Many fast-growing companies in Silicon Valley have one thing in common: they cater to a small, affluent, urban population — the 1 percent. Residents in high-cost cities like San Francisco, New York and Los Angeles can order an array of goods and services from their mobile phones.
These startups, including Uber, Instacart and a host of food delivery apps like Munchery, GrubMarket, Blue Apron, and Postmates, eventually have plans to broaden their offerings to attract middle-income consumers. This is the classic trickle-down business model.
As Farhad Manjoo wrote in The New York Times, “The rich subsidize the rest of us — were it not for the suckers who spent more than $10,000 on early versions of the Mac, Apple might not have survived to build the iPhone.”
As a venture capitalist who has invested in both Chinese and U.S. startups since 2005, I’ve backed several companies leveraging the trickle-down model, such as GrubMarket. But, now I see it also makes sense for some founders to take the opposite approach: mass market first.
Going Mass Market First
Attacking a mass market from day one may seem daunting, but it’s not impossible — just ask startups in China. Many Chinese startups go after the mass market right out of the gate, as hundreds of millions of consumers there fall into the middle class. There also are many high-net-worth individuals in China, with plenty of companies chasing them, but the sheer size of the Chinese middle class makes the mass-market-first business model viable. Companies like Alibaba, Tencent, Baidu and YY all went after the mass market right away.
Founders with a global vision to serve the world’s middle class have the chance to create billion-dollar companies with lasting growth potential.
The huge growth in global smartphone adoption will now make this approach more common outside of China. Unlike the first wave of late 1990s (Internet companies that targeted higher-income consumers who could afford expensive computers), today’s startups can quickly reach billions of middle-income consumers who only need a simple smartphone and low-cost data plan to get online.
My favorite current example of the mass-market-first model is Xiaomi, one of the world’s most valuable private companies. Like Apple, Xiaomi makes high-quality, coveted smartphones. Unlike Apple, Xiaomi’s phones are priced very affordably. Companies like Xiaomi with mass-market appeal not only grow faster, but survive market downturns better than companies catering to the 1 percent.
Sectors Ripe For Mass Market First
Consumer Hardware. We already have the ultimate example of a successful mass-market-first company: Xiaomi. And not only is Xiaomi creating low-cost, high-quality hardware, it’s putting customers at the center of the entire design process. Xiaomi collects tons of usage data and customer feedback, and integrates these findings into future products. Xiaomi now has a massive customer base; the company sold 61 million phones in 2014 and recently broke a world record by selling more than 2 million phones in one day. With that scale, a whole startup ecosystem has sprung up to sell mass-market accessories and home appliances controlled by Xiaomi phones, including Zimi (battery packs), 1More (headphones) and Huami (activity trackers).
E-Commerce. When it comes to e-commerce, Chinese companies like Alibaba and JD.com nailed the mass-market-first approach, and similar models are beginning to emerge in the U.S. Whereas U.S. e-commerce startups tend to go after high-end consumers first (including Etsy, Gilt Groupe and monthly subscription boxes like Birchbox), Chinese e-commerce startups often target middle-income consumers first.
In China, Mogujie and Meilishuo.com have achieved mass reach selling low-cost items like clothes, baby goods and household goods. In the U.S., a great example of a mass-market-first startup is Wish, a smartphone shopping platform offering low-cost products shipped directly from China and elsewhere. It has a massive following of U.S. and European shoppers looking for bargains across its four apps (Wish, Geek, Mama and Cute).
Emerging e-commerce giants in India, such as Flipkart and Snapdeal, are also succeeding with mass market first. Companies that sell every-day items to millions of people, not those selling special treats and luxury goods to the 1 percent, will have staying power when the next economic downturn hits.
On-Demand Services. Though most mobile apps for on-demand services cater to tech-savvy early adopters, some can and will succeed with the mass market. In China, that’s already the case. For example, while Uber perfected the top-down approach, starting with luxury town cars and expanding into shared cars with UberX, Didi Dache in China and GrabTaxi in Southeast Asia started with the mass market first. These companies recruited existing taxi drivers for low-cost rides, and are only now expanding into luxury services.
Meituan, a daily deals site, and Wuba, the ‘Craigslist of China’, also offered their services via mobile app to the mass market first. Some on-demand mobile apps that could appeal to middle-income consumers in the U.S. include Boxed, which delivers a low-cost ‘club store’ shopping experience, and any other services that offer affordable necessities,
While it’s perhaps more natural to build a mass-market startup in China and even India, it’s far from impossible in the U.S. More importantly, the best startups taking the mass-market-first approach know they must go global from day one. Catering to the 1 percent in San Francisco and New York may deliver revenue and high margins in the short term, but founders with a global vision to serve the world’s middle class have the chance to create billion-dollar companies with lasting growth potential.