Ever wonder how Facebook decides who to acquire? Here is my satirical take on the decision tool that they just might be using. My estimations of company valuations and company personalities are tongue in cheek so please don’t take any of this too seriously.
Click ‘Play’ to see if you can improve Facebook’s market cap.
This is my first HTML5/WebGL app using the Construct 2 game engine and I’m definitely encountering bugs. It works with some browsers, but not universally, and does not seem to work at all on touch devices like iPads. Apologies if it doesn’t work for you; IE9 and Safari seem to work well. The game is all posted on the Scirra Arcade and may work better there.
It’s easy to misunderstand Google’s strategy. A lot of people look at Google and think “They already dominate Search so now they will diversify”. This seems reasonable. This is what most companies do after dominating an area. However, Google is not like most companies.
Google spends most of its $3.8 Billion Research & Development budget on Search. That tells you Google is still focusing on its core, not on diversification. Nicholas Carr in The Shallows clearly outlines Google’s strategy: Google’s money is in search and its strategy is to make all complementary products cheap. If you are selling mustard, you benefit from cheap hot dogs. If you are selling tires, then you benefit from cheap cars. Google wants everything complementary to Google Search to be cheap. What is complementary to Google Search? The Internet. The cheaper the Internet the better for Google. That means cheap content, cheap operating systems, cheap devices and cheap access. Google doesn’t care if its side businesses lose money as long as they increase the amount of content and access. It doesn’t matter if YouTube loses money, it just needs to generate content and demand for that content.
Enter Android. Google doesn’t need Android to make money. It just needs Android to increase access to the Internet. Purchasing (or renting) an operating system and a device are still a prerequisite for accessing the Internet. Providing a cheap OS will decrease the cost of entry. A cheap operating system will mean more devices (like phones) and more people Googling the Internet.
While Google doesn’t need Android to turn a profit, Apple does need to make money from the iPhone. Apple is up against the scariest competitor that any business can have: one that doesn’t need to make money from the product you are competing against.
Apple successfully introduced the Mac, the first microcomputer with a rich graphical interface, only to lose the market to an inexpensively priced copy cat: the Windows and Intel PC. History is about to repeat itself when Apple’s iPhone, the first smartphone with a truly rich interface, loses the market to the Google Android.
Will this create an anti-trust problem for Google? Underpricing Android for the sake of Google Search may be considered an anti-competitive practice. However the U.S. Department of Justice is unlikely to intervene in a situation that benefits the consumer.
The movie Invictus intertwines three great stories: the triumph of human rights and democracy in South Africa, Nelson Mandela’s personal journey, and the turn around story of a rugby team. Three great themes; two great actors, Morgan Freeman and Matt Damon; and directed by Clint Eastwood. However, there was a nagging feeling that it wasn’t as good a movie as it should have been. Despite the nobility of the story and the strength of the execution the movie is simply good, not great. Actually, there seems to be disagreement on this point as many people feel it was an awesome move, but not all. So what may have been missing?
Conflict. There were no bad guys. That was the point of course. Mandela embraced his former enemies. Several times in the movie a potential villain emerged (e.g. the former South African security police) and yet Mandela conquered by embracing them, and so any conflict was fleeting. The moral of course is that we must get past our differences, understand our enemy and by doing so unite. All this peace and harmony is definitely noble but perhaps less entertaining.
Susan Scott in her book Fierce Conversations points out that many business meetings are boring because of a lack of conflict. Her point is complementary to that of Invictus. Scott means that too many business meetings avoid confronting real issues, skirt decision-making, and are of little value because people are unwilling to address the deeper issues that may fuel conflict.
Our fear of having fierce, crucial and courageous conversations paradoxically results in a more hostile work environment (and often home environment). Out of fear, politeness or deference we avoid directly addressing issues, and then demonize others by making assumptions about what they believe. People quickly become caricatured objects and the work place becomes a grinding machine rather than a team of people. There are two great books on this topic by the Arbinger Institute: Leadership and Self-Deception: Getting Out of the Box and The Anatomy of Peace: Resolving the Heart of Conflict. These books are written as novels and so are more entertaining than other similar books (and yes, they contain lots of conflict).
