Bet on yourself to create your own market space

Our television screens are awash with commercials pushing the latest odds and free £10 for your first bet for online gambling. Since changes in the law in 2005, the online betting market has experienced significant growth, driven by the influx of new technologies, increase in the broadcast of live football and high levels of product innovation from betting companies.

Betting used to be the domain of traditional fixed odds bookmakers such as Ladbrokes, William Hill and Coral in smoked filled betting shops, with horse racing the primary sport. With the demise of the football pools mirroring the growth of live televised football, the rise of online betting has seen the advent of sports spread betting companies such as Sporting Index, and exchange betting companies, such as Betfair, leading the way. Putting to one side the morality, it is an interesting business lesson on how to evolve your customer offer and product innovation in a seemingly simple, mature market.

Whilst inconceivable only a few years ago, online gamblers can access a mobile betting service that allows them to see prices update in real time, place bets, view their bets and deposit funds. The rise of in-play betting has transformed betting from simply placing a bet before an event on who is going to win, lose or draw, in-play betting is effectively ‘sports trading’ where people trade bets during an event as team or individual performances ebb and flow.

Spread betting allows people to place bets during an event and close bets at anytime to take a profit or cut losses. People can trade any specific performance within a live match in the same way a share trader would buy and sell shares as a company’s share price performance fluctuated in a day’s share trading.

Betting companies have also become sophisticated in recruiting new clients and maintaining the loyalty of existing clients. Free bets are commonplace as a means of attracting new clients.

Betfair is a particularly interesting model. Andrew Black, formerly a professional gambler, and Edward Wray an ex-derivatives trader, founded Betfair in 2000. Today it is the world’s largest international online sports betting company and the world’s biggest betting community. The company has over four million registered users with weekly turnover of £50m. Betfair is the world’s largest betting exchange handling 1,000 bets a second and completing 5m transactions a day, which is more than all European stock exchanges combined. Their business model has some unique features:

Peer-to-Peer betting exchange. The key difference to traditional gambling is that instead of betting against bookmakers, Betfair customers bet against each other. Betfair was built on a stock exchange model (similar to Nasdaq) where odds function as the share price. This enables bettors to trade in and out of positions on sporting events, much like trading in and out of positions on shares. Betfair was hugely innovative in the UK sports betting market and created a new type of gambler that took advantage of market trading dynamics, without needing to have an opinion on the outcome of the sporting event itself.

No risk exposure on bets. As detailed above, Betfair differs from traditional gambling companies in that it does not bear the risk of the bet. It connects punters to each other and then pays out winnings rather than offering odds that it stands to win or lose. It makes its money by taking a commission on any winnings.

Cost advantage. The model creates an inherent cost advantage relative to the traditional bookmaker model. Because a bookmaker takes risk on the outcome of each betting event, this cost is built into the bookmaker odds offered to the public. Therefore the odds that the public sees on Betfair are more reflective of a true market, resulting in most cases, in higher odds, and thus attracts more stake monies.

Liquidity of the market. Much of the success of Betfair is dependent on maintaining high levels of liquidity, a significant proportion of which is generated by Betfair’s sophisticated and high-spending repeat, core customers. Early on Betfair recognised that the key to creating a successful betting marketplace was to improve the chances that any reasonable bet placed, would be matched.

In essence, Betfair needed to balance supply and demand the same way that a stock exchange does. They solved this by encouraging volume betting, and marketing to high volume players – and a new type of bettor, people looking for arbitrage opportunities. These bettors move large volumes of bets to lock-in a very small profit regardless of the outcome of the event, providing liquidity to the exchange.

A highly liquid exchange for bettors is a difficult barrier to entry to overcome. Creating the critical mass to have an effective betting exchange is difficult and costly, and this is reflected by the almost non-existent competition.

Rapidly, Betfair has built a business offering a new product, and created its own market space. What are the learning points we can take from this?

In a highly competitive market, Betfair’s strategy was not to compete head-to-head with opponents, but instead to create an entirely new market and offering. This way of redefining the market – and market boundaries – has been called a Blue Ocean Strategy, developed by W. Chan Kim and Renee Mauborgne.

Blue Ocean is a market that is as yet undefined, there is lots of space (literally, visualise an expanse of empty blue water) and appears when a company pursues seemingly unorthodox methods. Continuing the analogy, Red Ocean refers to a situation where the market is predefined. Companies vie for a set number of customers and in order to gain market share, companies compete on price to win, thereby depleting the resources of the other companies, and leading to metaphorical ‘bloodshed’ – thereby colouring the ocean ‘red’. Many markets can be classified as red oceans.

