Make your product an essential ingredient.
Before we talk about Intel and ingredient brands, I’ve created a tool to help short-circuit the time it takes to identify B2B partners. Keep reading if you’d like to download a copy (a web-based version is on the way).
Intel is an ingredient brand. It is a unique example of one brand powering another. We know it best from the ‘Intel Inside’ label attached to millions of computers.
Most entrepreneurs discount how the Intel Inside story paved the way to an important and underrated path to growth. And that’s because it takes time to demonstrate that a product or service is worthy of being substituted in for a component of an existing product.
The best analogy I can think of to describe ingredient brands are the links in a chain.
Every product is made up of links (components). When you first build a product, each link will be strong enough to perform its function and integrate with other links.
Each link requires investment (whether it’s bought or built) to make the product work and due to limited resources, both in terms of talent capability or capital, each link is likely to be just good enough as opposed to being fully optimised to be best in class.
If your product is positioned as best in class, it has the potential to become an essential ingredient. And your brand stands to benefit by being introduced to new audiences as the link that makes a larger, well-recognised brand even stronger.
Intel’s Ingredient Brand Potential
In the 1990’s Intel made computer chips. Their annual earnings were ~500M USD at the time. The Intel Inside label elevated the company from being one of many computer components to being the essential hardware ingredient in the eyes of personal computer owners. Intel reported earnings of 16B USD in April 2018.
And while Intel Inside was a branding masterstroke and created opportunities for Intel to grow and diversify, it also serves as an important example for entrepreneurs trying to build brands for two reasons.
First, building a consumer brand is hard. You just need to look at how much startups spend on Facebook and Google advertising to get noticed. And it’s not good enough to be happy with a small cost per acquisition if customers don’t stick around.
Second, while developing partnerships is the key to scaling a consumer brand, relationships where your product powers an existing, large-scale brand is many more times potent.
If the penny just dropped and you’ve just started thinking that your brand could be an ingredient, there are three steps you need to take to realise the growth potential as an ingredient brand.
Step 1: Understand Product/Ingredient Fit
I’ve spent a lot of time thinking about this type of fit, at AirShr, as I was helping to grow inkl and today, as I build a biotechnology venture. Three factors seem to help determine whether a product can be an ingredient.
The first relates to whether or not a product can be positioned as the best in the world. To claim this prize, the product needs to be sufficiently unique in its niche. I’ve also found that ‘unique’ doesn’t necessarily equal significant traction. Both AirShr and inkl had social proof but were still growing when the idea of becoming an ingredient brand became an option.
While developing social proof takes time, I think founders can be examining the ‘Product/Ingredient’ sweet spot from day one. I think this sweet spot is made up of the remaining two factors: Industry competitiveness and the number of components that make up a product or experience. The latter is best explained by thinking about hotels. There is a high number of constituent products and services that make up a hotel room experience. Each one needs to be procured and supplied at a consistent standard to make the experience work well.
Ingredient brands live in this sweet spot for three reasons
Credit: Phil Hayes-St Clair
First, businesses that operate in competitive industries and deliver products with a high number of constituent components are often competition-focused and cost sensitive. This is because changes in the price of those constitute products (eg amenities in hotels) affect the margins of the end product. The larger the swings in cost across a range of constituent products, the higher the compression on margins, which in the hotel example is the profit from a room sale.
Combine this with a highly competitive market faced with disruption from new models (like Airbnb if we extend the accommodation analogy) and cost sensitivity increases. Ingredient brands, particularly scalable software products, can provide competitive price-stable offerings (thanks to their relative size) that increase predictably and take the heat out of cost sensitivity for the bigger brand.
Second, ingredient brands can take advantage of outsourced R&D and product development which has been institutionalised. In other words, ingredient brands can slot into the role of product provider because cost-sensitive businesses have a habit of reducing (or doing away with) R&D to reduce fixed costs. An alternative and equally valid motive is a decision to keep an eye out and leverage innovations that can come from startups instead of trying to build an internal team charged with the invention of new things. Either way, the shift from a ‘build’ to a ‘buy’ model creates this opportunity for ingredient brands.
Third, the startup halo effect is important to larger brands, particularly those subject to disruption, who look to startups as a source of differentiation.
I have also found this framework useful in thinking about why a brand has low ingredient potential.
Companies creating new markets (ie low industry competition) whose product is made up of a relatively small number ‘raw material’ constituent products is likely to have a strong focus on internal R&D, product development and growth. For the most part, this excludes most brands from being ingredient products.
Step 2: Identifying Partners
Identifying partners doesn’t start with going straight to LinkedIn and looking up who you might know at a ‘big brand’ and then trying to formulate an introduction.
It’s also not about blindly accepting suggestions from people on the sidelines about who your company should partner with. After all, unless they have specific introductions they can make, their ideas often add to the noise to company building.
