The diagrams below aren’t new, but they get kicked around a lot in analyses of B2B information services companies – everyone wants to be at the top of the pyramid. But the neatness of the graphic hides the difficulties of growing businesses to that height: there are some hard problems in managing product development and sales at that level, and there’s an interesting question around how to build a business that can solve those problems.

The Value Pyramid

This is a value model for the information service industry. It was part of the official corporate strategy of the Thomson Corporation (as was) through the second half of the last decade, and versions of the diagram appeared in their annual Factbook; the one above is from “Business Model”, p5 of the 2008 edition. It’s a nice diagram, and is a good way to visualize the hierarchy of value in the sector – you can also see it as a value chain for the processing of information, from production through to consumption.

In 2009, the diagram was reused and put into a broader context by McKinsey in their report, “B2B Information Services: The Opportunity for Strategic Growth“: they adapted it as below, quantifying the value of each level of the pyramid (and also adding a new level “Community”, which I’m going to ignore in this post.)

Applicability of the model

This value model applies to anyone selling information – data, news, regulatory content, whatever – to other businesses. The value chain involved in collecting, processing and disseminating this information looks like this:

1. The base layer is concerned with collecting and distributing Content
2. This layer of content can be mediated by a Platform, whose purpose generally is (for content suppliers) to lower the cost of distribution or provide channel sales; (for consumers) to provide a convenient basis for accessing multiple content sets.
3. Productivity tools and solutions take content – often via a platform – and provide tailored solutions mapping to particular business tasks.

The example par excellence is Bloomberg, which makes an extremely good living selling financial data and associated services, at all levels of the pyramid. Or, drawing examples from Thomson-Reuters themselves, you can buy a Content-level product in WorldCheck – a database of risk information. You can also buy access to hundreds of training courses delivered on a Platform – Compliance Learning; and they will sell you productivity tools in Policy Manager, which will manage your entire organizations exposure to compliance risk.

It would be easy to read the model as a prescription for how you should build a data business: shoot for the top, where you’ll find all the high margin, high renewal clients. (In fact, a footnote in the McKinsey document notes that “Companies that are vertically integrated often have margins as high as 55 percent.” – i.e. if you can occupy multiple layers of the stack, it can be even more advantageous. Personally, I’m not convinced this is always a desirable/defensible position, but that’s a discussion for another blog post.)

However, bear in mind the original context of the model. In its initial incarnation, it was only aiming to describe Thomson’s own business model: as a strategy they wanted to focus on those of their businesses higher up the pyramid. In the McKinsey version, we’re looking through the lens of “strategic growth” – if you’re looking to buy an existing business, how should you pick the most valuable?

In both cases, the pyramid is being used as a tool to analyse existing businesses, and the prime value is in those which lie in the top segment. But as a tool applied to new business strategy, the model omits some key issues.

The difficulties of product development

Where do the high margins and renewal rates come from? If you’re at the top of the pyramid, you’re very hard to displace. Your clients are relying on you heavily as part of their business – your tools are embedded into their operations; indeed, their workflow may be accomplished directly within the context of your tools.

This is a much deeper integration point than merely pulling your content into an existing business process. It’s going to be hard for your clients to manage without you; it will take time to develop alternative processes: so they will need to renew every year. And when they renew, they are going to be very tolerant to price increases. Even for new clients, you’re in a better position: you can anchor the price more directly to the value your clients will gain from the productivity, whereas with content the price anchor tends to be closer to the cost of content acquisition.

However – for new businesses entering the sector, the story is very different. Firstly, the obverse of the happy picture for the incumbent is that if you are not in that position, you’re going to have a very hard job displacing whoever is. Your offering needs to be much more than a marginal improvement. Potential clients will need to change their operations: to get any traction, you may need to cast this as a strategic benefit to them, which is a much harder sale (with all the internal politics that entails).

Secondly, if you’re trying to sell productivity tools where there is not yet a market, you have an even bigger conundrum: you’re solving a problem your clients may not yet recognize – and you may not be right. Without direct experience across a number of potential clients, have you actually captured the problem well enough that your solution represents an improvement?

By contrast, a new business based around content sales is – relatively – easy to grow. As a pure content supplier, your key value is in how valuable (unique/actionable) your content is. You dictate very little about how and why your clients access and use the content; in terms of how product usage maps to your client’s internal organizations, you are fairly transparent, so there are more potential places to sell inside an organization. You can repurpose the product across multiple markets with little to no product-level modification, while you iterate to find your niche.

Successful strategies

Which is not to say that as a new business, you shouldn’t aim for the top – just don’t go in there blindly. There are two (or arguably three) key strategies that I think drive success in scaling the pyramid.

1. Start at the bottom & work your way up. Begin as a content sales organization and learn your market, then specialize around a particular vertical. This allows you to build up experience in your markets and your clients’ usecases; it lets you learn as an organization, build trust in your content/platform so that you make the relationships you need to get people in the door on your productivity tools. Practical Law (acquired by Thomson Reuters in 2013) is a classic example: they started off as a print magazine on the legal sector; now you can draft your legal documents within their software.
2. Or, if you’ve got a sufficiently dynamic product building process, you can go straight in the top: buy in content from elsewhere; work on top of a platform and iterate around your solution (and marketing, and pricing) until you get it right. This needs a very product-focussed organization, ready to learn. Mapflow (acquired by Lexis Nexis in 2013) is perhaps a good example of this; they sell to the insurance market, providing geo-visualization/analysis tools over any number of data sources.

The appropriate strategy probably depends on the type of organization doing the execution: Practical Law was founded by two ex-lawyers; the Mapflow principals came from a tech background.

The “arguable” third strategy is to start off by solving your own problems. If you deal all day with tax data, and along the way you create a tool that makes your life easier, then maybe you can generalize it to be useful to other people in other tax accountants. In principle (assuming you find yourself in this happy place), this gives you the best chance of success: you’ve got a known problem and your potential clients will trust that it genuinely solves the issue at hand.

The hard piece with this strategy (apart from the obvious issue that not everyone is in the right place to do this) is that organizations set up to be data consumers are not often set up to be data product vendors; not least because they may well regard whatever it is you are selling as a key competitive advantage – and the obvious clients for the new business are their competitors! However, it can work: Bloomberg itself might be an example – Michael Bloomberg had been designing financial information systems inside Salomon Brothers before he founded the company. Of course, his life was made easier since he had the organizational and financial independence granted by a $10m exit prior to starting his business.

Looking forwards

All of the three examples above are for relatively long-lived businesses. Bloomberg was founded in 1981, Practical Law was founded in 1990, and Mapflow in 1997. Will the same strategies apply to companies founded more recently? I suspect so, and my intuition tells me that strategy #2 is the one which we’ll see increasingly often as the industry progresses.

Software has made everything easier in the last couple of decades. Content acquisition/curation is much simpler, given the distribution possibilities opened up by the web, and this clearly helps strategy #1. But it’s always slower to start at the bottom and work up. I think a much more pertinent change is the extent to which product development has been made much cheaper and – crucially – much faster. This means that a type 2 strategy can have a much greater chance of success, and will get you straight in at the top of the pyramid.

However good the software, though, you can’t get away from the human factor: to scale the pyramid, you need to find the product that your clients want, and sell it to them. Regardless of your business strategy, the raw tactics of the product development/sales feedback loop are the critical piece of the implementation challenge: but I’ll leave that for another blog.