Mandela succeeded because he was unafraid of conflict and sought to resolve it by understanding and eventually embracing his adversaries. The political lesson is obvious. There is also a lesson for the work place. Almost everyone starts a new job with dreams and aspirations. All too often these fade and work becomes a grind. Both Mandela and the Arbinger books would tell us that to succeed we need to understand each other as people, deal with issues head on, and the result will be a high performance team.
Clayton Christensen warned that being too focused on your existing customers can lead to a myopia of innovation. That’s true for the big dogs, but technology firms often suffer from the reverse problem; they need more focus on their customers. A passionate focus on your customer base will ensure that they are predisposed to purchasing your upgrades and later offerings.
Innovation cycles have shortened over time. Companies rise and dive like spinner dolphins. Early Internet companies in the 90s (PointCast was so cool!) came and went as quickly as did early PC companies in the 80s (remember Ashton-Tate?). If you are a leading wood products company today, there is a pretty good chance that you will be a leading wood products company in 20 years. If you are a leading technology technology company today, it’s a lot less likely that you will stay in the lead for long. Today Google and Facebook look like the way of the future but I’m willing to bet that both will be weathered and fading within 6 years, crumbling before upstarts who are not yet in existence. I’m not suggesting that they are fads, or weaker than their competitors; Google and Facebook are great firms. It is simply think that the clock speed for innovation has quickened. Improved collaboration, access to information, globalization, and an increasingly entrepreneurial culture have all contributed to this.
Innovations are the sparks that drive our economy and our civilization but individually they don’t last long. Each quickly fades as another bursts into life; usually in a very different place. The hubris of many young companies is that they believe their ability to innovate is a repeatable process. This belief was as strong within Hewlett Packard and Xerox 50 years ago as it is within today’s coolest start-ups. So what can a firm do to protect their business?
There are several ways to extend innovation; companies like GE and 3M provide possible models for this. However, I believe the easiest path to longevity is to focus on your customers. Deep customer engagement is key (yes, that’s pretty much my tag line). A company that is riding a wave of innovation can leverage it by creating deep customer relationships and a strong brand.
Customers who love and promote you will be early adopters for your next product and forgive your failures. On the consumer brand side Apple is a good example; Apple zealots are willing to spend premium money on 1.0 releases (iPad) and have been willing to quickly forget failures. We will see if the iPhones’ antenna problems are forgotten as quickly as the Apple Lisa.
If you are selling direct with account teams, then deep penetration of the customer is the best strategy; IBM and Oracle are good models for this. If you are selling to consumers online or through channels then establishing a strong brand is essential along the lines of Procter & Gamble and GE.
Innovation is how great firms start, but great customer relationships and branding are what enable them to endure.
A Customer Advisory Board is not a focus group, user group, or outside board. It is a select group of 6 – 12 customers who are invited in on a regular basis to work with the company as partners. A typical arrangement is to have the members commit to be on the board for at least 2 years. They meet quarterly for a full-day to participate in discussing the company’s operations, challenges and future plans. The format is usually a mix of presentations and discussions culminating in a social event.
The most important benefit to the company is the sense of ownership that the customers feel. They will quickly become your strongest promoters and evangelists. In almost every case the customer becomes an excellent reference, and more forgiving when problems do arise. Other benefits are the insights learned from the customers, and the executive relationships which are developed.
- Learn what your customers want and how the company is performing
- Learn information about the marketplace and the competition
- Create promoters – customers who will be your evangelists
- Early detection of broad based problems
For the customer the benefit is an increased understanding of their supplier including a behind the curtains look at their operation, exposure to other customers, and education on the industry. Being treated royally is also a nice perk.
- Opportunity to Influence your strategy
- Better access to senior management
- Better access to engineers and company experts
- Career advancement through networking
- Networking with other customers about industry issues
- Everyone likes to offer advice, especially when they are well treated
- Tangible benefits – company swag, corporate entertainment, etc.
A common unstated objection to having a Customer Advisory Board is fear. The idea of customers sharing problems with other customers is frightening to sales people. That is an understandable insecurity. If real it points to deeper problems in the company. In my experience customers involved in CABs quickly assume the viewpoint of the company, and constructively engage in problem solving. Moreover, they tend to be more forgiving of future problems as they increasingly identify with the company.
