February 25, 2007
If you run an e-commerce website or have an otherwise clear conversion metric (e.g., filled in contact information, registration), then you probably have a small number of very clear metrics that you are using to monitor and manage to. But if you have a community, social, or entertainment oriented website, then your key metrics may not be as clear. Number of page views or Alexa ranking might be an acceptable starting point, but as you get more views and visitors, what are the truly best metrics for determining how “engaged” your users are with your site?
Eric Peterson has been running a really good series on measuring user engagement. His approach one of problem solving and also pointing out diverging points of view as he works through the issues in his series. Clearly, the issue is not fully resolved, but Eric (and others he points to) does a great job thinking through the issues as he works through the series:
I like Eric’s definition of engagement (as well as the more detailed components that I am not listing here):
Engagement is an estimate of the degree and depth of visitor interaction on the site against a clearly defined set of goals.
I also like the thinking that Eric has done on the topic. While there is probably a long way to go before there are some common metrics that are shared across companies (that I am sure that Eric and others will continue working on), his thoughts are developed enough so that you can incorporate them now and probably get significant benefit from them (you don’t need industry standards to get benefit from them and many of the metric refinements will most likely be highly correlated anyway!)
The one, perhaps most important, issues that I would like to see Eric cover as he continues his series is How do you change your site to better engage the visitor? The obvious answer is that you should change things such that your engagement metric goes up, but you should also be using the components of the engagement metric to better understand what the users really want to do and then modify your approach as well as your goals (and metrics), so that they are more aligned with what your users want to do on your site!
February 15, 2007
Firas Busnaq recently sent me a link that completely clarified why I can’t read some of the technology company websites and understand what the companies actually do. It turns out that they are using an automated system for generating their branding đź™‚
Getting your message to stick is one of the inexpensive and most important activities that you can do. if you think that you do have your messages clearly articulated and as simple as possible, here is a test that will give you a metric for your messaging:
- Write down your messages on a piece of paper (btw, if you need more than a postcard, simplify your messages!)
- Ask 3 board members what you do (score 1 point for each board member that comes close within 30 seconds after the question is asked. Score -1 point for each board member that takes longer than 60 seconds to complete the answer)
- Ask 3 of your most senior people what you do (score 1 point for each board member that comes close within 30 seconds after the question is asked. Score -1 point for each board member that takes longer than 60 seconds to complete the answer)
- Ask 3 salespeople what you do (score 1 point for each board member that comes close within 30 seconds after the question is asked. Score -1 point for each board member that takes longer than 60 seconds to complete the answer)
- Ask 3 customer support people what you do (score 1 point for each board member that comes close within 30 seconds after the question is asked. Score -1 point for each board member that takes longer than 60 seconds to complete the answer)
- Ask 3 customers what you do (score 1 point for each board member that comes close within 30 seconds after the question is asked. Score -1 point for each board member that takes longer than 60 seconds to complete the answer)
- Clearly, the top score would be 15 points on this test. If you score less than 10 or less than 2 points for any of the groups that you interview, you should work on simplifying your message, making your message “stickier” by making it resonate better, or work on your message delivery systems! (btw, in my experience this test results in negative numbers the first time it is given…a score of -15 is not uncommon for the first test if you are accurate in your scoring)
The more you can push the score toward 15 with a relatively random sample of people closely related to your company, the more clarity your message and the easier the message will diffuse to your prospects!
Note: if you don’t have a company large enough to connect with 15 people, then interview the group that you can…you are actually in a better position to get your messaging right as early in your company development as possible…
October 1, 2006
I haven’t posted in a while. Unfortunately there has been little time, as I have been working around the clock with my team to launch a new Venture Capital firm, OpenView Venture Partners, located in Boston, Massachusetts. Today, we officially launched the firm with the closing of our inaugural fund on Friday night. Given my excitement about this new venture, I thought that I would take the time to share our concept and some of the details. (Also, take a look at the new website, www.openviewpartners.com.)
The overarching thrust for the firm is Operational Value Add (in addition to capital) for InfoTech companies, who have reached the expansion-stage of company development (as in “I have a product and some customers, Now What?”), and are located anywhere in the world.
