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Zhuang Chenchao: how do start-up companies compete? How loss?

December 20, 2014 SourceCode

In December 2014, the first “Code Class” of Source Code Capital and High and Low Grade Homecoming were held at Commune by the Great Wall. A dozen LPs of Source Code Capital and CEOs of all investment companies gathered together to exchange. A number of LPs’ speeches are full of wisdom and later we will present them (without authorization, please do not forward).

Qunar has been fighting in the recent years. So far, we have struggled for a decade, and successfully made the entire industry in a loss. Even Ctrip that has listed for 11 years has to lose money. Today I talk about how enterprises compete, such as mistakes that a leading company easily makes, the chance of a relatively backward company, and how to see a price war.

Growth Strategy

The first question, after Qunar is listed, in fact, we have been at a big loss. Every quarter loss is probably 200-300 million cash. Accounting loss is 500-600 million, but basically the stock is still relatively stable. Many people have asked me why open capital markets can accept this point. We all think that the listing is to be profitable, in fact, it is not the case. You can study the history. Amazon was at a big loss when listing. A quarter cash loss was up to 75%, that is, if its income is one billion, cash loss is 750 million. Our cash loss rate basically does not exceed the rate of Amazon.

Why capital market can accept a loss? If you are not the market first, or even if you are the market first, your business growth and revenue growth can ensure more than 60%, and you are at a loss in a relatively long period, the market is acceptable. We can count, if you maintain a growth rate of more than 60%, you are probably able to turn the whole business about 2.5 times in two years, 6-7 times in four years. This proved that if the business scale is always in such a high-speed growth, in fact, your input is very effective. The market space, addressable market is very large.

Then everyone will say, you need 100 percent of growth, so addressable market problems emerged. How long can 100% growth rate maintain? Each business enterprise must think a problem. Especially after the company enters the C round, you need to clearly define how big your addressable market is, because it is certainly a single point of breakthrough in the early days. The start point is a special function point, opening the market. But when you enter a high growth phase, you need to know where the end of growth is. At least in the current products and strategies, where is the end? Growth is not endless.

Like today's ticket business, both Qunar and Ctrip are profitable. We two together account for nearly half of the entire Chinese ticket market. Currently, Ctrip is at 40% growth, and Qunar is 60%. What does it mean? The growth rate will maintain a year at most. If it maintains for the second year, we two together will exceed 100%, which is certainly impossible and violate the laws of mathematics. If your growth rate have been doomed in your addressable market and is impossible to maintain over 60% growth for a long time, price war is no doubt.

Conversely, it involves the issue of leadership and backward strategy. Qunar can be established six years after Ctrip was set up and today is still able to pose a threat to Ctrip. The biggest problem is that Ctrip fundamentally miscalculated his addressable market. This is a mistake many online companies often make. What is the specific problem? When Ctrip entered the market, it said the online travel was its addressable market. Have you ever thought, online travel is the market with annual growth rate of 40 -50%. When you have 50% of this market today, even if you grow quickly, you have a 40 -50%. But due to the rapid growth of the market each year, the released space will be very high. Moreover, if the online travel is at a sudden acceleration, the precise definition of addressable market is very important.

For example, if you define the entire tourism market as the addressable market, resources are limited in the tourism market: The hotel number is limited, it is impossible to build overnight at 40 -50% growth; aviation aircraft seat and air transport capacity is limited, it is impossible to grow annually at 40-50% growth rate; catering growth rate may be relatively higher. But Chinese people are limited. You can only eat three meals at most a day, and probably do not have breakfast outside. The addressable market is relatively constant.

I think once a lot of companies enter the high-growth phase, they define the entire market in a constant market, a relatively stable market, rather than the fast changing market. In a fast changing market, if you are No. 1, it sounds very cool. In fact, it bears a huge risk. If the market itself suddenly accelerates, your business strategy and model is likely to fundamentally change. There is also a bad situation. This business model from another angle is fundamentally different from your original business model, but it is a fundamentally same aspiration. Such as conferences, the earliest case is exhibition. A lot of listed companies did the exhibition business, which later was largely replaced by video conference. Now you can safely meet your needs through IM, so I think you must continue to abstract the addressable market. It eventually resolves people’s fundamental aspirations. You do not need to do it every day. If a company has valuation of more than $100 million, certain scale revenue and high-growth business, it has to think what it is doing if its business is abstract to a higher level and that how many options it has if meeting this level of demand. Such as catering, having dinner in a restaurant is a level, and group purchase may be a level; so is hotel. The hotel is a level. What is the higher level? I need accommodation outside. I have the demand of the accommodation in case of the local consumption. Airbnb proposed a new concept that you do not need to stay in a hotel. The fundamental demand is staying out. There are many solutions to staying out.

I suggest that you continue to think. Do you have a more fundamental and abstract level that will bring you a different space? Essentially, you can think about it. Does your business have 100 percent or at least 60% growth rate in the next three years? If you see that the business model in the market has entered the final stage, your strategy will be completely different.

For example, if your market share is already close to 50%, you have to see whether it is profitable and prepare in advance for cost reduction and control. If you still want to maintain a high growth, you have to consider solving the same fundamental problem, if there is alternative or solution to the fundamental and basic needs. Only when you make these issues clear, you will take a different strategy.

