Hi friends,

Over the last ten years, hundreds of businesses have created online therapy platforms.

They’ve attracted billions in funding and many have grown into large businesses, hiring tens of thousands of therapists, landing huge contracts and providing care to millions of people.

In 2024, it’s now a very competitive market.

Large platforms are desperately pursuing profitability (to either IPO or satisfy shareholders if they are already public). Smaller platforms are sprouting up everywhere, focusing on different niches, with slightly different approaches and value propositions.

Amidst all this, many therapists are pushing back against this rise of therapy platforms, demanding higher pay and improved working conditions and the promise of new technology looms as both a threat and opportunity.

The execs at these businesses have a lot to think about.

So how is this going to play out? Is this a winner takes all market? And how should leaders of these platforms think about their options?

That’s what we get into in today’s post.

We’ll cover;

• Winner takes all? Understanding if this is a winner takes all market.

• Win Within: the strategic priorities for winning in a fragmented market

• Break Free: an alternative strategy for businesses who don’t want to compete in a crowded therapy platform market

Winner takes all?

As the wonderful Abba song goes…

Some of the most successful businesses the world has seen were built in winner takes all markets.

Google dominates the search engine market. Airbnb controls the majority of the short-term rental market and Spotify owns music streaming.

While these companies can take responsibility for winning in these markets, the important thing to note is that the dynamics of these markets meant that they would always tend towards a single winner.

Many years ago, I was interviewing for a role at a VC firm. I was pitching a potential investment to them and the Partner of the firm asked me a question;

“is this a winner takes all market?”

It’s one of the most important questions to ask when thinking about a market and I for any business I work with or analyse, I ask myself this question. Why? Because that determines your strategic options.

So, for the mental health platforms, will it be a winner-takes-all market?

In short, no.

A winner takes all market typically displays three fundamental criteria;

1. It has network effects

2. It has economies of scale

3. Switching costs are high

The mental health platform market has none of these.

Network effects

Network effects occur when the value of a product to a user is increased by the use of the product by other users.

Bill Gurley defines this well for marketplaces;

When a market has the potential for network effects, a company that develops that power, will accelerate past their competitors and claim an insurmountable position as market leader. As they get more users, the value to each user goes up, allowing them to attract even more users.

As the total value of the product goes up, they can raise prices. They can do this because (a) it’s justified by the higher value their product delivers and (b) competitors cannot compete with them.

Any competitor with lower user numbers (and therefore a less valuable product) who wants to compete, will have to spend a significant amount to try and do so. Most of the time, that cost is just too high. I mean think about, even massive companies like Google wanted to build a social network (remember Google +), but even with all their capital and talent, they couldn’t compete with Meta.

Anyway, none of this really matters because there are no network effects in the therapy platform market.

Clients don’t benefit from other clients using the platform.

And providers don’t benefit from other providers using the platform.

You could argue that there is a small amount of cross-market network effects - clients benefit from having more providers on the market and vice versa, but this is limited and likely more a step function as opposed to linear or exponential.

As a client, do I really care if your platform has 100 therapists or 10,000? No. As long as you have one available to see me, that’s all I care about.

Scale economies

Size matters. We can define scale economies as “the quality of declining unit costs with business size”.

If your market benefits from scale economies, and you are a big player, you can deliver your product or service at lower costs than anyone else.

How you choose to use that power is up to you. You can grow market share by pricing low and driving volume, squeezing out smaller competitors. Or you can maintain prices and benefit from your increased margin.

Either way, the power lies with the largest player and they use that power to further entrench their position and beat out competitors. Over time, this leads to a single company (or a very small number) owning the market.

Netflix benefited from this in the entertainment market. As they grew, they used their size to invest significantly in content. They could spend a bunch of money on this content because when it’s split across their large user base, it still resulted in lower content costs per subscriber than competitors. They were making a better product at lower unit costs than competitors - a recipe for winning if ever I’ve seen one. In fact, in their earlier days when Headspace was still a meditation app, the same thing was true for them.

This is not the case in the mental health platform market however. There are hardly any benefits to scale. The reason for this is that the atomic unit of product in this market is a therapy session. This therapy session is (obviously) delivered by a therapist who has a certain hourly rate with a hard floor.

