by David S. Evans and Richard Schmalensee
Copyright 2007 David S. Evans and Richard Schmalensee
Summarized by permission of Harvard Business School Press
228 pages
Everyone’s keen to know the secrets of successful, fast-growing companies. In response,
David S. Evans and Richard Schmalensee look at new ways to bring buyers and sellers
together. Companies that act as catalysts combine opportunism, customer service and
savvy pricing to create a profitable, flexible business model by assembling audiences,
cutting costs or connecting other companies. The authors offer plenty of concrete
examples of these strategic combinations – from Diners Club and American Express
to Microsoft and Google. Perhaps the one weak point in their theory is that the borders
between catalysts and non catalysts are a bit fuzzy. (A supermarket isn’t a catalyst, but a
mall is.) getAbstract recommends this interesting, strategic analysis to managers seeking
a thought-provoking look at how to create new, enticing and profitable links.
Abstract
Catalysts: From Chemistry to Commerce
For much of the postindustrial era, entrepreneurs and businesses have followed a “onesided”
business model. In the classic example, the consumer enters a store or restaurant,
and buys a product or orders a meal with little interest in where the product came from
or how it was made. In the past half-century, though, and especially in the past decade,
a different model has emerged - the “catalyst.” In chemistry, catalysts spark reactions
between two other substances. In commerce, catalysts create sales among a group of
buyers and sellers who previously had no way to connect. At their best, catalysts are
low-cost ways to create value. And they’re “multi-sided,” in that they unite separate
constituencies. Catalysts follow three typical models:
1. “Matchmakers” – Sotheby’s auction house brings together buyers and sellers of art
and other valuable items. Auction houses rely on the catalyst model. Manheim Auto
Auction is another example. Online matchmaker eBay has profited by mastering the
catalyst code, adding value by policing users and enforcing honest deal making.
2. “Audience builders” – Magazines, newspapers and online publishers are catalysts
that focus on assembling audiences. By targeting a specific group of readers and the
advertisers who want to reach them, titles like Vogue follow the catalyst model. Now,
social networking sites, such as MySpace, have turned into catalysts.
3. “Cost minimizers” – These catalysts are primarily technology firms, including
software companies such as Microsoft, Linux and SAP. Video game consoles such
as Sony’s PlayStation and Microsoft’s Xbox are catalysts that connect gamers and
game makers. And they’re cost cutters in this sense: Pop a new Electronic Arts game
in your Xbox, and it automatically updates the Xbox’s operating system.
Diners Club, an early credit card, offers a case study in how to create a catalyst. In the era
before charge cards, Frank McNamara ate a meal in a restaurant before realizing he had
no cash. His wife left to retrieve money while he pondered a more efficient way to pay
for meals. The idea of Diners Club came to him, and he created an entirely new type of
product. His challenge: Convincing consumers to pay with a card while simultaneously
persuading restaurants to accept it. He succeeded, and Diners Club became so successful
that it spurred many copycats. American Express, Visa and MasterCard improved on
Diners Club’s concept so much that they thrived and it withered. This cycle is often
repeated in the catalyst world. Because catalysts rely on deep connections with the parties
they unite, they are somewhat sheltered from competition. But they’re not immune, and
Diners Club proved that the slow-to-adapt catalyst doesn’t last so long.
Catalysts start with three activities:
1. Offer “a value proposition” – Catalysts bring people together for a commercial and
social interaction they couldn’t fi nd elsewhere. The massive Mall of America in
Minnesota is one example. The Chicago Board of Trade is another.
2. “Provide information” – Consumers want enough information to make decisions, but
not so much information that they’re overwhelmed. Catalysts such as eBay provide
reliable information that helps customers feel comfortable.
3. “Make rules” – American Express has rules for what happens when someone
disputes a purchase. These standards build trust and create the community catalysts
need to prosper.
So what isn’t a catalyst? It’s easy enough to envision any business as a catalyst. A
supermarket, for instance, makes money by bringing together sellers and buyers. But
supermarkets aren’t catalysts because the shopper and the wholesaler aren’t working
with each other; they each do business with the supermarket. But mall owner Simon
Property Group is a catalyst; it unites retailers and shoppers in one place. In the catalyst
model, the business links like-minded individuals who work with each other.
To succeed as a catalyst, follow these six steps:
Step 1: Figure Out Who You’re Going to Serve
Find your target audience, analyze its needs and choose your business model. Spot
“groups that need each other.” Diners Club connected restaurant owners and patrons.