I’ve come to rely on an 18 point framework to identify business to business (B2B) partners. It serves as a filter to save time and:
- Ask fundamentally important partnership questions that often get lost in the ‘we should partner with [big brand]’ ideation process
- Expose how incentives can be aligned with partners
- Identify why a partnership should be avoided
Why you should partner matters
When I answer YES to the statements below, I’m usually convinced there is a there, there in terms of a partnership.
- We can access new markets and distribution networks
- We can generate revenue
- We can access specialised knowledge and expertise
- We might be able to access strategic investment or exit
- They don’t have resources to build what we’ve built (e.g. wanting to licence intellectual property)*
- Their brand benefits from partnering with a startup (innovation halo)
- They have a strong reputation/track record in partnerships*****
- Both companies can share risks and benefits of testing new markets
- Both companies can make revenue*****
- We can focus internal resources on core activities
- We can leverage the scale achieved by partnering
- We can positively change customer perceptions of our brand
However, these 12 factors shouldn’t be considered in isolation.
Why you shouldn’t partner matters more!
There are six factors that usually counterbalance why you should not partner with another company. These include they:
- Have similar/identical IP
- Aren’t financially secure or have credit issues
- Have a poor reputation/track record in partnerships*****
- Have just been involved in a corporate transaction (disrupted near term)
- Are philosophically opposed to partnering at all (“did it once, disaster, never again!”)
- Don’t have values alignment*****
There is nuance in both of these ‘for’ and ‘against’ partnership creation arguments as denoted by the asterisks.
There are three super incentive alignment factors under ‘why you should partner’. In other words, when YES is the answer to each of these factors, the chance of the partnership being productive increases significantly.
My most productive B2B partnerships shared these three factors. First, my partners had a clear ‘buy’ (instead of build) mindset. Second, they had a long history of partnering with smaller companies. Third, they were excited for both businesses to make money. And if I dig a little further into the last point, my partners wanted my business to be there for the long term as much as they wanted a small startup to succeed.
Red flags live on the other side of the ledger. Be aware if a company has a poor track record in partnerships. This is easily discovered by reviewing a companies last five press releases that relate to partnerships. Spider senses should start tingling if there is a spate of one-off press releases for new partnerships. Especially for companies that aren’t followed up by continued stories of partnerships growing.
If I’m unsure, I reach out to the founders of the businesses that have entered into a partnership with the bigger brand. Their view is often very telling of what you can expect.
Once you have a list of companies that are likely to be accepting of your brand as a key ingredient, it’s time to leverage every relationship you have to gain warm introductions that plot a path to decision makers.
💻 And here is the tool I mentioned at the top of the article. 💻
Feel free to use and share it, I hope it’s helpful.
Step 3: Make Your Partner Shine
Courting people in companies and helping them become your evangelist is mandatory to becoming an ingredient brand. Underlying these relationships is trust and while this is a journey, I start by over-indexing on being ready to create value out of the gate. This involves having a product that is ingredient-ready and understanding how my prospective partner thinks, behaves and is incentivised. Importantly, this also involves understanding how they perceive my behaviours and incentives.
As a founder, I expect them to know that becoming an ingredient brand is an efficient way to grow. They might not know just how important the deal is but they should know that my business is ready to take all reasonable steps to make the deal work. And I’m happy to make this clear if they’ve missed that point.
Being ‘ingredient-ready’ means being able to:
- Plug a hole or be an effective substitute for a problematic product, feature or supply chain component
- Possess ways to integrate rapidly
- Use runway to absorb the time it takes to close the deal
Delivering on each of these three factors with regular, empathetic relationship management, including doing unscalable things (like travelling from Sydney to Washington for one-hour meetings), generates trust.
Making your partner shine is the next step and in a nutshell, it means making their life better.
This can involve tactical measures like being quick to respond to questions and issues. It may also mean providing them with first or early access to products, inviting them to launch events and improving their standing within their business by helping them ‘hit a number’ that’s important to them.
Expect that it will take time to negotiate the ego of the bigger brand. Expect them to operate at a pace slower than you hope as they work hard to differentiate in a mature industry. And expect them to grapple with the bold decision to introduce your startup as an ingredient into their supply chain.
Playing this long game pays off in spades. Especially for those who can understand and work within the context of their (prospective) partner.
One last thing …
Time and patience are needed to claim the benefit and halo of an ingredient brand. But don’t wait until your business is generating $100M in sales before opening conversations with potential partners. The speed at which big brands are being disrupted is accelerating.
Intel showed how valuable becoming an ingredient can be. Following the above three steps may reveal a similar path to growth for your venture.
Phil Hayes-St Clair is a serial entrepreneur. He writes about startup growth each week on his blog and makes the Founder To Founder podcast.