Mind the Gap
A true economist, the joke goes, would never bother to pick up a $10 bill on the sidewalk because in an efficient market, instant, riskless profit is impossible. Of course, markets are far from efficient, and an entrepreneur would not only scoop up the sawbuck but also scheme about where to find more. Startup companies are ventures whose entire existence is based on exploiting a gap in the market-an inefficiency that existing companies have failed to identify and pursue for profit. Potential investors attempt to assess the size (or even existence) of a startup’s designated gap and whether the company is truly poised to take advantage of it.
I recently ran across a fascinating case of attacking such a gap in London, England-based SwapitShop, an enterprise dedicated to creating a universal currency for children. As Jonathan Attwood, SwapitShop’s CEO, explains, children have tremendous economic influence via their parents, who purchase endless quantities of toys, food, and entertainment on their behalf. Yet kids themselves generally have very little ready cash. Guiding their economic influence is big business, and marketeers constantly strive to “incent” (i.e., bribe) kids to demand the games, TV programs, and sugary snacks that they sell.
Attwood finds huge inefficiencies-and hence opportunities-in the ways that these incentives are currently meted out. Inserting a Spider-Man figure in every box of Frosted Flakes costs millions, he explains, and of course many children may not like Spider-Man, or action figures at all. His solution: give kids Swapits, a virtual currency redeemable for merchandise on the SwapitShop Web site. Swapits are distributed as coded numbers printed on coupons or product packages. Printing 100 Swapits on the inside flap of a cereal box costs next to nothing, says Attwood, and kids can get things they actually want.
SwapitShop profits from these transactions by selling its currency to, say, a cereal company, typically for a few tenths of a penny per Swapit. SwapitShop then spends about one-third of its take on new merchandise, ensuring a broad range of gettable goodies and preventing Swapit currency devaluation. The remaining two-thirds is gross profit-not a bad ratio at all!
The site began with another idea, though, that it continues to promote. Kids can also obtain Swapits by auctioning off toys, CDs, Pokmon cards, and other closet clutter to obtain something more desirable: hence the “swap” moniker. Children post descriptions of items for auction on SwapitShop’s site. When a bidder has won an item, the seller mails it to SwapitShop, which forwards it to the buyer. Sellers, meanwhile, redeem their Swapits for new or auctioned items on the Web site.
Taking a commission on auctioned items, as eBay does, isn’t particularly useful to SwapitShop, since Swapits aren’t worth anything outside the company’s own Web site. However, Attwood and his founding partner, Emily Elton, realized that the outflow of parcels from redeemed Swapits has made them one of the United Kingdom’s largest direct mailers to children. Now every package carries coupons and other marketing literature along with the purchased item. Attwood claims that the revenue from direct marketing covers the cost of processing the merchandise in the first place-plus a small profit margin.
|Elevator Pitch||Monetize the economic influence of children worldwide|
|Future Vision||“Swapits” will become a fungible kids’ currency|
|CEO’s Insomnia||Running out of money before building a critical mass of end users|
|Leg Up||Strong brand recognition in the U.K.; solid, well-known customers|
Attwood and Elton excel at squeezing every pound of profit from what began as the simple idea of swapping old toys. In addition to the sales of Swapits to consumer products makers and the fledgling direct-marketing business, they’ve created a division to survey and test-market third-party products to SwapitShop kids, obtaining valuable market data from a group that is traditionally difficult to reach. SwapitShop charges anywhere from several hundred to tens of thousands of pounds for these services, but the participants are paid, of course, in Swapits.
The duo’s obsessive pursuit of efficiency and profit has enabled the company to survive a grueling economy with minimal cash infusions. To date it’s raised less than $750,000 from angel investors and is squeaking by at more or less breakeven with five full-time employees. Nonetheless, it’s managed to expand its user base to more than 100,000 children and boasts Disney, Vivendi, Sainsbury’s, Nestl, and the U.K. government as paying customers.
Although now operating solely in the United Kingdom, SwapitShop has major ambitions for its currency. Attwood foresees Swapit cards that operate like debit cards, redeemable for discounts or merchandise in participating stores around the world. He pictures Swapits as gifts, allowances, and homework incentives-a universal motivator for kids.
Ultimately, the Swapit currency may become the mechanism for monetizing the economic influence of children. That’s a market gap that may be worth a fortune to the companies that can successfully exploit it, and to the investors lucky enough to pick a winner. Then again, the gap, like the economist’s ten-spot, may be just an illusion.
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