Art galleries link artists and collectors. In any industry, the catalyst looks past existing
business models and creates something new. Catalysts alleviate steep transaction costs,
and make interactions cheaper and more convenient. To learn what else you need to
know, take these steps:
• Analyze “why and how much they need each other” – Publisher Jason Binn’s magazines,
including Aspen Peak, Ocean Drive and Hamptons, balance an appeal to high-end
consumers and ads for firms that want to sell to them. Misjudging is easy. Pets.com
soared until it became clear that shipping dog food costs more than selling it at the store.
• Analyze other players in the market – This analysis led banks and credit card issuers
to combine the functions of ATM cards and credit cards. They weren’t in direct
competition, but they were going after the same market from different directions.
• Decide whether a “multi-sided” or “one-sided” model works best – Catalysts gain
power from multi-sided models, but they’re not perfect. Apple’s iPod is a singlesided
model, but Microsoft’s Zune has a multi-sided strategy. The iPod is by far the
superior product.
Step 2: Set Prices
Pricing is a tricky issue for catalysts, but there are some guidelines:
• Establish separate prices for access and usage – Vogue charges readers $4.95. It
charges advertisers thousands of dollars. Set prices to lure the buyers you need to
spark a catalytic reaction.
• Let price balance demand – Auction houses charge you nothing to attend an auction,
but buyers and sellers pay hefty fees, based on the value of auctioned items.
• Set prices for modest growth – At least at fi rst, keep prices low. Your network needs
only a few members to set off a large catalytic reaction. Start small, nurture your
customer base and then raise your expectations as the catalytic reaction begins.
• It might make sense to pay customers to belong – Magazines use “asymmetric pricing,”
in which one side pays much less than the value of the product. Other examples
include Realtor.com, where consumers see property listings for free, but sellers pay.
• Maximize long-term profits – When Microsoft launched Windows, it kept prices
down to get users. Windows quickly became the dominant operating system.
Maximizing short-term profits might have scared away PC users and dampened the
catalyst reaction.
Step 3: Structure for Success
Set up your catalyst’s platform, whether physical or virtual, to draw groups that need each
other. Tokyo’s Roppongi Hills development appeals to a wide population by including
homes, cinemas, shops, restaurants, an art museum, a hotel, offices and medical services.
It demonstrates “bundling,” a tactic that draws varied groups. To build a strong catalyst,
also try to:
• Encourage groups to interact – “Serendipity” encourages the buying side of the equation.
By interspersing articles and ads, Vogue encourages readers to interact with advertisers.
By rotating featured items on its Web pages, eBay encourages impulse buys.
• Cut transaction costs – Travel site Orbitz cajoles airlines to give it the lowest fares.
In turn, Orbitz imposes tight restrictions, making its tickets non-refundable and
non-transferable.
• “Design for evolution” – Flexible catalysts are more powerful. Long-lasting catalysts,
such as American Express and Linux, expand or contract to meet changing markets.
Step 4: Think Profits
To boost your bottom line by using a catalyst strategy, know history but think about
the future.
• “Study industry history” – Heed how industry leaders evolved. Video game pioneer
Atari sold a player-plus-games unit. A competitor debuted interchangeable game
cartridges; industry catalyst Atari followed. It profited, but faltered when better
games emerged using its consoles. Nintendo set standards and fees on game-makers,
selling its console cheaply to profit on game sales (the “razor blade” theory). Its
console and Sony’s fight for dominance. Microsoft followed Nintendo’s two-side
model (cheap console, fees for games), and added its own games, in a three-prong
strategy that played off everyone else’s industry experience.
• Predict the future – Forecasts aren’t perfect, and the more uncharted the waters, the
more inaccurate the projections. Even so, launch with a strong idea of how long it
will take to turn a profit, how much you can stand to lose and when you should quit.
• Think like a chess player – Just because a market opportunity is wide open today doesn’t
mean it will stay that way. Sony was the only video game platform that could play Grand
Theft Auto from 2001 to 2006. Then Microsoft persuaded the manufacturer to offer an
Xbox version. Any catalyst success spawns imitation, so you must innovate constantly.
Diners Club played the chess match poorly; American Express played expertly.
Step 5: Compete Strategically with Other Catalysts
To be an effective catalyst, know what to expect. The catalyst model is unusual in that
its target groups are not loyal. Readers and viewers don’t consume just one magazine,
newspaper or television network, just as advertisers don’t rely on just one outlet.
Merchants don’t accept just one brand of credit card, just as consumers don’t use just one
type. This “multihoming” is a crucial challenge for catalysts. You need to:
• Anticipate unexpected rivalries – Windows was too profitable to go unchallenged
forever, so Linux arose as an open-source alternative to Microsoft’s operating system.
