Here’s a secret that countless companies use to achieve long-term profitability.
Businesses for the Greater Good Make “Mudflaps”
You know razors and razor blades, but do you know mudflaps?
Mudflap
Mudflap is a metaphor for products or services that ride the coattails of platforms sold by large corporations. A mudflap is not limited to formal partnership programs offered by companies like Microsoft®, though partnerships are mudflaps. However, there are many opportunities to ride the coattails of big corporations. I’ll tell you my store, but before we dive into this metaphor, we should consider razors and razor blades.
Razors and blades
Many startups adopt the razor and blades business model. With this model, you offer your product or service at or near cost with the hope of making your profit by selling supplies or advanced services that work with your primary offering.
A well-known example of the razor and blades business model is the consumer inkjet printer market. Manufacturers of inkjet printers practically pay you to acquire their printer because they know you will be buying high-margin ink cartridges from them for a long time.
Keurig® is a splendid example of the razor and blades model. The coffee maker (their razor) is not their core business. Profits from selling their own coffees (their blades) have provided a reliable, long-term revenue stream for the company. However, as we will see, Keurig moved beyond the razor and blades model and created a thriving economic ecosystem.
The problem with razors
The razor and blades model has a problem. There are usually significant upfront costs to create brand awareness and inventory without any income. Then, when the “razor” is launched, you are in a race to the bottom, against your competition, to gain enough market share to cover your startup costs through the sale of your profitable “blades.” It’s great when it works, but many people have lost everything they owned, trying to make this business model work for them.
Startups and new revenue streams
Cash flow is easy. It’s the margin that’s difficult. Whether you are at the genesis of your startup, or your startup is beginning to gain traction, you need a revenue stream that doesn’t require expensive marketing or sales. You need a product or service where you can quickly identify and qualify prospective customers.
I’ve always been hesitant to start a business that must invent a new market. I find it advantageous to participate in an existing market, one that helps you create realistic projections.
To keep us on point, let me ask you this question. Is your product or service profitable, easy to understand, easy to justify, easy to acquire, and beneficial to your customer for years to come? If your answer is “yes” then congratulations! However, if your answer is “maybe” or “no” then the next two paragraphs may be encouraging to you.
The specific business needs that I just touched on are often seen as competing goals. However, I built two successful mudflap products while diminishing the natural tension among profitability, creating a compelling value proposition, selling at a reasonable price, providing a low friction purchase, and rendering long-term value to my customer.
I was surprised when each product’s business needs coalesced in a way that was solved without seriously diminishing any of these goals. Each product produced a profitable revenue stream while not causing serious belt-tightening within my company during the development stages or the sales pipeline’s build-out.
Metaphorical mudflap
Actual truck mudflaps are an excellent example of the metaphorical mudflap. Trucks are not just a product; they are a platform with amazingly healthy economic ecosystems. It takes a lot of capital to manufacture and sell trucks. However, the price of mudflaps for trucks is little more than a financial rounding error, yet there are hundreds if not thousands of companies manufacturing them. Using a very unscientific test, I did the following Google search:
companies that manufacture +mudflaps in the +USA
This search returned, “About 23,200 results.” Unicorns do not dominate mudflaps for trucks. Even small businesses participate in this trucks-as-a-platform market.
Mudflap examples
First, let’s consider Salesforce®. It had a revenue of 17.1B USD this year with an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of 2.63B USD. Salesforce is a big company. It would be unwise to start a company to go head-to-head with Salesforce but look at their ecosystem.
Their two main paths for companies to participate with Salesforce are APPEXCHANGE Partners and Consultants. The Salesforce website proudly claims, “86% of Salesforce customers have installed an AppExchange app.” If we check their site, we find 284 AppExchange Components riding the coattails of Salesforce.
“Alone we can do so little; together we can do so much.”
My first successful product was like those living in the Salesforce ecosystem. I designed and manufactured a third-party product that rode the coattails of a costly HP® platform. My product was listed in HP’s recommended third-party catalog, a list from HP that provided new customers with guidance for products and services they should consider adding to their purchase; many did.
