Analyzing markets is not an easy task. It’s going down the rabbit hole. Dynamics, competition, fragmentation or consolidation, PEST, TAM, SAM, SOM are just the tip of the iceberg.
That said in competitive environments, there is one ratio that stands alone. Market growth.
Jeff Bezos apparently decided to start Amazon upon realizing that the internet was growing at 2300% YoY.
From a product strategy perspective it might feel easy to discard market growth as another statistic. In fact, you might go as far as to say that a differentiated product offering would fare better against a steadily growing (stagnating & mature) market which is already shaped and rigid where differentiation has the ability to disrupt, erode, and re-distribute (to your benefit). And that is true. It can happen. But it’s against the odds success where a startup disrupts an industry, not the norm.
In practice, high-growth markets have a few fundamental advantages.
High growth rates coincide with medium to small markets driven by early adopters. Easier to identify, target, and create early communities.
Growing demand means that supply can have healthy margins. Since the market is growing and demand often outstrips supply, there is no incentive for suppliers to engage in price wars.
Paid acquisition is very low and it’s possible to acquire customers at large.
It’s possible to grow without a highly coordinated & sophisticated marketing plan.
COVID, Cycling and bike shops
Bike shops are a good example. It’s September 2020. The restrictions of the pandemic are very much in place. One of the (few) good outcomes of the pandemic is the rapid rise in cyclists where at least in the UK, their number of increased by 100% within 8 weeks.
Have you passed outside a bike shop? If you haven’t and you want to see the effect of rapid market growth in practice, find the most obscure bike shop, one without a website, and pass by on a random weekday. It’s very likely they’d be packed.
In fact today, I had to wait 1.5 hours to get a simple fix on my bike at a mom’n’pop shop that does not have a website or any market presence whatsoever. Why? Simple. Before COVID 42% of people > 5 y.o. had access to a bike and 8% cycled weekly. Within a space of 8 weeks the total miles increased by 120% and since all other means of public transport fell by a whopping 95% the urgency to fix our primary vehicles elevated from a “to-do” to a must-do. Result? Bike shops are getting customers left right and center with no effort. The market is pushing them up.
Market growth first, company second
The bike shop example showcases a fundamental truth: Jump on a wave and the wave will help carry you. In the case of the bike shop, it’s literally “Offer to fix it and they’ll come”.
In the case of a new business? Its so much better to follow market growth than not. It’s not just another metric. Then again, you can always go for a bike shop.
Lately there’s a business fascination with Mental Health. The majority of people who want to get involved with mental health and specifically therapy, think that it is about to break out; become the next gym; the next yoga; and every time we talk about that, it never happens.
While there is a lot of room for innovation on the client side, the current landscape does not accommodate the needs of the most important player: the therapist. And that seems to be overlooked. What is it that therapists really want after all?
The therapist journey
Therapists, like every other professional, go through their own journey of professional maturity. Besides honing their therapy related skills they also have to deal with figuring out how to run a business. And whilst therapy might be quite an esoteric profession, like any other business, there’s a traditional path in the life of a therapist. So, what does a therapist trajectory look like from a business point of view?
First, a therapist needs to find their first clients.
Once the first few clients are there, the need for operationalization kicks in: Find clients who are a good fit, deal with practice admin and start building a brand.
Once that’s done now it’s time to optimize. Process and revenue improvement.
If they get above all three, then the therapists start thinking about consulting, writing books, opening up a clinic or of course stay happy with a full practice.
And it is very important to see the industry through this lens because these are the use cases that have shaped the industry.
As you can imagine, the first big players were formed to tackle what was top of mind for therapists in the beginning: getting clients.
And so the first successful business model that was born was “directories”.
Directories aka traffic uber-alles
From a business perspective these companies were the first matchmakers and put therapists who didn’t have the resources to create a personal website on the map and are currently thriving due to a mixture of things: domain authority, brand, dominance in search, network effects, and as discussed later, the inability of platforms to innovate effectively. These platforms work as marketing services providing referrals and auxiliary marketing services such as profile statistics and other branding opportunities such as content publishing (which works in a self serving way for the platform).
For that, therapists pay a base subscription which essentially lists a profile but does not guarantee any traffic to it; following the typical classified model of the 2000’s, therapists can upgrade to get additional traffic.
