'Camel Startups' Put a High Value on the Quality of Their Products Customers are willing to pay for reliable, safe and efficient products. Know your worth.
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We have much to learn from leading entrepreneurs operating outside Silicon Valley, in emerging ecosystems and markets. There, they have long faced a shortage of capital, a lack of critical resources, and regular macroeconomic shocks. Their startups are more akin to camels than unicorns — they can adapt to multiple climates, thrive when times are good, but can also survive without food or water for months in the world's harshest ecosystems. To reckon with this new landscape where survival is by no means assured, the answers don't lie In Silicon Valley, but with these global entrepreneurs.
Camel startups working in less-developed markets don't share Silicon Valley's obsession with offering free or subsidized products in service of growth. They charge their customers for their products — there is no free lunch.
In Silicon Valley, entrepreneurs are willing to subsidize their products. Essentially, large sums of venture capital used to achieve "hyper-growth" end up in the pockets of new users who need to be courted to try a new product or service. User growth is valued highly and touted as proof that a concept is working, even if the business is built on shaky foundations because the price point is too low — or nonexistent — to be sustainable.
This approach can backfire, as it has for certain companies in the direct to consumer mattress or meal-kit model. Many companies fall into the trap of over-discounting to convert new users, but they struggle to get those users to become recurring subscribers.
Similarly, in many pockets of the on-demand industry, abundant funding has created a race to the bottom -- saturating markets, supporting copycat businesses, and leading consumers to default to the cheapest options. Many behavioral economists have documented enduring problems with subsidized or free products: users don't appropriately value the product, and later it is hard to turn them into paying customers.
Camel startups charge for the value they offer from the start. Grubhub's co-founder Mike Evans explains the dynamic succinctly. "I am building a business, not a hobby," Evans said. "Businesses make revenues, and hobbies don't."
Camel startups understand that a product's price is not a barrier to adoption but rather one of its features, reflecting its quality and positioning in the market. In emerging markets, solutions are either nonexistent or so dysfunctional that customers are willing to pay — often even a premium — for reliable, safe, and efficient products. No matter their income level, customers are not looking for free products. They are looking for something that responds to their needs, treats them with dignity, and, most of all, that works.
Charging the appropriate price for the value of goods and services has the effect of keeping a company's cash flow within acceptable limits. While a higher price point may initially slow growth slightly, the strategy will repel potential customers unwilling to pay a reasonable market price in the first place. Growth will instead be achieved in manageable increments, and profitability — a word which has reentered venture capital jargon in a big way recently — is within reach.
By spurring subsidies, Camel startups take a long-term outlook. They can still draw customers, but they will likely be better able to retain them and will be rewarded with foundational growth that will sustain them in the long term.