We set the goal of operational value add because, in our experience, this involvement helps improve products, sales and marketing, and customer service. The improvement leads to enthusiastic customers and increased growth rates, profitability, and long term competitive advantage. Net net, the more value we provide, the greater and faster the enterprise builds value.
We developed and refined the approach at our prior firm, Insight Venture Partners (we had been working as its Boston Office). As we evolved the approach, we have found the results to be both significant and significantly different than the approaches used by other firms.
The goal of operational value add is a principle that we have spent a great deal of time operationalizing through a combination of focus, value add resources, and a small fund size. We believe that staying focused, having the best resources, both internally and in our network, and then “putting all the wood behind the arrow” is a great approach for delivering the most value (I gave similar advice to emerging growth companies last year and, again earlier this year). Finally, and perhaps most importantly, we work extremely well and in partnership with our portfolio company senior management (an earlier post on the topic is here). The feedback to date from our approach has been outstanding.
Some details on each of the points:
Our value add starts with the focus that we have on market and stage. With this focus, we have developed a much deeper understanding of the issues and opportunities facing our portfolio companies and have geared our firm to help address those issues and opportunities. Our focal point includes the following:
- Our Market Focus is InfoTech, particularly around companies that configure software, data, and/or hardware into packages that provide meaningful value to their users. At this point our list includes software (all flavors from installed to on-demand), internet, information services, and technology enabled business models.
- Our Stage Focus is Expansion Stage. Expansion stage to us starts when a company has worked out the major kinks in its core product, has begun to address its first market, has a viable approach to reaching the market, and has some customers that use, like, and reference the product. (Generally, a good proxy for this is company revenue in the $500k to $1MM per quarter at a minimum with good historic growth).
- Our Geographic Coverage is Global. Our belief is that expansion stage InfoTech companies all need to develop a global presence, so the starting location is not as important as the company’s desire to expand globally, particularly in North America (given our North American presence).
We strongly believe that the issues and opportunities that emerging growth InfoTech companies face at the expansion stage are very different than the issues faced by companies in other sectors or in other stages of development. By choosing a sector and a stage, we could then more deeply gear our firm to deliver the most value against that more specific set of issues and opportunities. Separately, we have found that the major issues facing expansion stage information technology companies are independent of their geographic location, enabling us to have a wide geographic coverage (that is, we invest globally) without diluting our value add.
Operational Value Add
Our operational value add programs are described on our website. Our general approach is to determine the key issues facing each portfolio company at the senior management level, compare notes with the management team, help determine the top goals of the company, and then offer each company a “menu” of ways that we might help. The menu includes items such as offering our portfolio companies people on our team for small or large projects, introductions to our network, and/or helping our portfolio companies recruit senior staff and add to the “DNA” of their team.
Our efforts also include a number of functionally specific (sales, marketing, development) “best practice” forums for our portfolio companies. The forums are designed to help our portfolio companies network among themselves and also help to spread “best practices” in each functional area between and among our companies. These forums take the form of one-day events in Boston, each devoted to a particular topic.
My blog is also meant to be an extension of this work. By reading some of the posts in the blog, you can get a pretty good feel for the issues that we work on with the companies and some of the principles that we use to address the issues.
Optimal Fund Size
As OpenView took shape, we thought a lot about the optimal fund size. We believe that a smaller fund is better for both our investors and our portfolio companies, which ultimately makes it better for us. Yet, it was important that the fund was large enough to create a level of diversification and to give us enough time for the portfolio to develop before raising our next fund. Net net, we set the fund size at $100 million, which we believe is the optimal amount to meet our goals.
From a portfolio company perspective, the smaller fund size relative to some of the other VCs means that we will do fewer investments, allowing us more time for each portfolio company. From both a portfolio company and investor perspective, it means that a larger portion of our income comes from creating value in our investments, which results in highly aligned incentives between our portfolio companies, our investors, and us.
Working In Partnership
Finally, and perhaps most importantly, our belief is that we can’t add value without building strong relationships and working in close partnership with our portfolio company management teams. Every member of our team has outstanding professional credentials, great values, and a strong desire to build meaningful relationships with senior management teams. These characteristics, as well as an intense desire to add value, help to create great partnerships between our team and the portfolio companies.