Had the competition come from a for-profi t competitor, Microsoft might have been
prepared. But Linux is free, and its strategy was so foreign that Microsoft was caught
off-guard when large users began to abandon Windows for Linux.
• “Leverage to attack” – Google used a classic catalyst tactic, harnessing the power
of its communities to attack competitors, namely newspapers. Competition from
the Internet shook the newspapers’ catalytic business model. Newspaper publishers
underestimated the threat of Google’s online ads. Publishers responded by moving
content and advertising online. But this survival move is little more than a defensive
position in response to an aggressive challenger.
• “Consider cooperation” – In one potential example of catalyst cooperation, mobile
phones and credit cards soon could share platforms and functions. If the barriers to
entry make it untenable for you to use leverage as an attack strategy, cooperate instead.
Step 6: “Experiment and Evolve”
Know when to be first and when to follow. Sometimes it’s best to arrive first in a market,
but not always. Google came late to the search engine space, yet it became so much better
than its rivals that it’s now the dominant player. However, although Zetheus was the first
dot-com to create an online exchange for commercial real estate, it failed after managers
realized that no one wanted its services. Strategically, consider these growth strategies:
• Control growth – Sirius and XM understood the importance of not overreaching in
the satellite radio niche. They aimed to start small and gradually add critical mass.
• Offer something unique – For Sirius, it’s Howard Stern. For XM, it’s Major League
Baseball. For eBay, it’s the feedback system. Unique content builds loyalty.
• Plan for what’s next – Successful catalysts, such as credit cards, eventually plateau.
Credit cards have reached a “midlife crisis.” Revenues have stopped skyrocketing,
and they grow by stealing business from each other. If your catalyst is maturing, look
for ways to freshen up the model.
• Look out for the cops – Catalysts invariably innovate and, therefore, draw critical attention
from regulators and the legal system. For Microsoft, it was antitrust issues. For credit
card companies, it was criticism of late fees. Help the authorities understand why you do
business the way you do. Being open and honest will defuse some of the scrutiny.
About the Author
David S. Evans is vice chairman of an international consulting and expert resource
Copyright 2007 David S. Evans and Richard Schmalensee
Summarized by permission of Harvard Business School Press
228 pages
Everyone’s keen to know the secrets of successful, fast-growing companies. In response,
David S. Evans and Richard Schmalensee look at new ways to bring buyers and sellers
together. Companies that act as catalysts combine opportunism, customer service and
savvy pricing to create a profitable, flexible business model by assembling audiences,
cutting costs or connecting other companies. The authors offer plenty of concrete
examples of these strategic combinations – from Diners Club and American Express
to Microsoft and Google. Perhaps the one weak point in their theory is that the borders
between catalysts and non catalysts are a bit fuzzy. (A supermarket isn’t a catalyst, but a
mall is.) getAbstract recommends this interesting, strategic analysis to managers seeking
a thought-provoking look at how to create new, enticing and profitable links.
Abstract
Catalysts: From Chemistry to Commerce
For much of the postindustrial era, entrepreneurs and businesses have followed a “onesided”
business model. In the classic example, the consumer enters a store or restaurant,
and buys a product or orders a meal with little interest in where the product came from
or how it was made. In the past half-century, though, and especially in the past decade,
a different model has emerged - the “catalyst.” In chemistry, catalysts spark reactions
between two other substances. In commerce, catalysts create sales among a group of
buyers and sellers who previously had no way to connect. At their best, catalysts are
low-cost ways to create value. And they’re “multi-sided,” in that they unite separate
constituencies. Catalysts follow three typical models:
1. “Matchmakers” – Sotheby’s auction house brings together buyers and sellers of art
and other valuable items. Auction houses rely on the catalyst model. Manheim Auto
Auction is another example. Online matchmaker eBay has profited by mastering the
catalyst code, adding value by policing users and enforcing honest deal making.
2. “Audience builders” – Magazines, newspapers and online publishers are catalysts
that focus on assembling audiences. By targeting a specific group of readers and the
advertisers who want to reach them, titles like Vogue follow the catalyst model. Now,
social networking sites, such as MySpace, have turned into catalysts.
3. “Cost minimizers” – These catalysts are primarily technology firms, including
software companies such as Microsoft, Linux and SAP. Video game consoles such
as Sony’s PlayStation and Microsoft’s Xbox are catalysts that connect gamers and
game makers. And they’re cost cutters in this sense: Pop a new Electronic Arts game
in your Xbox, and it automatically updates the Xbox’s operating system.