If you get big and want to drop the price you pay your therapists, therapists will start leaving you. Many of the bigger folks are trying this right now and this is what is happening. They are losing providers or having to hire therapists with less experience and therefore potentially lower quality.

What about other costs? Like marketing and sales, technology costs and other centralised expenses? If you reach significant scale, wouldn’t the costs of those start to lower on a per client basis?

In theory, yes. The challenge is that in reality, that doesn’t seem to be happening in this market - larger platforms are still have significant opex expenses with limited reductions on a cost per client basis.

We also must recognise that the majority of the expense of a therapy platform business lies in the labour expense of paying therapists. So if you’re not reducing that at scale, you’re limited in the impact you can make on overall costs.

Here’s some data I’d love to see…

The cost to treat one single client by a therapist in private practice vs the fully loaded cost of treating that same patient through a mental health platform business.

If you have it, please let me know, but my hypothesis is that it’s not significantly lower (and may even be higher) proving the lack of scale economies in this market.

Switching costs

I kinda hate switching costs. They just feel like a tax imposed by big companies with bad products, allowing them to continue making money because it would be such a pain to change.

But whether I like them or not doesn’t really matter. If a market has high switching costs, it can tend towards a winner takes all scenario.

Again, switching costs in the therapy platform market are low.

Clients can easily find another provider.

Providers can easily find another platform. In fact, they often work for several at a time!

And the same is true for payers. If I am an insurer or government payer, it’s not hard for me to switch the therapy platform provider I use. Knowing that allows me to shop around and drive platform prices down.

Switching costs are less important than network effects and scale economies in determining if a market will be winner takes all. Either way, it’s worth recognising that they don’t really exist.

I’m not sure people fully realise that this is not a winner takes all market.

I was reading Andreesen Horowitz’s post about why they invested in Talkiatry (admittedly a slightly different business to therapy platform businesses) and this is what they said:

I think that logic is pretty loose.

“We get better, which means we get more customers, which means we get better?”.

I’m not saying Talkiatry isn’t a great business and frankly, the folks at Andreesen are definitely smarter than me, but I just don’t see how there are compounding benefits to scale for such a business.

I think founders should be really honest with themselves on this topic. Yes, everyone wants to pitch flywheels and network effects to investors, but are they really there?? Your strategy depends on the answer so you better be damn sure about what you say.

Realise that this is not a winner takes all market, that you probably don’t have any real network effects or scale economies. It’s OK, you can still win, but only if you’re honest with yourself about they type of market you’re in and strategic assets you hold.

There is one important caveat to all of this however. This analysis is based on a relatively static view of the market.

While it’s unlikely that the fundamentals of the market shift dramatically in the near future, it’s of course possible. And if they do, it would create a different set of circumstances.

For example, if all of mental health moved to Value Based Care contracts, what would that mean? Would there suddenly be huge advantages to scale? Regulation in the mental health therapy market is comparatively low to the rest of healthcare, what would it mean if that changed?

I don’t know if these things will happen and would have to think more about what their effects would be. But the important thing to take away is that we must recognise markets are dynamic, not static and pay close attention to any shifts in their fundamentals and how that might impact the markets future and our strategy within it.

For now however, we know that this will not be a winner take all market.

So what will it be? And what will it take to win?

Fragmentation and Specialisation

Currently, the mental health therapy market is fragmented and specialised. It’s likely to stay this way. This means that there will be multiple winners.

Not only do the fundaments of the market not support a winner takes all approach, but they actively create fragmentation and specialisation.

Each individuals mental health issues are highly diverse, as are the range of potential treatments. Payers are fragmented across and within categories (Government vs Insurers vs Employers vs Self-Pay) and all of them care about slightly different things. There is also significant geographic variation, not only from a regulatory perspective but with relation to cultural attitudes and preferences.

Let’s think about how this plays out in reality.

Say a big deal for therapy services for a large retail business in Texas goes out to tender. If I run a therapy platform that recruits Spanish speaking therapists and focuses specifically on selling to employers to help them minimise absenteeism and maximise employee productivity, I’m pretty likely to win that deal. You can see how hard it would for a more general therapy provider based out of New York to compete here.