You can Help!
To the extent you are interested and willing to help, there are a few things that you could do that would thrill us:
- The team would be very appreciative if you would be willing to mention OpenView Venture Partners and our URL (www.openviewpartners.com) so that the search engines have an easier time picking us up. Version 1.0 of the site just went live, so it will probably take some time for the spiders and indexers to register its presence. Your mention of the site would greatly help this effort,
- We are constantly looking for people to add to our network globally. To the extent you are interested in helping our portfolio companies, let us know via e-mail, and
- We are always on the lookout for the next expansion stage InfoTech company to meet with (our focus is above). If you know of one, send us an e-mail!
OpenView Venture Partners is all about Operational Value Add aimed at Expansion Stage InfoTech companies located anywhere in the world. Our approach has been in place and constantly refined for several years now and we take great pride in the references that our current and former portfolio companies offer about us.
If you want to participate in some way or have an interesting company that we should know about, let me know. My new e-mail address is firstname.lastname@example.org. I do my best to keep up with the e-mail, so drop me a line. This post marks the end of the beginning of what we hope will be great for everyone that participates!
A Special Thanks
It is hard to talk about the launch of a new fund without reflecting on and acknowledging some of the people that enabled the success. We had a significant amount of help from our portfolio company senior managers, enthusiastic and extremely high quality investors, and our tremendous network of individuals and companies who have helped us be successful over time. In addition, the team at Sparring Partners Capital did a fantastic job as the fund’s placement agent and the team at Goodwin Procter have done an equally outstanding job as council to the fund.
The group that I would like to single out here are my (now technically former) partners from Insight Venture Partners. The partners have been very supportive over the years as I pushed on different initiatives, and since the idea of OpenView started gaining traction they have been extremely supportive, helpful, and generous with their time. In addition, we have been able to work out an approach whereby we will continue to work directly with our Insight investments until each of the investments has grown and exited, something that is extremely important to us given our value add focus. Thanks guys!
EndNote: I have apologized many times to my network that has had difficulty reaching me over the last several months and appreciate the enthusiastic support and encouragement that has come from everyone. I expect that now that the firm is formed and the fund is closed I will be returning to a more normal schedule of focusing on my portfolio work and network and even updating my blog more frequently đź™‚
April 25, 2006
ASP, ISP, MSP, xSP, SAAS, Web 2.0, On-Demand, service bureau, business service, Internet service, service utility, data service, web service, service oriented, video on-demand, "salesforce.com for (fill in the blank)", mash-ups, composite applications, technology-enabled outsources service, blah blah blah…
We recently had to sort through all of these terms to try and decide how to title a forum. Since we settled on a B2B focus, we decided to call it a On-Demand/SAAS Forum, which seem to be the most appropriate "tags" in use today.
The process pointed out a real flaw in the current vocabulary for describing newer approaches for offering valuable products to consumers and businesses with as little installation/configuration/integration/maintenance/use headaches as possible (that's what it is all about, isn't it?).
The forum led to my rethinking the tag for the introductory presentation at the forum. Perhaps a better tag for the service is xAAS (pronounced zass).
Here is the 2 minute presentation posted as a YouTube Video…let me know your thoughts…
Update: Tien Tzuo, SVP of Strategy at Salesforce.com, pointed out that the presentation style I used was of the Lawrence Lessig style. I didn't realize it had a name, but I had seen and loved Dick Hardt's Identity 2.0 presentation using the style. I have also met Dick a couple of times and have a lot of time for both him and his ideas…
January 30, 2006
While large companies have had a growing trend toward hiring “technology evangelists,” it is becoming clearer to me that institutionalizaing the approach (i.e., setting goals, formally staffing the roles, responsibilities, processes, metrics) has increasing benefit in emerging growth technology companies.
What is “Evangelism”?
James Pethokoukis has a good U.S. News overview article, Spreading the Word, on the approach used by several companies (you have to sit through an annoyingly long 10 second ad to see it, but the article is worth it).
