Case study: eHarmony

Concepts of a case study:
General to specifics.
The economic, strategic and business logic of the industry. What are the choice, pros, cons, trade off.

Intro

eHarmony: online dating site for marriage-minded individuals. It combines extensive relationship questionnaire, patented matching system and guided communication.
Information good of eHarmony: individual match.

Match: eHarmony biggest competitor.

I. Overall view of the industry

| Size | Information flow | interaction | activities (work, random encounters) | 3 | 1 | 3 | brokers (family, friends) | 2 | 2 | 1 | market (parties, bar, club) | 1 | 3 | 2 |

Interaction: how easy it is to get a relationship out of random encounters, friends etc.
Information flow: information you give about yourself and information you learn from the other.

From this table we can deduce that there is no perfect and best channel. Every channel has a significant disadvantange.
Hence there is a potential of overcoming these difficulties through online dating.
Companies have to add value and capture as much of this additional value as possible.

II. How much of that value can a company get?

For this we need to do an industrial analysis. How structurally attractive the industry is.

Suppliers and buyers are the same group of people. They are the customer supplying information/profiles.
They have a very strong power because they can go to another firm.
But the limit of their power is the price/time effort/network effect to subscribe to another online dating site.
The overall power lies with a customer because the price is not too expensive.

Substitutes: other way of finding a partner. This has a huge power.
Entry: some barriers to entry but the barriers are not very high. A lot of market power but not as much as others.
Competitors: degree of rivalry is quite high.

To conclude it is a bad industry to be in. It is not expected to have high profit margin. So you cannot survive by being the average firm.
Solutions:
* cost leadership * differentiation.

eHarmony is differentiating their product by looking at a particular market segment.

III. eHarmony differentiation strategy

Look industry at a whole, different positions of the firms and now only we look at what can be done next.

Differentiation strategy based on a market segment.
Generic strategy eHarmony is pursuing is differentiation.

Differentiators: * science * questionnaire/ algorithm: interpersonal suitability (how these two people get along with each other in the long term). Chemistry bases it on personal attractiveness. * Reject people that they believe are not serious for long term relationships. * Guided communication * Pricing: more expensive than competitors. Charge higher prices to signal that they have a better product.

Targeting a particular market niche: people looking for a serious long-term relationship and willing to invest in that.

Market segmentation is the key thing of the differentiators.

Do the differentiators make sense?
The 5 differentiators fit together. Science is based on matching people in the segment, therefore they have long questionnaires for long term, and reject people who are not in this market segment. Put obstacles to target the particular market segment.
Fast track is already a deviation from the strategy.

This differentiation is costly to make it different from the competitor.
Each individual tradeoff is costly.

How big the comparative advantage actually is?

Most important costs are advertising costs
The profit depends on the market size. How many subscribers

| Match | Yahoo | eHarmony | Revenue | $349 Million | $172.5 million | $ 190 million | Advertising | $145 Million | $ 17 million | $ 80 million | Profit | $204 Million | $155 million | $110 million | # subscribers | 1.3 Million | 900 000 | 600 000 | Profit/ Subscribers | $157 per year | $172 per year | $183 per year | Per month | $13.08 | $14.33 | $15.28 |

Profits are not that great for such a differentiation strategy.
Quantification shows that the business model is under severe threats.

What next?

4 options: * Defending eHarmony’s position as the leading matchmaking company in long term relationship. * Broadening the customer base to include more casual dates * New business based on either eHarmony’s research and development efforts * Rapid geographic extension

Two options: expansions geographic or with the development of new business area.
Two options: addressing the core business, defending the market segmentation or broadening, moving away from the market segment.
Defending the position and stopping rejecting customers contradict each other. If you stop rejecting customer you deviate from the original business model.

If you stop rejecting your consumer, you cannot expand geographically because you wont believe in your business model.
Particular focus is Chemistry.

All the options have to be seen in the light of the genetic strategy, which is differentiation, and take that options that make sense.