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You may have heard of Rosetta Stone, the pioneers who created the world’s first digital language learning software. I joined the company in 2017 when the company was struggling to keep up with the times. Well, it was basically still a perpetual software company.
Rosetta Stone
Most of the investment in the language business has focused on the language learning space for enterprises. This market is much smaller than the consumer, K-to-12, and children’s markets. The company had focused on this segment because they believed they would not be successful in the direct-to-consumer market. There was concern about Duolingo’s free product, which they feared would eat up all of the market share. So the strategy was largely defensive.
To set the context, the addressable market for language learning is about $50 billion a year. The penetration of this market by digital products is still single digits. There are many geographic differences and customer segments in the space, and you need to be very judicious to find your edge and market entry point.
Obviously we weren’t very good at B2B and it was a smaller addressable market. We did a top-down look at the company in about 90 days and determined that the consumer market, especially in the US, was a better place to start. We had also neglected one of our biggest advantages: the brand. Rosetta Stone has over 90 percent brand awareness in the US. Despite this, we weren’t focused on the consumer at all. The team also did a lot of customer research to make sure we validated our intuition as to what to focus on with the company.
The way we approached it was to not just look at the TAM (total addressable market) and SAM (serviceable addressable market). We also wanted to identify some competitive advantage – and the most important one was our brand. Once we got stuck in the US language learning market (which is about 20 percent of the total market, with single-digit digital penetration), we started looking at our market entry point. Our brand really stands for the gold standard in space (or is it cooler to say the “Bitcoin standard”?). We wanted to identify a consumer segment that resonated with our brand attributes as a premium and effective product.
Here’s how we split the market by psychographics. We looked at the North American language SAM and then did in-depth customer research that showed there was a subset of this market that was perfect for our offering. Within this segment (which we called the Expressives), we identified three sub-segments. Each had a different gender and personal bias, but all those segments raved about our premium offering (I won’t go into much detail about these segments – it’s pretty proprietary).
Let’s take a detour and give a little Strategy 101 overview from strategy guru, Michael Porter. In his book Competitive Advantage: Creating and Maintaining Superior PerformancePorter says that for a horizontal (mass market) product you have two possible strategies: a cheap horizontal strategy or a premium differentiated strategy. We chose the latter.
Those consumers we call Expressives are willing to pay for a premium brand experience. We found that in the US there were 65 million Expressives out of the 165 million people who were the right opportunity for us.
Because we have focused the strategy on creating a premium experience for our customers, our benchmark has never been subscriber count or unit count; it was the highest lifetime value (LTV) growing at or above the revenue share growth rate. I have handed over leadership of the unit to the cheap tiered competitor. There are free products like Duolingo that will naturally follow that strategy.
We can debate whether Amazon’s adage that “your margin is my chance” is correct, but personally I believe that a clearly differentiated strategy with a brand that is aligned (with the right positioning and pricing) can be a winning strategy and has been.
It’s about establishing how you’re targeting the market — not just the entire addressable market, but the portion of the market that’s usable. This allows you to differentiate between pricing and feature packaging and identify the right customer wants and needs for the specific market you are looking for.
For more advice on finding your comparative advantage, find Matt Hulett’s book Unlock on Amazon.