In my view, the key issue is all about how the emerging growth company organizes to leverage available communication channels and external influencers to both “get the word out” and, possibly more importantly, “get the word in!”
This probably does not take a lot of explanation, but the increased number of impressions formed by online activity (forums, blogging, domain-specific directories, etc.) makes the benefit associated with evangelism much higher for all companies, and the positive ROI now extends down to extremely small companies.
Guy Kawasaki, the first technical evangelist when he worked for Apple, has a recent post The Art of Evangelism. Declan Elliott has some good thoughts and links on the topic. Guy’s approach is a little too “religious” for my taste, but it works for him as well as the causes he evangelizes (you can, of course, tune the message to your customers’ taste).
Robert Scoble is probably the best known current Evangelist, working for Microsoft. He has a follow-up to Guy’s note with his point of view. The comments are also a great read (note the different viewpoints on the use of the “evangelism title vs. other possible titles for the activity). Another must-read is Robert Scoble and Shel Israel’s new book, Naked Conversations (reviewed here), which gives a great overview on the use of blogging for creating conversations with the people that make up your market (not sure about the title however…the image of Robert Scoble naked is not appealing to me).
Church of the Customer Blog has some of their thoughts on customer evangelism vs. corporate evangelism (Ben and Jackie also offer up their books and other material on making your customers evangelists. I have read them and found them to be full of great practical ideas for building customer evangelists…their blog is well done and on my reading list too…
How to get started…
Ben and Jackie have some practical ideas on getting started in their post How to become a Customer Evangelism Evangelist The key here is just to get started in some capacity…even by just opening your eyes to the opportunity. See this view from a emerging growth company from 2% Creativity Blog.
January 5, 2006
In case you missed David Teten‘s Virtual Handshake Conference, David has posted the conference presentations on The Virtual Handshake blog. It is full of good ideas for newer approaches to marketing (and other functions). Like his book, The Virtual Handshake (written with Scott Allen), the session write-ups are packed with practical ideas for using social networks and blogging to benefit your business. (I read the The Virtual Handshake last quarter…great read.)
December 22, 2005
This post is an overall summary of the David vs. Goliath Series and meant to act as a pointer to all of the posts in the series. There are three overarching points for the series:
- Emerging growth companies have several natural advantages over larger companies that they can amplify,
- Large companies have several advantages that emerging growth companies can minimize, and
- Emerging growth companies can (and should) take a series of specific short-term actions that over time will accumulate into a long-term defensible competitive advantage (by amplifying their advantages and minimizing the large company advantages)
I canâ€™t emphasize enough how important it is for emerging growth companies to think through these issues and develop a clear point of view on what they are trying to achieve. Regardless of the long-term goal (a sale of the company or remaining independent), building a defensible advantage will make life much better for you (easier time in the product markets, better growth, better bottom line, higher valuation, etc.). Of course, once you know what you want to achieve, you need to execute against it!
The Nine Major Themes:
- Create an Information Advantage. The emerging growth company has the natural advantage of being closer to the customer that the large company. You can truly capitalize on this advantage by taking steps to increase the information flow into your company even more.
- Create the Time Advantage. The large company has a disadvantage as it grows, as solid communication between employees gets much much more difficult as companies grow. This communication difficulty turns into a time advantage for emerging growth companies, as larger companies have difficulty doing anything quickly, while emerging growth companies, with their smaller staffs, can turn on a dime. The emerging growth company can take several steps to capitalize on this natural advantage.
- Create the Scope Advantage. The emerging growth company has the ability to focus on one product market. The larger companies naturally need to increase their scope in order to sustain growth. The emerging growth company can exploit this natural advantage by staying focused and continuously improving â€śownershipâ€? of its product market.
- Create the Scale Advantage. Large companies have difficulty seeing and/or addressing small markets, even if they are very high growth. This gives the emerging growth company time to establish a foothold in the market as well as create some level of defensibility before the large company enters the market.
- Create the Innovation Advantage. Large companies have difficulty executing against certain types of innovation (for example, innovations that cross department boundaries, such as new products with new channels of distribution and new customer service approaches). If emerging growth companies innovate against these natural advantages, they can create an edge against the large companies.