A more subtle objection is that of the Innovator’s Dilemma. Clayton M. Christensen put forward the idea that over focus on existing customers can blind companies from developing products for new markets. This is a legitimate concern. However, ignoring your existing customers is not what Christensen had in mind. In fact, his recommendation was to have a separate organization focus on the new market. I would recommend having separate CABs for both the existing and the new markets. For start-ups this can be more of a concern. It’s not uncommon for start-ups to over focus on the needs of their first customer and end up building out a product that is not usable by anyone else. One solution is to have more than one customer in the CAB. In fact, membership in the CAB can be used as a selling point in the early stage of growth.
A common question is ‘Should we have sales people in the room?’ The pragmatic response is ‘can we keep them out if we wanted to’. A more measured answer is: ‘it depends, but definitely there should be no hard selling or defensiveness’. Company attendees can vary throughout the day. Attendance by senior executives at some point is absolutely required. Cocktails or dinner afterward is a good opportunity to include sales personnel.
If you have experience with a Customer Advisory Board I’d be interested in hearing about it.
I’m often surprised at how some marketers still confuse the differences between marketing to consumers (B2C) versus marketing to businesses (B2B). This is especially true in startups. Consumer marketing concepts predominate and tend to bleed over onto B2B marketing. We can’t help it. We are all consumers, and even if we are professional marketers we are heavily influenced by consumer marketing techniques. Most introductory marketing texts ignore or marginalize B2B marketing. B2C marketing gets the limelight because that’s where the media spend is, and media spend is what drives the media and most agencies.
I recall a situation where we were trying to create a marketing strategy for a startup chip manufacturer. If the client captured even three industrial customers in the first year they would be very successful. Our lead marketing strategist insisted that the right approach was to create broad brand awareness. This shotgun approach would have been very expensive for the client. The strategist based her argument on the ‘Intel Inside’ campaign. This is a popular case study because of its spectacular success and its uniqueness. However it is unique and not broadly applicable. Intel had a real competitive problem with AMD where hundreds of billions of dollars were at stake. It was also credible that PC buyers would care about the chip inside their box. Most importantly, Intel could afford to risk hundreds of millions of dollars on the campaign. Very few B2B firms can capture that type of value, or afford to risk such a shot gun approach.
So how is B2B different than B2C? The salient characteristics of a B2B business are: 1) a direct sales force, 2) higher dollar volumes per customer, and 3) a high consideration product. There are a lot of gray zone businesses. Anything in retail is really a consumer brand even if they are selling to businesses, e.g. Home Depot; Large banks and software firms typically market to both consumers and businesses.
Within B2B companies the sales department typically dominates the marketing department since every customer has an Account Manager and success isn’t measured by market share but by sales forecasts and sales quotas. Consumer companies also have Sales or Account Managers, but they are really channel managers since they work with distributors and not end customers. As a result of this marketing typically reports up to the VP of Sales in B2B companies, and the marketers are continually trying to prove themselves.
Despite the marketing differences between B2B and B2C, they are rapidly converging. Once upon a time consumer firms were not expected to have much of a relationship with their customers. That is becoming less true every day. Peppers and Rogers’ 1:1 marketing ideas began this trend in the 90s and technology is making it a reality. Some examples are customer mailing databases (with value not spam), customer relationship management (CRM/XRM) systems, enterprise marketing systems (EMS), Campaign Management Systems, business intelligence, and social media. The growing emphasis on Net Promoter Scores (NPS) underlines the growing importance of the individual customer. This overall trend is a move from shotgun marketing to customer engagement and loyalty.
In an upcoming set of posts I’m going to mention a few valuable and under-rated techniques for B2B marketing with an emphasis on startups.
The phrase ‘creative pricing’ instantly smells bad. The credit card companies’ new service fees cast marketers as evil, especially those in charge of pricing. This is unfortunate as well done creative pricing can help both consumers and sellers.