How to fight a price war?

Everyone says they want to compete on price. The price war can bring market share and subsidies. Why do you want subsidies? Why do many companies go bankrupt? They regard the price war and high investment as the only goal of pursuing market share. In fact, my view is that the pursuit of market share is always a tactical goal. The real problem is that when you address this market, you have a concept of final game. If you occupy 70-80% of this market, you have to think about what the most critical resource of a market is and which resources are not expansionary, but have a very high exclusivity. When you occupy the entire market, others may not come.

For example, the tourism industry typically has the seat and hotel resources; because the hotel is impossible expand at high speed. This is an exclusive resource. Like some business, copyright has exclusive resources. When you fight to the final game, you definitely need to get some key exclusive resources, so as to ensure long-term sustainability of your business model.

When you need exclusive resources, stages are required. When you might have 5%, you can at least use exclusive resources or some resources. When you have 25%, you may have some control over some kind of exclusive resources; when your market share reaches 50%, you may have complete control of some exclusive resources. The pattern of each market is different, but the key is that you have to make the addressable market clear. What are the exclusive resources? How much market share do you need to complete from quantitative to qualitative change. The price war and big investment have very clear milestones. 49% may not be meaningful. 52% may be wasteful. 50% is just right. If your plan is very clear, when you accelerate, you do not need oil-filling tactics, because a lot of companies win the growth rate by losing money, but this is completely pointless.

When you have a very clear goal that my today's market share is 5% and I think at 15% I need to conduct a quantitative change for this resource, permission or my accessibility, you should have a very clear plan to invest heavily within the shortest possible time to reach one-time 15% and immediately lock out this resource. So, the speed of losing money is not a linear growth, while ladder type is a better solution. When you start to lose money, the more the better, and the sooner the better; because of this, competitors are not able to prevent. When loss is up to a point, you need to immediately stop, because you have reached the goal. 50% is just right, 51% is ok, and then you need to occupy the resources.

After you occupy, when others grab market share, you can wait, why? Maybe when you have mastered 20% of the market, others may also have access rights, and you are not able to prevent. If your money grows from 20% to 50%, when you do not have the manpower, you can only make others come. But you have to control the rhythm of this game. In all price wars, you shall not be dragged away by others, which is very easy to lose, because you do not know other people's strategic goal. If you fight back when others fight, it does not work. You must take the initiative to launch a price war, and shall not passively launch.

But you need to think clearly before launching. First, what is your strategic goal? How much market share do you need at each stage? When can you lock the resource? How to lock resources when getting to this point; Second, what is the friction of time if you do this? Can you directly occupy by investing 100 million in a short period? Does it have a slow process? If time permits, I think it is very important in price war to get your market share at the fastest speed and then immediately stop.

Third, make it clear where the return ticket is. You plan well to invest 100 million. If competitors also understand and fight the price war, you probably cannot reach this market share. You need to have an exit plan. For example, my plan is to make the market share up to ten points, and then I occupy the resources. After two weeks, this progress is much worse than what I thought, I have to withdraw immediately. Before you start, you must do a detailed plan including reflection of competitors and the industry.

Neither price war nor the market share is the purpose. Really, it is a ladder-type function. When you reach a certain share, you occupy the market. Then you wait and see other situation. When your company is relatively large, you may have different business lines that need to quickly get resources at some point. Corporate headquarters might need to be coordinated. You may have more expected resources with longer time consumption. I think this is a very important point in the expansion phase.

Many companies go bankrupt in the expansion phase, because they only pay attention to the market share and do not lock resources, so they have no exit strategy. Even when they reach 60% market share, as long as they stop, they will immediately fall from 60% to 30%, which is meaningless. How to fight a price war well? You may increase from 10% to 12 percent or 13 percent; once you stop you can immediately remain over 10%. That’s fine. No waste is allowed.

If you are already a market leader at growth stage, you need to pay special attention to that if your business is still in the high speed growth. In my opinion, if you are market No. 1, your business can maintain at least 60% growth, the profit is not important. If the loss is up to 100%, you should lose. Only one case you can be profitable, namely you have 100% growth rate. You really do not know how to spend money, and you are profitable no matter how you spend, ike Tencent, Baidu. In this case you can be profitable. Otherwise I think profit is guilty. You give a lot of the opportunity cost to others.

In many cases, when you dominate the competitor and have triple relationship with him, you always hit him, you will be out of the game. However, if you encounter a formidable competitor, you are a bit profitable and give him a chance to reach 50%, you may never get rid of him.

Many companies can be suddenly defeated from profit to loss. A company that is always unprofitable is actually not easy to be defeated, why? After a company makes profit for a period of time, the company's internal control and management will have many changes, and you will begin to control costs. After the company makes profit for one or two years, especially after the listing, your whole way of thinking will be driven by profit. When you want to remain profitable, finance staff will have greater say in the business. After a long time, some more radical people will leave the company. Relatively speaking, they do things more securely. More balanced people will stay in the company. The company's entire gene is changed. Not everyone will be at a loss. Loss is also a kind of skill.