- Set Your Operating Point Closer to the Funnel Singularity. This is the strategy of allocating your resources against nailing the customer experience at low price points to the customer instead of allocating significant resources against sales and marketing activities. If you do this well in the right markets, you can create a large, profitable business that is very difficult for the large companies to compete against. This is a classic strategy, but the internet-based sales and marketing approaches now allows the strategy to be executed more aggressively.
- Attenuate Goliathâ€™s Strengths. The large company does have some natural advantages itself. The posts below address each of the large company advantages as well as what the emerging growth company can do to minimize the large company strengths (and in many of the cases, create an edge):
- Great senior managers and employees
- A technology platform in place with customers
- A Patent portfolio and ongoing new patents
- User comfort with the user interface â€ślook and feelâ€?
- Many customer relationships
- Well developed channels of distribution
- A huge set of great technical talent
- A brand name and reputation
- Significant financial resources
- Economies of Scale and Scope
- Ability to bundle multiple products
- Defend Against Goliathâ€™s Attack. No matter what you do, if you are successful then Goliath will eventually attack. These posts address the nature of Goliathâ€™s attacks as well as how the emerging growth company can set up in advance to defend against the attack. I point out that the results of the attack will be determined well in advance of the attack! The two posts are:
I am going to take a breather from this series for now, but I do intend to put together the implications for each department so that some of the more esoteric points will be made more tangible for each functional group. When I post each of the functional implications, I will place a link on this post below so that this post will act as the index of the major strategies in addition to the specific implications for each function.
December 2, 2005
This post is part of the overall posting “How Can David Beat Goliath?- Strategy #7: Attenuate Goliath’s Strength“:
Well-run large companies have a well-known name and a solid reputation. This is a powerful strength. But, as with all of Goliath’s strengths, you can and should take steps to attenuate it…and try to get the edge!
In a lot of ways, branding has been turned into a relatively esoteric topic by the “experts”, so I try to boil it down to its essence here. My definition of brand/reputation is basically the mental model (or models) that your customers, prospects, employees, partners, etc. have regarding your company, its products and its services. Brand/reputation is not a company, product, name, or symbol, but rather a mental model (more specifically, a repeatable biochemical reaction) that gets triggered in people’s minds when they read or hear your name or see your symbol (the mental model could be an image, sound, touch, feeling, taste, thought process, or any other type of reaction.)
My best simple example of this is Pavlov and his experiment with a dog (Pavlov’s dog). Essentially, Pavlov figured out that if you ring a bell and feed a dog over and over and over then, over time, the dog will associate the bell with being fed (which triggers saliva in the dog). After repeated training the bell will make the dog salivate without the food being given. The bell triggered the mental model that made the dog salivate.
Attenuating the large company brand strength…
So, how can David build a better brand (mental model) than Goliath? Before I address the point, I need you to do a quick test… below is a list of names and I want you to quickly (within one second each) identify what comes to mind:
Assuming you have heard of them, pretty easy, right? If you thought “web conferencing, web search, tissue, open source operating system, open source database, blog search, and social tagging” then you would get the same answers that I did (If you salivated, you got a different response than I did!).
Now let’s try another set:
4. Computer Associates (now called CA)
5. Procter & Gamble
Much more difficult, right? You probably did not get a single, clear mental model associated with the name. All of these companies are relatively well known, but the name doesn’t necessarily mean anything in particular (or, perhaps, it means a lot of things or it means different things to different people!), as the mental model has gotten too complex and lost its focus.
Other than Kleenex, the first set is of relatively new companies but the brands have very specific meaning. The second group is of older, larger companies with many products. Larger technology companies should be branding at the product or product set level as they grow, but in general they do not do this very well (they generally try to include their company name into the product name because it is well known).
In contrast to the large technology companies, Procter & Gamble is an example of a company that is particularly good at creating true brands well beyond its company name. Just for laundry products, as an example, Procter & Gamble makes Bounce, Gain, Downy, Cheer, Dreft, ERA, Febreze, Ivory, and Tide! Each brand stands for something, and most consumers do not even know that the products come from Procter & Gamble.
