Selection is king (for marketplace businesses)

Back in late 2018, Netflix made headlines when it paid a reported $100 million to secure the streaming rights for Friends for one year. The fight for Friends didn’t end there—HBO Max later paid $425 million to lock up the rights to stream Friends in a five-year deal.

Clearly, streaming services value Friends highly. To better understand why, I will introduce a concept called selection.

I define selection as:

The availability of distinct goods, services, or service providers that a business offers to its customers

Examples of selection in companies include:

• TV shows, movies, and documentaries for Netflix and HBO
• Books, household items, electronics, and clothing for Amazon and Walmart.com
• Albums, singles, and music videos for Spotify and Apple Music
• Restaurants for food delivery platforms like Uber Eats, DoorDash, Postmates, and GrubHub
• In-network physicians for health insurance policies from companies like Kaiser Permanente or UnitedHealthcare

Selection is so important because it dictates the experience of a customer within a marketplace business, including driving acquisition of new customers and building a competitive moat to retain existing customers.

HBO Max spent $425 million for the exclusive rights to Friends, because they believe it will be a key reason that customers will sign up for the new streaming service when it launches in May 2020. Disney spent $4.05B on acquiring Star Wars parent LucasFilms, because Star Wars enhanced the selection of their portfolio¹. This bet paid off quickly, as Disney had already generated $4.8B in sales from its four Star Wars movies by late 2018.

How to think about selection strategically

Getting selection right is the difference between success and failure for marketplace businesses that connect their customers to goods, services, or service providers. Now how should these companies think about selection strategically?

I believe there are three distinct aspects of selection that need to be executed flawlessly, typically by different teams within a company:

1. Identifying the right selection
2. Adding selection
3. Discoverability

1. Identifying the right selection

When identifying the right selection, companies need to start with their customer in mind. Each customer has different tastes and preferences, which influence which merchants or goods they desire. Some factors can be geographic or demographic, but others may not fall into easy-to-measure categories. To find the right selection for your business, talk to customers, identify how that plays out with your customers and partners, and iterate constantly².

Additional guiding principles for identifying the right selection for a business include availability, substitutability, and exclusivity.

Availability

Availability describes whether selection is an existing option in the market — like Friends, which is available to the highest bidder — or proprietary — like The Mandalorian, developed exclusively for Disney+. Proprietary options tend to be more uncertain in terms of consumer demand and require a large up-front investment before their value can be realized, though if successful, their benefits to a business will compound over time as they cannot be copied 1:1.

Substitutability

How easily selection can be copied or replaced describes its substitutability.

Popular intellectual property and powerful consumer brands have low substitutability, while more commoditized offerings are highly substitutable. The fewer substitutes an offering has, the higher its value to customers — and the higher its cost to businesses.

Customers who prefer Friends, McDonald’s, or Taylor Swift cannot be easily convinced to consume The Wire, Burger King, or the Grateful Dead instead. The reverse is true, too! In comparison, consumers do not have strong brand affinity for commodities like phone chargers, so a phone charger produced by AmazonBasics or Apple would be substitutable.

Exclusivity

Selection can also be exclusive or non-exclusive, with the value exclusivity varying wildly based on the bargaining power of suppliers and competitive dynamics of an industry. While exclusive selection can be incredibly valuable, overvaluing exclusivity is an expensive mistake.

2. Adding selection

After identifying the right selection, a business must acquire it.

For existing goods, services, or service providers, a business needs to balance a provider’s willingness-to-pay with their business model. A provider’s willingness-to-pay increases as the perceived unique value a company can provide increases.

I think of perceived unique value as:

The ability of Company A to create value that Company B desires and cannot attain from other sources³

Adding existing selection is typically a sales or business development concern.

For propriety selection, a business needs to understand the investment required to develop the selection and reconcile that with their business model.

For this type of selection, resourcing needs are determined by the nature of the selection itself. Examples include developing an in-house film studio like Netflix, or white-labeling generic products like AmazonBasics.

Finally, the acquired selection should drive desired behavior at a cost the business is willing to bear. A feedback loop needs to be established to measure the performance of added selection, so a business can optimize the acquisition of high performing selection and de-prioritize the acquisition of lower performing selection.

3. Discoverability

Once a business has the right selection available, it needs to empower customers to easily find what they want.

This is a product question without a one-size-fits-all playbook for every business. That said, all businesses need to both understand the motivations of their customers and design how selection is surfaced for each type of customer.

When designing how selection is surfaced for each type of customer, these four methods of segmentation may be helpful: lifecycle, demographic, revealed preference, and stated preference.

Netflix could use lifecycle segmentation to determine discoverability by showing new users a wide net of generally popular shows — perhaps adjusted by their geographic region, as a potentially relevant demographic component — that allowed these new customers to quickly identify something they would enjoy viewing.

Disney+ could tackle the same problem by creating a large search bar at the top of the screen so users could manually search for specific content, tracking what the users actually viewed, then surfacing similar titles in future sessions — an example of using revealed preferences to make selection more discoverable.

As another alternative, HBO Max could survey users during an onboarding flow to see which types of content the most enjoy, using these stated preferences to display recommendations.

A business can learn how to measure and optimize discoverability, but it will never be a fully solved problem as customer motivations are constantly evolving.

Concluding thoughts

Selection helps explain why Netflix and HBO Max emptied their pocketbooks for Friends and why Disney purchased LucasFilm, Pixar, and Marvel.

Any marketplace business can tap into this powerful concept by developing a selection strategy that reconciles the interaction effects between selection, customers, and their business model. This selection strategy will inform key decisions that will shape a business — and its profitability — over time.