?

This is where “value chain analysis” shines: it guides us human to the seed stage: focus our energy to harvest and grow as many seeds as possible, instead of running after bees, or become a chef who is really good at making tomato salad.

You get the point.

Before finding the exact niche for a founder to work on, select an ecosystem that she is familiar with, say social media marketing. Social media marketing exists because businesses want to find buyers, who hang out a lot on social media.

The core activities on social media is this: posting and reading messages. Hence we have stake holders like:

  1. Social media core platform: twitter, facebook, Instagram, pinterest, snapchat
  2. Message creator: business, individual, journalist, photographer, government etc.
  3. Message receiver: just like message creators, each creator could also be a receiver.

Like electricity is delivered through our utility network, “messages” are traveling on the social media “chain”. For businesses, the ultimate goal is to turn this messages into value. One way or another, message will include a link for people to buy something.

These activities made up the industry, or ecosystem called social media marketing. Different businesses participate on the different part of the social media marketing value chain, such as:

  1. Social media management (SproutSocial, Hootsuite)
  2. Social media advertising (Facebook, Twitter)
  3. Social media scheduling (Buffer, MeetEdgar)

The value generated through social media marketing value chain is asymmetric, meaning, value created at one part of chain is lost in the next stage. For example, a message including an useful article link sent to all your followers are being seen by only small portion of it. The majority of your “reach” is wasted.

Buffer is well known for capturing value through scheduling tweets. Recently, a product called @pixelme by buffer product manager maxime berthelot discovered an even more hidden but giant value vacuum in the social media marketing value chain: once a person opens a link in a tweet, there was no way to reach her, until Pixelme.

What @pixelme did was truly amazing: it identifies this HUGE value drop off cliff, created a social link pixel so sender can retarget at the readers of her link.

Isn’t it brilliant?

Thinking back. retargeting has been around since 2008 for SEM/SEO marketers to capture users who landed on marketer’s site or app. I am so surprised 9 years later, retargeting on social media link’s receiver finally became noticed and adopted.

When there is a place value enters is greater than output, there is an opportunity for startup capture the lost value. Further, startup exists to amplify the value input from last stage of the value chain.A tomato could produce 200 seeds, if you simply accidentally dropped tomato into a fire pitch, seeds will all die. If you then risk your life to salvage the seeds, you add value. This is the passive startup activities: save lost value.If you figured out a way to put seeds into a patch of rich soil, cultivate it carefully with your love, labour, sunlight, water, you add value in a proactive way. This is the proactive startup activities: create new value.

It takes years of industry experiences and intuition to identify value drop off spots on value chain. However, with systematic approach to value chain analysis, entrepreneurs have more chance to identify that elusive hidden opportunities.

Special thanks to maxime berthelot, Pixelme, Joel Gascoigne for their transparency, brilliance to share their learning. You have to read From Bali to our first 10 paying customers.

Finally, I found a value chain analysis article written by Tom Tunguz a few years back quite informative.