Integrative Case Analysis – Competitive Strategy eHarmony Industry Structure and Value Creation/Capture
From times immemorial, with the possible exception of Adam and Eve (whose marriage was probably made in heaven anyway), finding a life partner on Earth has been a difficult task. Wars have been waged, monuments erected and kingdoms won and lost, in partner-acquisition endeavors. People have used numerous techniques, institutions, practices and systems over time to try to perfect the art of finding a partner that they could be happy with. Yet no system is universally accepted as a formula for success.
The Internet in the mid-to-late 1990’s offered the promise of making the partner search process more efficient, quicker (for some), less onerous, and less emotionally draining than other means. This led to the creation of a new Industry – the Online Personals Industry – which I would define as “a collection of online services built specifically to cater to the needs of those looking online for a relationship partner, whether for marriage or long-or-short-term companionship”. By leveraging the power of faster communication, access to a large number of candidates and intelligent learning systems to suggest possible matches, online personals sites had an opportunity to carve out a non-trivial share of the matchmaking or partner-finding “market”. Technology had the additional benefit of bringing together people from distant geographies (I have a Chinese-American friend who met his Ukrainian wife-to-be on a US personals site).
Structurally, the Industry had evolved by the turn of the century, to contain a few distinct segments, distinguished by the types of customers they served:
• services facilitating the long-term life partner search
• services catering to casual daters and non-committal exploratory relationships
• niche services targeting narrow segments along ethnic & social preferential lines
The other structural dimension was the revenue generating mechanism, i.e. subscription services and free-to-customer advertising-driven services. Looming large over the industry was the growth of new viral social networks that indirectly offered a place where people could size each other up, learn about each other and initiate contact.
A Five Forces Analysis of this industry (see Exhibit A) reveals that while there is rivalry, it is not a race to the bottom, and prices are sustainable. The industry is made up of a couple of oligopolistic dominant players and many marginal fringe players. Buyers (i.e. match-seeking customers) have moderate bargaining power as they have limited high-quality choices within their particular interest segment. Suppliers (i.e. software/hardware vendors, scientists, marketers) do not have bargaining power as there is plenty of competitive supply. Old and new substitutes, namely offline/traditional substitutes and social networks, are viable. The biggest challenge for the industry was to wean (and win) customers away from the substitutes. Barriers to entry are not particularly high, though barriers to sustainability are quite high.
The industry created value by making the process of finding a partner more convenient, streamlined, “scientific” (i.e. more predictive of a true fit), palatable, and emotionally less exacting. The industry certainly did not invent matchmaking, but it used the power of algorithms and psychological profiling to find and deliver matches that arguably had a better chance of success. The road to finding a partner using traditional methods was paved with much hit-or-miss anguish. The high-end of the online personals industry sought with some success to make this process less risky, more efficient, and less emotionally turbulent, and in doing so, created true value in terms of satisfaction.
However, capturing this value was another matter altogether. Although finding a life partner is often an all-consuming activity for those in the hunt, it is a problem of life, not an economic problem. The individual does not typically see this as a willingness-to-pay problem. Matchmaking, when done by a friend or relative, is done as a philanthropic act of friendship, not for money. For a 3rd party, an impersonal online one to boot, to perform this act for a fee, requires the “customer” to make a personal leap of faith that is not always natural or comfortable. And therein lies the problem of value capture in this industry. Although a successful match generated by the industry is arguably immensely valuable, worthy of lifelong gratitude and thanks, how many DOLLARS is it worth? Considering this dilemna, the industry actually did a reasonable job of monetizing some of the value it created. They overcame the slow growth of the early years (of stigma and poor match rates) by steadily improving their matching techniques. The fact that between 6 to 20% of all marriages in the US were facilitated by the industry, represented very real created value. This success begat sustainable prices and revenues that heped the industry reach $900 million of value captured in 2007.
For the leading incumbent oligopolists, such as eHarmony and Match, the industry was structurally attractive. For the fringe players, the industry was a tough place to survive and grow big. For new entrants, while the barriers to entry were low, particularly into one of innumerable niche opprortunities, it would take superior matchmaking methods and marketing to take market share away from the mainstream incumbents. The key factor to success was being able to generate a critical mass of successful matches that could then be leveraged with marketing. However, creating a substantial number of these matches required bringing enough users to the service, getting them to provide detailed personal information, and having the algorithms to predict probable matches. Overall, the industry had enormous room for growth, and those with superior matchmaking models and ability to convert customers from tire-kickers to payers had much to gain.