The credit card companies have reacted to new federal regulations by imposing a variety of new fees such as foreign exchange fees, inactivity fees, and reward redemption fees. The media has compared this to the airlines’ ‘unbundling’ of fees such as bag fees, change fees, meal fees and even lavatory fees. However, the airlines are hardly unique. For example, the car industry offers so many options that today the base price of a car barely covers the wheels. ‘Unbundling’ is just a nasty word for ‘customization’. After all, why should everyone have to pay for all the features when you only need a few? A lot of success in SAAS (Software As A Service) is really unbundling. You not only unbundle the features, but you get to unbundle the time commitment (renting versus leasing versus owning) and thereby unbundle the risk of a bad purchase decision. Unbundling or customization is the likely future of all products and services. However, this only means that the buyer needs to be smarter, and that the ethical marketer will have to offer a way for the customer to clearly compare products. Good marketers will also balance complexity with simple packages to ease buying decisions.
A great example of mutually beneficial creative pricing is the telephone industry in the early days. The phone companies never charged users for long distance calls that didn’t connect or went unanswered. This is despite the fact that the telephone companies incurred a very real cost which they owed to the other regional carrier even if the call went unanswered. The phone companies absorbed this cost. They realized that users would be less willing to make calls if they would have to pay for unsuccessful call attempts. This was particularly true in the early adoption days. In other words the carriers both simplified the pricing and took on the risk burden themselves. They easily covered the cost of that risk by increasing the fee for successfully completed calls.
There exists a popular moral belief that pricing should simply be cost plus; in other words a company should only charge a reasonable (i.e. small) markup over the cost. This moral belief was actually debated in an episode of Star Trek: Deep Space Nine in a conversation between the entrepreneurial Ferengi and the melancholic Karemma. The first problem with the cost plus approach is that it doesn’t include the risk premium that a company takes in developing and offering a product or service. Pharmaceutical companies for example need to cover the developmental costs of all the drugs that never make it to market. When you buy a successful drug like Claritin you are actually paying for all the drugs that failed in development. The second problem with cost plus was illustrated in the long distance telephone example. Customers will pay extra to simplify the pricing; a simplification that often includes removing the risk, but sometimes just makes it easier to understand..
Can you imagine if airlines used a cost plus model? Since the per passenger cost of a flight would vary with the number of passengers on your plane, you would never know the base cost until the flight took off. If the flight was re-routed to a stop over city due to bad weather you would have to pay for the extra hops including landing fees. Headwinds, air traffic congestion and the daily price of fuel would all impact the flight cost. When you purchase an airline ticket you are really entering into a futures contract with the airline where a considerable amount of risk has been eliminated. If the airlines didn’t do this no one would ever buy a ticket.
The take away here is that product managers should realize that consumers are willing to pay a premium for both risk reduction and simple pricing. It’s unfortunate that the credit card companies are offering a counter example to this. They are adding complexity, and reducing trust at a time when their industry is very unpopular with the public. They should also consider whether car manufacturers and airlines are really the best industries to emulate.
Inventing ever more complex business models is the bread and butter of strategic consulting firms. Each model tries to view the business from an ever more novel perspective. The early ones such as Michael Porter’s 5 Forces model had merit simply because we needed an effective way to categorize things. The more recent ones remind me of yesterday’s porridge stirred and steamed. They are as contrived as books with titles like ‘The Leadership Principles of Harry Potter’ or ‘The Management Techniques of Conan the Barbarian’.
Most of the models are essentially a way to get you thinking about the business. The better ones go beyond analysis and offer a process for improving your business. However that’s rarer than consultants would have you believe.
My favorite one isn’t even a real business model but more of an ice breaker and conversation starter. I was introduced to this one by an early mentor named Ed Kennedy. I call it the 3 Things Model.
Basically there are 3 things you should know about a business: What it says it does; What it actually does; and How it makes money. Most importantly, recognize that these 3 things are usually not the same. Ed used a popular fast food chain as an example. What they say they do is make hamburgers; what they do is deliver consistency and cleanliness; and how they make money is selling soda pop.
Now this isn’t a formal model that you would draw on a flip chart in a board room. This is a way to get a conversation started over coffee. From experience, this conversation can carry you a long way and unearth a lot of insights.