Diners Club, an early credit card, offers a case study in how to create a catalyst. In the era
before charge cards, Frank McNamara ate a meal in a restaurant before realizing he had
no cash. His wife left to retrieve money while he pondered a more efficient way to pay
for meals. The idea of Diners Club came to him, and he created an entirely new type of
product. His challenge: Convincing consumers to pay with a card while simultaneously
persuading restaurants to accept it. He succeeded, and Diners Club became so successful
that it spurred many copycats. American Express, Visa and MasterCard improved on
Diners Club’s concept so much that they thrived and it withered. This cycle is often
repeated in the catalyst world. Because catalysts rely on deep connections with the parties
they unite, they are somewhat sheltered from competition. But they’re not immune, and
Diners Club proved that the slow-to-adapt catalyst doesn’t last so long.
Catalysts start with three activities:
1. Offer “a value proposition” – Catalysts bring people together for a commercial and
social interaction they couldn’t fi nd elsewhere. The massive Mall of America in
Minnesota is one example. The Chicago Board of Trade is another.
2. “Provide information” – Consumers want enough information to make decisions, but
not so much information that they’re overwhelmed. Catalysts such as eBay provide
reliable information that helps customers feel comfortable.
3. “Make rules” – American Express has rules for what happens when someone
disputes a purchase. These standards build trust and create the community catalysts
need to prosper.
So what isn’t a catalyst? It’s easy enough to envision any business as a catalyst. A
supermarket, for instance, makes money by bringing together sellers and buyers. But
supermarkets aren’t catalysts because the shopper and the wholesaler aren’t working
with each other; they each do business with the supermarket. But mall owner Simon
Property Group is a catalyst; it unites retailers and shoppers in one place. In the catalyst
model, the business links like-minded individuals who work with each other.
To succeed as a catalyst, follow these six steps:
Step 1: Figure Out Who You’re Going to Serve
Find your target audience, analyze its needs and choose your business model. Spot
“groups that need each other.” Diners Club connected restaurant owners and patrons.
Art galleries link artists and collectors. In any industry, the catalyst looks past existing
business models and creates something new. Catalysts alleviate steep transaction costs,
and make interactions cheaper and more convenient. To learn what else you need to
know, take these steps:
• Analyze “why and how much they need each other” – Publisher Jason Binn’s magazines,
including Aspen Peak, Ocean Drive and Hamptons, balance an appeal to high-end
consumers and ads for firms that want to sell to them. Misjudging is easy. Pets.com
soared until it became clear that shipping dog food costs more than selling it at the store.
• Analyze other players in the market – This analysis led banks and credit card issuers
to combine the functions of ATM cards and credit cards. They weren’t in direct
competition, but they were going after the same market from different directions.
• Decide whether a “multi-sided” or “one-sided” model works best – Catalysts gain
power from multi-sided models, but they’re not perfect. Apple’s iPod is a singlesided
model, but Microsoft’s Zune has a multi-sided strategy. The iPod is by far the
superior product.
Step 2: Set Prices
Pricing is a tricky issue for catalysts, but there are some guidelines:
• Establish separate prices for access and usage – Vogue charges readers $4.95. It
charges advertisers thousands of dollars. Set prices to lure the buyers you need to
spark a catalytic reaction.
• Let price balance demand – Auction houses charge you nothing to attend an auction,
but buyers and sellers pay hefty fees, based on the value of auctioned items.
• Set prices for modest growth – At least at fi rst, keep prices low. Your network needs
only a few members to set off a large catalytic reaction. Start small, nurture your
customer base and then raise your expectations as the catalytic reaction begins.
• It might make sense to pay customers to belong – Magazines use “asymmetric pricing,”
in which one side pays much less than the value of the product. Other examples
include Realtor.com, where consumers see property listings for free, but sellers pay.
• Maximize long-term profits – When Microsoft launched Windows, it kept prices
down to get users. Windows quickly became the dominant operating system.
Maximizing short-term profits might have scared away PC users and dampened the
catalyst reaction.
Step 3: Structure for Success
Set up your catalyst’s platform, whether physical or virtual, to draw groups that need each
other. Tokyo’s Roppongi Hills development appeals to a wide population by including
homes, cinemas, shops, restaurants, an art museum, a hotel, offices and medical services.
It demonstrates “bundling,” a tactic that draws varied groups. To build a strong catalyst,
also try to:
• Encourage groups to interact – “Serendipity” encourages the buying side of the equation.