eHarmony Strategy and Commitments I would describe eHarmony’s objective as generating profits by enabling motivated and serious mate-seekers find their life partners, through the use of scientific methods to predict successful long-term compatibility. Their strategy was to build a position of strength around delivering the highest rate of successful matches possible for singles seeking long term relationships. In pursuit of this strategy they made a commitment to limiting the scope of their firm to singles seeking long term relationships. Their process was self-selecting in that people that were not dedicated to the search tended to drop off during the arduous first phase of the process. Further, eHarmony rejected nearly 20% of potential subscribers for not fitting the profile of the single person seeking a long term relationship. This was another commitment aimed at increasing longer-term compatibility matches. Their tactics were internally and externally coherent in that the overarching focus throughout was to maximize the chances of a successful match, and fill the funnel with candidates likely to find a match. They made a strong commitment to R & D, setting up labs, scientists, research projects and extensive studies to carefully refine their selection and matching process. The resulting tightly integrated three-phase process for qualification, matching and guided communciation, was unique in the industry in terms of its effectiveness. They also made a commitment by investing in a patent. Their marketing and advertising campaigns served as an outward extension of their selective funnel, delivering a candidate pool three times as likely to convert to a paying customer as compared to the industry average. They also made a commitment to cost-conscious, and effective advertising with high ROI, eschewing brand marketing expenses and focusing instead on direct-response campaigns. They also made a commitment to not serve the same-sex market as the profitability and matchmaking dynamics of that sector were unclear. Thus eHarmony’s strategy was bolstered by a series of commitments they made, that made their system unique and superior, and that avoided situations that would dilute their success rate. This helped them establish a relatively lonely place on the strategy frontier, as a high-cost high-value provider of focused and quality services in their industry. They dominated the long-term relationship-seeker market with the highest conversion rates (3x) and match rates (2% of all weddings) in the industry, and as a result, were able to command a premium significantly higher (2x) than their competitors.

Sustainable Advantage eHarmony had a distinct advantage in the industry, owing to a number of factors:
• The ability to charge twice as much as other online personal sites yielded higher margins and cash flows
• 2% of US marriages were the result of eHarmony matches. This gave them an enormous power of word-of-mouth, positive references and testimonials. Furthermore, this metric had grown over 200% over the period of 2004 to 2007, showing that eHarmony was gaining strength over competitors in the marketplace
• They had a registered-user-to-paying-subscriber conversion rate that was 3 times the industry average. This meant that their cost of customer acquisition was an advantage.
• They had mastered the low-cost direct-response marketing channel. This allowed them to do more marketing per dollar spent as compared with their competitors.
• Their three-step process meant that customers generally spent a longer time in the funnel (3 to 5 months) and this meant greater subscription revenues.
• The company also had a sustainable advantage in terms of R & D capability. This one is hard to quantify but clearly eHarmony’s R & D capabilities were a contributing factor in their more effective match making process.
• Above all, eHarmony comes across as an operationally and strategically very tightly integrated and aligned firm in its internal processes and external position, as demonstrated in the Strategy section above. All its resources and activities appear well-aligned with the overarching strategy of high-quality matches. This alignment in my view is a key indicator of an organization’s ability to defend its position in the marketplace and grow its advantage.
The sustainability of these advantages appears strong. Note that by sustainable advantage I do not mean an automatic and persistent irreversible advantage into the future. I mean that eHarmony appears reasonably well-positioned to defend its leadership position.
The absence of financial data on eHarmony and to a lesser extent Match and others makes it hard to quantify the extent of the advantage in financial terms and also precludes any observation of financial trends. But it is reasonable to assume that the main costs that eHarmony will incur in growing, are technology, marketing and some people costs, and these do not seem like they will balloon to such an extent in the future as to threaten the sustainability of eHarmony’s advantage.
Options analysis and Recommendation
Option 1 of trying to rapidly expand the customer base potentially by encouraging greater Fast Track communication or relaxing the stringent membershup criteria appears inordinately risky. The risk is that eHarmony would dilute or bypass its core process so much that ultimately match rates and quality (which are the cornerstone of the company’s success) will suffer and that can spell trouble for the company. Of course, the upside is greater revenues and market share, and potentially thwarting Match and the like.
Option 2 of extending downmarket into the casual dater and medium term relationship market again has the risk of diluting the core message that eHarmony stands for. At the same time that Match is trying to move upmarket with its Chemistry service, if eHarmony were to try to move downmarket, it might erode whatever distinguishes eHarmony in customers’ minds. The two companies start to look very similar at that point. This will then threaten core revenues at eHarmony. Hence I would eliminate this option.
Option 3 of investing in R & D in a variety of ancillary areas to power ad-based sites is very open-ended with no assurance or timeline for success. While R & D is a key differentiator for eHarmony, relying on research in new areas outside the company’s core areas of expertise would be a high-risk gambit in the short-term though potentially a game-changer long-term. Option 4 seems very attractive. Although the eHarmony model is not readily applicable in Asian and African cultures, it certainly has broad applicability in the Western hemisphere, particularly in English-speaking countries. In fact, this is “low hanging fruit”, and could be lost if Match moves in quickly into these areas. While international expansion is an expensive proposition for brick and mortar companies, for eHarmony costs would be relatively low and with some fine tuning of their marketing messaging and applicant filtering/matching, they could launch quite quickly in other English-speaking countries.
All in all, I would recommend that Greg Waldorf adopt a mix of Option 4 and Option 3. In other words, eHarmony should aggressively expand internationally and grab global market share, starting with English-speaking countries. At the same time, they should step up R & D investments in ancillary areas so as to increase the likelihood that they can launch new businesses in the coming years. The international expansion would address the short-term competitive threats from Match and establish new growth areas, while the R&D investments will plant the seeds for long term expansion into adjacent industries globally in a few years. With their existing investments in R & D, they have a better chance of extracting ROI from new R & D investments than competitors. International expansion will generate positive cash flows quickly and help offset some of the increased R & D spending. EXHIBIT A: Five Forces Analysis of Online Personals Industry