August 29, 2012

Most of us can remember the dot-com bust of 2000 when the NASDAQ plunged 78% from its peak in March 2000 to its bottom in October 2002. In my opinion, it was driven by numerous dot-com startups that, although they had plenty of investor money up front, when they went public they didn’t offer products or services of any real value to consumers. If you’ve been following recent dot-com IPOs, we’re seeing another dot-com bust, but for an entirely different reason.

But first a few numbers based on a Wall St Journal story (August 20th). Groupon has shed more than three-quarters of its stock value, or about $10 billion, since its IPO. Shares of Facebook are now about half their May IPO price. Zynga (online gaming firm) shares have dropped 70% since its December 2011 IPO.

Now, unlike the 2000 dot-com bust, the current companies have services people want and are generating solid revenue and some are even turning a profit, so why don’t investors like them? I can’t answer that, but they are all facing one marketing issue that is a challenge to their long-term success: They have no “barrier to entry.” In theories of competition in economics, barriers are obstacles that make it difficult for others to enter a market.

What prevents other coupon-deal sites from competing with Groupon? What prevents new social media sites (like Pinterest) from taking away Facebook’s 900 million users? What stops gamers from finding a better site than Zynga? Answer to all, nothing. And that’s the challenge. Many of the most successful businesses today have markets that have significant barriers to entry. This is not true with many dot-com businesses.

The lesson for your business? You need to find ways you can create barriers to entry to your market. There are dozens of ways you can do this. Email me (Mark@dennettgroup.com) and I will share them with you.

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