However, the economics underpinning this subscription model are flawed for a few reasons.
The first and foremost being that incentives between the directory and the therapist are misaligned and consequently lead to negative aggregate marginal benefit.
What does this mean?
The no.1 priority of the directories is to list more therapists given that this is how they make money. Their no.2 priority is to up-sell said therapists. Everything else is an add-on and that is evident simply from the fact that there has been no attempt towards innovation whatsoever beyond the first two.
And here is why incentive misalignment is bound to create inequality and therefore a negative sum game.
First, the existing premises of the game. Directories in the UK have xx,000 of therapists subscribed. Therapists see that and of course this is attractive. If it was not working, why are so many others paying for it? It’s social proof. So here is what happens.
Step 1. Action: A therapist lists their profile and start paying. Step 1. Result: Competing for views with more than 1.000 other therapists in any given area, there is a high chance that the therapist won’t receive a client. This happens for two reasons: the directory cannot ensure demand increases proportionally with supply and don’t collect enough data to tailor search results for each user (matching).
Step 2. Action: The therapist now decides to upgrade (50% extra cost) their subscription. Step 2: Result: Now the therapist ranks highly in the location search and therefore starts getting clients, disproportionately to the price increase they have paid. They’re happy and decide to stick.
At this point it’s important to note a couple of things:
Users searching therapy result sets act similarly to as if they’re searching on Google. The implications is that the top 10 results get 99% of the clicks.
There are more therapists in each given area than top positions.
Result? For every therapist that pays a premium listing, another therapist loses.
Predictably, there is a clear threshold for when the curve of value / fee starts declining. And that is the time when more than 10 therapists are paying a premium listing to appear in a given area. Then they are all collectively eroding their ROI. At least one will not benefit by not being in the top ten even though they’re paying extra.
But this realisation has a lagging effect. By the time people are realizing their listing performance is going down, we don’t have 11 contenders, we have more like 30.
Result? Initially they stall, but eventually they churn from being up sold.
What you might be thinking is: But aren’t the clients using the network increasing? Why is there a problem?
This is a good question and traditional logic has it that the more therapists on one platform the more demand comes. But then again:
The site itself does not have as a priority to market to clients; rather it has its eyes on more therapists. Additionally, since these organizations started as marketing organizations, it’s not in their core skillset to be thinking of market equilibria and distribution optimization (liquidity). It’s in their mind to sign and upsell.
The no.1 obvious marketing benefit resulting from more therapists in an existing network is that of unique content and thus, organic traffic. But again, not the case for a couple of reasons:
Legacy platforms are already receiving most of their traffic from SEO/ organic search which indicates that a new therapist’s profile listing is not going to provide a novel and previously lacking answer to a user’s search engine query (imagine that queries on google are “therapist in London”).
Therapists profiles are actually duplicate content! Because no one platform can guarantee an influx of clients, therapists end up being on multiple platforms all of which are trying to do the same. Thus, they copy paste their profile pages and the case for unique content becomes null.
So we conclude that subscriptions to provide marketing facilities is not an optimal model to create, deliver and capture the value of the therapy industry. To summarize:
Your happy clients don’t pay more then your unhappy necessarily,
value in upsells goes down the more participants in the network get sold and acquisition of new clients is organic (search)
but there is no lock-down which leads to churn.
But what if we could go deeper, provide more services that better the recurrent relationship between the therapist and the client which is likely to reach >£1,000 in several cases?
Marketplace 2.0, the serviced marketplace.
Psychotherapy as an industry, and especially through the lens of a marketplace model looks very attractive at first sight for a few reasons:
There is a lot of talk about it: government, mainstream media and social media create the expectation of continuous growth in demand.
At least 89% of therapists operate at least partly under a private practice which means there is a lot of fragmentation in the market.
And the space has become interesting to tech entrepreneurs who understand how to build marketplaces. The story goes something like this: Aggregate the therapists (supply) under a full stack service proposition, charge fees that persist for the duration of the therapeutic relationship and reinvest said fees to get more clients in and keep the loop going. By providing a better service and a performance model (i.e. no subscription costs) these services lower the barrier to sign up. More traffic, better experience, lower CAC. This is marketplace 2.0 approach, or “let’s make the Uber of therapy”.
“We will give you clients, booking facilities, online payments and all that for ~10% each time. How does that sound?”