By interspersing articles and ads, Vogue encourages readers to interact with advertisers.
By rotating featured items on its Web pages, eBay encourages impulse buys.
• Cut transaction costs – Travel site Orbitz cajoles airlines to give it the lowest fares.
In turn, Orbitz imposes tight restrictions, making its tickets non-refundable and
non-transferable.
• “Design for evolution” – Flexible catalysts are more powerful. Long-lasting catalysts,
such as American Express and Linux, expand or contract to meet changing markets.
Step 4: Think Profits
To boost your bottom line by using a catalyst strategy, know history but think about
the future.
• “Study industry history” – Heed how industry leaders evolved. Video game pioneer
Atari sold a player-plus-games unit. A competitor debuted interchangeable game
cartridges; industry catalyst Atari followed. It profited, but faltered when better
games emerged using its consoles. Nintendo set standards and fees on game-makers,
selling its console cheaply to profit on game sales (the “razor blade” theory). Its
console and Sony’s fight for dominance. Microsoft followed Nintendo’s two-side
model (cheap console, fees for games), and added its own games, in a three-prong
strategy that played off everyone else’s industry experience.
• Predict the future – Forecasts aren’t perfect, and the more uncharted the waters, the
more inaccurate the projections. Even so, launch with a strong idea of how long it
will take to turn a profit, how much you can stand to lose and when you should quit.
• Think like a chess player – Just because a market opportunity is wide open today doesn’t
mean it will stay that way. Sony was the only video game platform that could play Grand
Theft Auto from 2001 to 2006. Then Microsoft persuaded the manufacturer to offer an
Xbox version. Any catalyst success spawns imitation, so you must innovate constantly.
Diners Club played the chess match poorly; American Express played expertly.
Step 5: Compete Strategically with Other Catalysts
To be an effective catalyst, know what to expect. The catalyst model is unusual in that
its target groups are not loyal. Readers and viewers don’t consume just one magazine,
newspaper or television network, just as advertisers don’t rely on just one outlet.
Merchants don’t accept just one brand of credit card, just as consumers don’t use just one
type. This “multihoming” is a crucial challenge for catalysts. You need to:
• Anticipate unexpected rivalries – Windows was too profitable to go unchallenged
forever, so Linux arose as an open-source alternative to Microsoft’s operating system.
Had the competition come from a for-profi t competitor, Microsoft might have been
prepared. But Linux is free, and its strategy was so foreign that Microsoft was caught
off-guard when large users began to abandon Windows for Linux.
• “Leverage to attack” – Google used a classic catalyst tactic, harnessing the power
of its communities to attack competitors, namely newspapers. Competition from
the Internet shook the newspapers’ catalytic business model. Newspaper publishers
underestimated the threat of Google’s online ads. Publishers responded by moving
content and advertising online. But this survival move is little more than a defensive
position in response to an aggressive challenger.
• “Consider cooperation” – In one potential example of catalyst cooperation, mobile
phones and credit cards soon could share platforms and functions. If the barriers to
entry make it untenable for you to use leverage as an attack strategy, cooperate instead.
Step 6: “Experiment and Evolve”
Know when to be first and when to follow. Sometimes it’s best to arrive first in a market,
but not always. Google came late to the search engine space, yet it became so much better
than its rivals that it’s now the dominant player. However, although Zetheus was the first
dot-com to create an online exchange for commercial real estate, it failed after managers
realized that no one wanted its services. Strategically, consider these growth strategies:
• Control growth – Sirius and XM understood the importance of not overreaching in
the satellite radio niche. They aimed to start small and gradually add critical mass.
• Offer something unique – For Sirius, it’s Howard Stern. For XM, it’s Major League
Baseball. For eBay, it’s the feedback system. Unique content builds loyalty.
• Plan for what’s next – Successful catalysts, such as credit cards, eventually plateau.
Credit cards have reached a “midlife crisis.” Revenues have stopped skyrocketing,
and they grow by stealing business from each other. If your catalyst is maturing, look
for ways to freshen up the model.
• Look out for the cops – Catalysts invariably innovate and, therefore, draw critical attention
from regulators and the legal system. For Microsoft, it was antitrust issues. For credit
card companies, it was criticism of late fees. Help the authorities understand why you do
business the way you do. Being open and honest will defuse some of the scrutiny.
About the Author
David S. Evans is vice chairman of an international consulting and expert resource
Thank you so much for your review of Catalyst Code. I wanted to let you know that the book has an accompanying blog that looks at current business news about catalyst companies. Please join us at www.catalystcode.com. Your feedback is welcome.
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