It’s extremely hard for any single platform to succeed in all the different categories of mental health and therefore the market tends towards fragmentation and specialisation.

So what do you do in such a market?

I think you have two options; “Win Within” or “Break Free”.

Win Within

OK, what’s this about? Essentially, it’s the strategy for winning within the existing mental health therapy market that you’re already playing in. You accept that it’s not a winner takes all market and aim to develop a business that can own a sub section of the market. It’s the strategy pursued by most therapy platforms right now - for example, Spring Health have clearly set their eyes on owning the Employer market.

So what do you need to do to win with this strategy?

1. Find your niche

Being a “Jack of all trades, master of none” is a losing strategy here. You need to define your niche and develop specialisation within it. This niche could be defined across multiple dimensions; population, indication, intervention, geography or payer type. The important thing is that you have clearly defined what segments you are pursuing and then align your investment accordingly so that you can build defensible assets and leverage in that space.

2. Be realistic about your potential for scale

Niches get riches. But those riches may be smaller than what your investors desire… Niches don’t have to be small markets - the niche of anxiety treatment for teens is still a huge market (unfortunately).

But by definition, they are going to be smaller than whatever you put on the TAM slide of your pitch deck that shows the entire therapy market.

That’s OK. Better to be a big fish in a small pond. But you need to be realistic about the size of that pond and more importantly, make sure your investors are aligned with you.

For some, that ship may have already sailed - they have existing investors demanding a level growth that cannot be sustained by a certain niche. That’s a tough situation. You’re only options here are to try and sequentially dominate multiple niches or… follow the “Break Free” strategy which I discuss below.

3. Increase the value created by your platform

Bill Gurley has a great quote about marketplaces;

“Great marketplaces do not simply aggregate a market; they enhance it.” 

What is your platform doing to significantly enhance the therapy market? Both for clients and therapists?

Airbnb didn’t just aggregate the short term rental market, it increased trust for both guests and hosts through reviews, made booking and payment easier and improved discoverability. Perhaps most importantly, it allowed guests to have entirely new experiences that they couldn’t have before - they expanded the market far beyond what was available in short term rentals before they existed.

Gurley talks about how the real estate platform Zillow provides homebuyers with data that was historically kept in proprietary systems. Another small example is how DoorDash takes away the frustration of not knowing when you’re food will arrive by allowing you to track your food in real time.

I am not saying that therapy platforms should try to be like Airbnb, DoorDash or Zillow. There is much more at stake here and platforms need to be extremely considerate of that.

But, the point remains, how are you using your platform to create real, incremental value for clients, therapists and payers?

4. Solve the platform-provider problem

If you’re pursuing this strategy, you need to be able to recruit and retain therapists at scale. I am quite concerned about the current trajectory of the relationship between platforms and providers.

I wrote about it here and feel like it’s heading in a direction that is good for neither party. Again, the atomic unit of your service is a therapy session, so you have to think about how, over the long term, you have good relationships with therapists that allow you to scale your service and provide high quality care at a price that sustains your business.

Resilience Lab are one of the few businesses taking an innovative approach to this, actually investing in training their own therapists using their own clinical methodology.

5. Differentiate on quality

For the last few years, mental health has been all about access. How do we get people access to treatment? This is the pitch therapy platforms have played into but it’s losing it’s allure. Every platform can now claim to offer access to a network of therapists.

The bigger problem, is quality of care.

Talk therapy still has a lot of room to improve outcomes for clients and as payers spend more and more on these services each year, they will increasingly ask about such outcomes and the quality of care being delivered. Yes, every platform will mention quality in some respect, but it unfortunately has not yet become a strategic necessity. If more payers adopt value based contracts, this will become even more important.

6. Develop process power

There’s a very unsexy lever to pull here. And it’s called process power - a term I stole from Hamilton Hemler.

Hemler defines process power as; “the ability to improve product attributes and/or lower costs as a result of process improvements embedded within the organisation"

An example he gives is of how Toyota implemented the “Toyota Production System” which became embedded in their business, regardless of who was actually working there, and allowed them to consistently increase quality and reduce costs over many decades.