Another business following the Blue Ocean approach is Apple, which like Betfair, created its own market space. But don’t be overawed by Apple’s apparent continuous stream of innovations, Apple doesn’t actually do that, it’s a user-focused fast follower and a relentless improver. Patrick Barwise and Sean Meehan developed an innovation model, Beyond The Familiar, which incorporates the Blue Ocean philosophy, and illustrates Apple’s innovation strategy as creating new market space.

When Apple enters new categories, it does so not as a pioneer, but as a user-centric fast follower. It did not invent the first online music store, integrated music offering, smart-phone or tablet, yet Apple dominates these markets with premium-priced high-end offers, which combine enhanced features and capabilities (mostly created by others), backed by brand communications, product and service design and innovation, and world-class execution. All its products live symbiotically in the Apple brand eco-system, boosting sales of the entire product family.

Having entered a new market as a user-centric fast fol­lower, it then determinedly embraces incremental improve­ment. It studies the initial customer response to the pioneers’ products and then trumps them by adding more features and benefits, and a much better user experience, well beyond what customers have had before. It isn’t a pioneer but it does innovate Beyond the Familiar.

Consider the iPod. It was not the first MP3 player. Apple learned from the earlier offers that had failed that compactness was good, but not at the expense of capacity, battery life, ease of use or attractive design. The iPod did not create a new product – it was a fol­lower, but it was the first to succeed in bringing the real benefits of an MP3 player to the premium end of the mass consumer market. It was the blue ocean strategy of ITunes that made the iPod the killer app, and subsequently added a range of better and cheaper variants such as the ‘shuffle’, the ‘nano’, and the ‘touch’.

The general framework for innovating beyond the familiar developed by Barwise and Meehan reflects Apple’s obsession with the nature and effective­ness of customer orientation, to execute the four direct drivers of long-term organic profit growth:

  • Offer and communicate a clear, rele­vant customer promise.
  • Build customer trust and brand equity by reliably delivering that promise
  • Drive the market by continuously im­proving the promise, while still reli­ably delivering it
  • Get further ahead by occasionally in­novating beyond the familiar

How can your business adopt this model? Here are three thoughts:

Look beyond your comfort zone When a disruptive new competitor appears you need to respond urgently, almost certainly going outside your strategic comfort zone. Doing this is never easy, the ten­dency to stay within the comfort zone is greatest when the business is doing well and there are no obvious storm clouds on the horizon. But you need to be restless, if not agitated to counter this potential complacency, ask yourself ques­tions such as: What are our recognised blind spots? What are the mavericks and troublemakers within the industry telling us? What future surprises could really hurt us?

Focus on adjacencies. Moving away from what you know introduc­es unknown unknowns on top of the known unknowns. The implication is that the main innovation opportunities are in adjacent markets rather than newly created markets that often represent a major discontinuity in the current business model. This is precisely what Betfair has done.

Follow fast It is better to be a follower than a pioneer. The pioneers get scalped – Andrew Carnegie. Most of the time, you should drive the market by relentless­ly raising your game ahead of the competition – shouldn’t you? But what about the case of radical, new stuff, should you aim to be first to market?

Being a successful pioneer is hugely appealing: think of the fame and fortune achieved by companies such as Sony (the Walkman), Starbucks and Nintendo (the Wii). What’s not to like? Alas, these are exceptions. Research has shown that most of today’s market leaders, often widely believed to be pioneers, were in fact fast followers, the actual pioneers having long since gone bust or exited the market. Pioneer ad­vantage turns out to be largely a myth because the failure rate is so high.

The reality is that innovation is like the old story about a teenage boy’s claims about his first kiss: everyone talks about it all the time; everyone boasts about how well he is doing it; everyone thinks everyone else is doing it; almost no one really is; and the few who are, are fumbling their way through it incompetently.

From Betfair to Apple, Blue Ocean and Beyond The Familiar, if you look around, all the pieces of thinking can come together like a jigsaw puzzle in evolving and revolutionising your own business model. The good news is that you don’t have to start from scratch, simply be curious, have ambition to do something remarkable with your business, and take insights from truly great business adventurers – and create your own story of success. Can you make it happen? I’m not a betting man, but you look like an odds-on winner to me.

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