#007 - Product Management Lessons by Meituan Co-Founder - Pt 6: Two Mental Models
5 mins read - Incremental vs. Reserve Market; High-frequency vs. Low-frequency
Let’s get you up to speed:
Wang Huiwen is the co-founder of Meituan, who recently retired at age 42 with an estimated net worth of >US$2B. He opened a Product Management course at Tsinghua University in September 2020. This article and others in this PM series are my translation and edits based on a compilation of the content of his course shared online. You can see other articles in this series here.
Incremental Market vs. Reserve Market (增量vs存量)
Reserve Market refers to markets where the total demand has been seen and determined. The competition is for market share. It usually is value chain competition (full competition in every link of the chain), and the ocean is getting “red".
Incremental Market refers to markets with expanding boundaries. The total demand is increasing and it can even cannibalize other markets of similar categories. The overall scale of the market is increasing.
For example, in the past, in a given era, the number of citizens reading newspapers is relatively stable. As long as there is no demographic upheaval, the total circulation is relatively constant. The entire newspaper industry is in a Reserve Market, and they compete for each other's market share.
Now, when mobile phones gain prevalence, more and more people switch to mobile phones to get their news rather than from newspapers. The few mobile news providers are in an Incremental Market. On the one hand, their individual user bases are increasing. On the other hand, the total market is expanding rapidly as well. In addition, some news Apps also offer funny videos or memes that were not offered by newspapers. News Apps then become a comprehensive information consumption platform. The market is further expanded and even more people flow into this market - increment in multiple dimensions.
— 30 Lectures on Product Thinking by Liang Ning 梁宁老师产品思维30讲
This is a simple but important concept. At any given time, we must know whether we are working on an Incremental or Reserve Market. Although the Reserve Market is not without opportunities, it's much harder to make it in a Reserve Market, especially for latecomers.
For a latecomer in a Reserve Market, you'd find that almost the whole world is against you. Once a market enters the reserve mode, the possibility of changes in the industry structure decreases drastically. The Reserve Market also has high requirements for management expertise, so it's best to start up in an Incremental Market.
One measurement for Incremental vs. Reserve is the penetration rate. For example, the total number of air tickets sold online/total number of air tickets sold a day. When this ratio exceeds 50%, it will be difficult for the market structure to change.
In Internet businesses, one effect of Incremental vs. Reserve is the difference in customer acquisition costs, whether it's advertising, subsidies, or ground sales. The difference in customer acquisition costs between Incremental and Reserve markets is at least 10X. This leads to untenable unit economics in Reserve Markets.
How to Win In A Reserve Market
Being in a Reserve Market doesn't mean there aren't opportunities. Take Pepsi for example. Pepsi was originally a very small company. The cola industry was pioneered by Coca-Cola, and it has a dominating presence. At its peak, Coca-Cola had a market share of more than 90%.
At this time, there's a guy at Pepsi named John Sculley who believed that although it's not easy, there's still a chance to win market share. In consumers' minds, cola is Coca-Cola, so how can you change people's minds?
The opportunity here was that when a person reaches around 13 years old, he goes through a rebellious phase where he will disagree with his parents on every single thing, including his parents’ consumer brands.
If we look at the next 100 years, these newly born people will be Incremental. These newly born people cannot choose their own consumer brands at the start, but one day they will. What we need to do is on that day, we tell him, "Young people should drink Pepsi". This is a counter-positioning that Coca-Cola can't compete with. What's more, the new-age consumers not only drink Pepsi when they are young but in the future, when they do get old, they will continue to drink Pepsi to feel young.
Therefore, Reserve Markets also have opportunities, and it largely depends on how much you differentiate from the leading incumbents.
High Frequency vs. Low Frequency
This mental model is especially relevant for Internet companies. A common strategy used by Internet companies is to use high-frequency Apps to overpower low-frequency Apps - high-frequency Apps have unfair advantages over low-frequency Apps.
Meituan used this strategy when we entered the hotel online booking business. Meituan was definitely a late entrant - 10 years later than the first movers, but we came on top.
For most people, booking a hotel online is a relatively infrequent behavior. When you want to book a hotel, you'd be more inclined to open an App already installed on your phone that also has added a hotel reservation feature rather than going to the app store to download and register another app.
High-frequency Apps will have advantages in user acquisition costs and retention rates over low-frequency Apps.
Of course, another important reason that we decided to enter the hotel booking business is the Incremental vs. Reserve Market mentioned earlier. Although Meituan Hotel was 10 years late, the market penetration rate of online booking in 2010 was only about 10%, and there’s still a huge potential for the Incremental Market, and Meituan Hotel has seized the opportunity.
App’s Usage Frequency And The Phone
The frequency of people changing mobile phones is about 2 years. With new phones, the Apps that you used to have are gone. Only a small number of people will install the all original Apps back one by one. Most people will think about what Apps to install, so the high-frequency Apps come to mind and will be installed first, and high-frequency Apps will have more prominent positions on the screen. For example, WeChat is usually in the position where the fingers are easiest to touch. So the high-frequency Apps are in a very advantageous position on the mobile phone.
Also, when people open their Apps, there is a certain amount of startup time. Firstly, after turning on the phone for the first time, it takes a certain amount of time to load the App from the hard disk to the memory. Secondly, when phones do their memory management, they will deprioritize infrequently-used Apps. WeChat is opened so often that it almost has no startup time. Mobile manufacturers will also help WeChat with startup optimization. This results in WeChat Pay has a better product experience than Alipay even though WeChat Pay is not on the main screen of WeChat. This time advantage has a huge and subtle impact on consumers subconsciously.
How to Win For Low-Frequency Businesses
This is not to say that there is no chance for low-frequency businesses. If you want to operate a low-frequency business and maintain a competitive advantage, it's very important to go deep into the industry value chain.
For example, some of the lowest frequency activities include marriage and buying a house. Lianjia is now a public company. They didn't get here by just building a website. They must go deep into the industry value chain. For example, Lianjia has floor plans of all the condominiums in China - a lot of work went into that.
Lianjia started as a second-hand property agency, not a Web company. At the beginning, the employees of Lianjia were property agents providing second-hand property brokerage and financial services. These services remain important sources of revenue for them, so the business is highly vertically integrated.
Another way for low-frequency businesses to work is to partner with high-frequency businesses. For example, WeChat has an entry point for Beike that can help you find a house to buy or rent.
Meituan has this problem as well. Although eating is high-frequency, it's still a lower frequency than talking or messaging, so we have to partner with WeChat. On the other hand, we also have to go deep into the industry value chain. We provide supply chain services to restaurants (Kuailv) and also have a restaurant management software business.
👋 Hi! I’m Tao. As I learn about building products & startups, I collected some of the best content on these topics shared by successful Chinese entrepreneurs. I translate and share them in this newsletter. If you like more of this, please subscribe and help spread the word!
Love this. Can you share the English version of "30 Lectures on Product Thinking". I was not able to find any good translated content for this.