Essentially, are you an operational powerhouse? Can you build processes into your business (whether in how you recruit and manage therapists, build product or acquire payers) that is significantly better than your competitors.

This is a powerful strategic asset because it is hard to replicate.

I think of the consulting industry, perhaps one of the most competitive and fragmented markets in the world, and yet my old employer, McKinsey, has a process power that allows it to attract, train and retain top quality talent every single year. Think of how hard it would be to start a company that competes with McKinsey…

Break free

Continuing the trend of referencing the music my parents listened to when I was growing up…

“I want to break free, I want to break freeeee”

Take a big step back. If your goal is to improve population mental health and build a successful business while doing so, there are some real, limiting factors with a model focused solely on delivering talk therapy to clients.

Of course, talk therapy is a good treatment. It’s incredibly well researched with a tonne of evidence behind its ability to deliver positive outcomes. And in the real world, it has helped millions of people get over their mental health challenges - this author included!

But let’s be honest, it has significant drawbacks. It doesn’t always work. Not everyone responds to it and many people drop out of treatment before they can see the benefits. It’s expensive and it’s hard to scale - because you need highly trained professionals to deliver it synchronously with a client.

Yes, it’s often the best option we have, but I often wonder if we will look back in twenty years and wonder how we ever tried to treat mental illness with talk therapy as our biggest tool.

For as long as I’ve been studying mental health, I’ve wanted the industry to be bolder, to really consider what the future of mental healthcare could like and make big bets on creating that future.

There’s a real opportunity here for a therapy platform to do this.

To leverage their talent, technology, data, capital and position in the market to “Break Free” from the therapy platform market and build something truly bold.

Something that could truly move the needle for patients, and create a massively valuable business at the same time.

To succeed with this strategy, you need to think about three things;

1. How to change the atomic unit of care

If your atomic unit of care is always a human delivered therapy session, then you are still in the therapy platform market and will be subject to the forces of the market. This is really hard to do, but your only chance of doing it is to first start it as your ambition.

2. Can you create a new market

One of the most interesting things about Calm and Headspace was that they created a whole new market - people who wanted meditation and mindfulness on their phone.

What new market is yet to be created in mental health? What need to people have that is not being served?

To me, that’s a fascinating question and for businesses who want to “Break Free” from the therapy market and its constraints, this is the question they need to be asking every day.

3. Can you develop network and scale effects

Network and scale effects are sexy. Every founder wants them, very few have them. And more importantly, you cannot force them. If your market and business does not have the fundamentals that allow network effects and scale economies to exist, you cannot simply create them. I’ve seen a lot of companies waste time and money trying to do so.

What you can do is;

• Choose markets and products that have the fundamentals to allow these effects to occur

• Keep a keen eye on if you are starting to experience these effects

• If you do experience them, do everything you can to enhance them

These effects are not necessary conditions for success, but they are extremely helpful.

The “Break Free” strategy gives you the opportunity to search for a market and product that can facilitate network and scale effects. Don’t waste that opportunity.

I can see some platforms trying to pursue this “Break Free” strategy. Many of the larger therapy platforms are investing in the development of software products to either augment talk therapy or offer an entirely different mode of treatment (from AI chatbots to Digital Therapeutics).

So far, however, success has been limited. No-one has really been able to create a product other than therapy that is both delivering outcomes and operating at true scale.

The challenge is that some of the larger businesses are attempting to pursue both strategies simultaneously, trying to 'Win Within' while also aiming to 'Break Free'."

That’s hard.

Capital and talent will be always be allocated to the strategy that generates revenue today (the therapy platform), especially as these businesses get closer to IPO and profitability becomes increasingly important.

How do you successfully pursue a “Break Free” strategy whilst keeping revenue flowing through your therapy platform, that’s a topic for another post and frankly, will require a bit more thinking...

These platforms are all an important junction in their journey.

They’ve done a huge amount of work to get to where they are today, but to deliver the impact and business value they all aspire to, they will need to be very thoughtful about their strategy over the next few years.

That’s all for this week.

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Keep fighting the good fight!

Steve

Founder of The Hemingway Group

P.S. feel free to connect with me on LinkedIn

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