Initially it sounds great to the marketplace and good to the therapist. But then issues arise. A deeper look reveals the inflection point: incentive misalignment.
Initially it might not be clear. Therapists are cryptic and don’t like working with people that “sell” them. Once one peels through the many layers of the conversation and assuming manage to separate business from therapy (not easy at all), what therapists really want is pretty simple:
First, they want a steady stream of clients. Depending on whether they’re running a full practice or not that number might be higher or lower but the value is the same. They don’t want to have to stay in the mode of survival.
Secondly they want the platforms to stay out of their business and let them manage the relationship with the client whom they view as their own client.
Third they want additional services to help them manage their practice efficiently but in a way that does not cost an arm and a leg and serves their existing workflow.
Platforms on the other hand, have different incentives. Specifically:
Platforms need to control the relationship between client <> therapist because otherwise disintermediation becomes a real issue.
Platforms are incentivized to provide more tools and services to therapists so as to control the relationship and justify their recurrent margins. However standardizing the experience is imperative to build a model around costs and revenues. In other words, there are rules every therapist must adhere to. Platforms can’t create different user journeys for each therapist nor operate under an open architecture where therapists can plug in their tools because a) that’s not convenient to start with before you have serious cash coming in and b) it invalidates the case for control of the relationship.
And what is the control point of it all? The Calendar. Why? Because by having access to read & write in a therapist’s calendar massively increases client conversion rate and reduces CAC. So every marketplace app is vying for the ability to have access to read and write on a therapist’s calendar.
The problem boils down to something very simple. Platforms base their business on two premises: First, that broader servicing of therapists will result in higher Lifetime Value per therapist and secondly that returns increase drastically when the market gets effectively monopolized. Therapy in the UK however is worth £3bn so not that big of a market. Therefore the whole “when we get too big, winner takes all” pitch does not sit very well given the risk reward ratio and absolute magnitude of the two. And that implies that reliance to institutional money with negative unit economics is not an option.
So platforms *need* healthy economics from day one. Any friction between the client booking the therapist needs to be eliminated. Given the newly established paradigm of on-demand services where online booking & checking out happens seamlessly, clients come with increased expectations of therapy platforms. And thus, the lack of visibility into a therapist’s availability is up there in the product problems worth fighting for. Otherwise unit economics are unsustainable**. Result? Cash flow deficit and diminished interest of additional investment. Frictionless experience end-to-end is crucial and the ability to add bookings directly to the calendar key.
On the other hand, the only therapists willing to give (up) their calendar to be managed by a platform are those who don’t have enough clients and once they do, they’d stop updating their availability. Why? There are a couple of good reasons for that.
First, therapists want to see clients they can actually help. The fact that a client wants to book a therapist does not mean that’s the right choice for them. Therapists feel they have to do the triaging (and they don’t trust an automated alternative) and should they deem a client a bad fit they would find themselves in the difficult position of having to cancel the appointment the platform booked and disappoint the client.
Secondly, this process requires a lot of work from therapists. Every time they get a booking from one service, then invariably they’d need to update their availability in every other platform and that is quite cumbersome. Also, what if their schedule changes? Why would they need to report to anyone?
And so we have the calendar deadlock. Therapists want freedom and no more admin and platforms don’t have enough clients to impose terms.
But the deadlock extends on another dimension which is crucial to answer the titular question: That of competition between the incumbent(directories) and the new entrants (marketplaces).
Without the calendar, marketplaces can’t provide their seamless experience to customers nor service the therapists as they like. And by not doing so, there is no differentiation. They provide a subpar experience, become “yet another directory” and compete in a commoditized game they can’t win (referrals, seo, paid ads).
But if they push for the calendar they lose their therapists as there’s no supplier power and thus, can’t scale. And of course the more platforms created, the more the calendar is requested and the more the problem is exacerbated. For every new platform created the worse the unit economics for every other platform in the short term.
And so there you have it. Therapy in the consumer space remains locked between a model that is inefficient both in terms of economics and user experience and another that does not provide a good UX for the therapists.
And in this industry without the therapists, you can’t craft a great UX for the customer either.
A vicious cycle really.
*We have interviewed therapists that mentioned they hadn’t received a client from directories for over 18 months whilst paying of course.
** We have seen up to 200% higher CAC from paid ads when a therapist does not provide their calendar.