Your Startup can be a Freerider

What's a freerider? In this context, a freerider is one company using another resources without compensation. Sounds evil, right? Here's an example: people go to Gateway stores, understand the kind of PC they want and then order it online at Dell. Dell gets big. Gateway goes out of business. Does it still sound evil? More like the invisible hand of the market doing its work.

I was reading about Target's woes when it comes to competing with online retailers and it occurred to me that a startup can be a freerider. 

Be Like Amazon

Clearly, free-riding is not a viable long-term strategy as the companies that are subsidizing your existence will eventually die. Let's amend the strategy to: You start freeriding at first, get big and then fend off secondary free-riders who attack you.  That's what Amazon did. They were, at first, a low-cost alternative to offline stores. Customers do their research offline and then order at Amazon. Now, the dynamics are reversed. First, Amazon has a valuable resource in terms of user reviews of products (educational material and social proof). Second, Amazon may not be the lowest cost provider in a given category. Shouldn't someone be free-riding on Amazon? Nope. The Amazon user experience is such that it's very easy for someone to order something at Amazon once they've done their research. End result: Amazon did well in converting customers who wanted education into purchasers via a slick experience.

Find Your (Unwilling) Host

The key characteristics shared by companies that are unwilling hosts for free riders are:

• Undifferentiated Products - PCs are generic, Groceries are generic, Books can be ordered from anywhere. Look for companies and industries selling products that are not differentiated.
• Unrewarding or Broken User Experience - Look for companies and industries where the user experience is so broken that you can just slip right between the customer and the host with a superior UX.
• Wrong Focus - Gateway had higher markups because they spent *money* to maintain a physical presence and workforce to educate the customer hoping that this would translate to loyalty. That did not work. Customers appreciated Gateway's educational service but their dollars went to Amazon.
• Provides a Valuable Resource or Service - Gateway providing educational services to choose undifferentiated products helped Amazon because Amazon did not have to invest in customer education.

Don't be an (Unwilling) Host

At some point, you're going to be a host. How do you fight off free riders (now or later)?

• Full control of Differentiated Products -  Apple has stores. Apple has an awesome sales service. Do you see anyone free-riding them?
• User Experience - Make it easy for people to buy from you once they've reached a decision with your help (like Amazon does).
• Lock in Customers -  Be so great that customers don't want to explore other options. Apple is such a great example of this. The people who bought the iPad probably had an iPhone. The people who bought the iPhone were people who had the iPod.