HP’s recommended list helped to create an ecosystem. A partner in a different market space from mine contacted me, and we joined forces. They bundled my product with their product and sold them at a premium price because our products worked together, and both products worked with HP’s system. This approach provided a genuine benefit for new HP customers.
Mudflap value
Easily identify prospects and qualified leads
My HP partnership reduced my marketing costs because I wasn’t forced to hunt for prospects. A drip marketing campaign produced better results. You see, for HP customers that opted in, a contact list was compiled and made available to approved partners. My sales funnel started with identified prospects and many qualified leads. It’s much easier to sell products or services when you are communicating with companies that need your product or service.
I think of mudflaps as barnacles on a whale. A mudflap business is deeply tied to the health of the whale. If your whale is healthy, then you have a reliable channel for your product or service. Customers who buy or rent the whale, are motivated to include third-party products and services to help ensure their project’s success.
Enable realistic projections
Whether it’s Salesforce, Oracle®, Microsoft®, General Motors®, or GE®, the whales want to keep their ecosystem healthy and growing. Some whales provide general guidance to their partners regarding the number of new customers for the next quarter and projected sales for the remainder of the year. This guidance is a tremendous improvement over flying blind.
Easy to understand
It is easier for your qualified lead to understand your product or service when you present it within the context of the expensive solution they’ve adopted, such as a new Salesforce installation, an Oracle LMS (Oracle License Management Services), or a Microsoft Dynamics installation.
Easy to justify
When a customer spends $500,000 on a product or $50,000/month for a service, they are motivated to acquire add-ons that add polish and power to their hefty investment.
Easy to acquire
By participating in a whale ecosystem, you are often provided with step-by-step instructions for how you should work with the whale and the customer. Some whales provide this handholding for free.
Effective solutions for your customers
Customers rarely spend $500,000 for a product or $50,000/month for a service and then drop it after a year. These commitments have a “long tail.” By “long tail,” I don’t mean the Investopedia definition; I mean a product or service that existing customers will easily justify your fees year after year. If your add-on is part of the customer’s solution, then it’s likely that your relationship will grow as your customer grows.
The greater good
“A rising tide lifts all boats.” President John F. Kennedy
Most companies are small businesses. Big companies want their product or service to be a platform that creates an economic ecosystem for a competitive advantage over their competition. The partners within these ecosystems frequently partner with each other and leverage each other; a byproduct of this activity is that most companies within the whale’s economic ecosystem grow.
Revisiting Keurig®
A Keurig spokesperson said the company sold 10.5 billion K-Cups for the fiscal year ending in September 2015, which is the last year public data was available, the Chicago Tribune notes. Keurig went private after a $13.9 billion buyout by JAB Holding Co. in 2016. — USA Today
Keurig started life as a coffee company. Then they built an innovative coffee maker for their coffee, and then they made their coffee maker a platform that enabled other companies to participate with them. As Keurig grew, so did the size of its market. This ecosystem translated into considerable opportunities for its partners.
As of 2019, Starbucks® represented 17.1% of K-Cup sales. This small percentage for such a large company means that a substantial portion of the K-Cup market is serviced by other partners, some large, and some artisans.
I started this article with the Keurig example because Keurig is an excellent implementation of a platform built for a robust economic ecosystem. They don’t just sell their own coffee K-Cups. That would be the razor and blades model. Instead, Keurig has an expansive partner ecosystem that enables many companies to participate by selling their unique coffees, teas, hot chocolates, and much more.
Final thoughts
Mudflaps are not a panacea. If your whale becomes ill, then your revenue will suffer. Whales are famous for changing their partnership agreements, often with precious little notice. And whales only care about partners when their partners are more effective than in-house solutions.
Nevertheless, suppose you need reliable cash flow with a moderate accounting profit without prohibitive up-front costs or expensive customer retention expenses. In that case, you may want to consider making a mudflap product or service.
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