The emerging growth company opportunity…
Given that large technology companies are not addressing this opportunity very well, and they already have the Scope Advantage, emerging growth companies can seize the opportunity to become THE brand in their particular market niche! The goal is that when people hear or read your name or see your symbol, they trigger the mental model AND if they think of the mental model, they trigger your name or “see” your symbol!
In my view, it is a simple three-step process of packaging the mental model, making sure that your business is truly aligned with the mental model, and then delivering the mental model:
Step 1: Package the mental model. Determine the best message for your company/product (that is, how do you best allow people to understand how you fit into “their world”?).
You could start from scratch and try to explain everything or you could do the same thing that a productive developer does and package together pre-built components. The pre-built components in this case are the pre-existing mental models and associations that people are already carrying around. If you can understand them, link the right ones together and then link your company to them, you win!
Geoffrey Moore describes several approaches to creating these associations in his classic book Crossing the Chasm (a must read in my view).
One approach that he suggests for the elevator pitch (with some slight modifications that I made):
Just fill in the blanks:
- For (insert specific target customers)
- Who are dissatisfied with (insert the current alternative)
- Our product is a (insert new product category)
- That provides (insert key problem-solving capability)
- Unlike (insert the alternative product)
- We have assembled (insert all aspects of your customer approach, which he calls the “whole product”)
He gives the Intuit example (this is a relatively dated example at this point) for the above approach:
- For the bill-paying member of the family who also uses a home PC
- Who is tired of filling out the same old checks month after month
- Quicken is a PC home finance program
- That automatically creates and tracks all your check-writing.
- Unlike Manage Your Money, a financial analysis package,
- Our system is optimized specifically for home bill-paying.
Geoffrey gives a lot of color around this idea as well as different approaches for different situations as the company and the market evolve. (As I said, I highly recommend the book.).
That said, there are a lot of ways to skin the cat when it comes to simplifying messages down to their core and developing the right mental model and associations to your audience, so if you don’t like this approach then pick one or two that are equally simple or even simpler. My best advice is to read through a few books to find the simple approach that will help you form your simple message, but to ignore all of the complexity that is discussed. It is much more important to have one simple message and then to overcommunicate it to the market (step 3 below) than it is trying to get too clever with the message!
Step 2: Make Sure that every activity that you do is aligned with your message and that your message is aligned with every activity that you do. The key is that the product, marketing activities, sales, professional service, customer service, and everything else that you do reinforce the message as simply and effectively as possible. Anything that you do that is not aligned with the message does not reinforce it and will probably tend to complicate it.
Step 3: Deliver the mental model over and over and over…and then deliver it some more!
Once you have the message that you want to deliver, start communicating it. The key is to recite it enough so that your
- senior management is repeating it,
- marketing messages are repeating it,
- salespeople are repeating it,
- customer service people are repeating it,
- influencers from outside the company are repeating it, and then
- prospects and customers are repeating it.
You need to make sure that you have seeded the message enough so that everyone can and does repeat it until it truly becomes everyone’s mental model for what you do AND the mental model is associated with your company! Before long, you will have THE brand in your niche (so long as you deliver the message AND deliver against the message!).
The key point here is that it is not possible to overly simplify or overcommunicate your message. You can only undercommunicate and/or make your message too complex. Keep communicating! Play this game a few times and you will understand the point…
- In my view, there are two ways that emerging growth companies fail on these points. One cluster of failure is ignoring the issue completely, as it is considered fluff. This isn’t fluff…it is important stuff and can be engineered into the business just like everything else! The second cluster of failure is that companies spend way too much time wordsmithing and otherwise perfecting the messages and not nearly enough time with the other two steps, which are the steps that really make or break your approach. A perfect message that does not get delivered is wasted! An acceptable message that gets delivered is powerful!
- None of the steps above requires hiring branding consultants or even having a branding expert on hand. The point is to spend 10-20 hours over the course of a couple of months getting very clear on your message and then managing the message into everything that you do and every contact that you have! You can only go wrong by having a message that is too complex or undercommunicating it!
- At some point, the market will start talking about the new category with companies like yours…my view is that you need to keep the process above going until it is overly-clear that the mental model has been built and that you are considered one of the leaders in the market.
- You will bake yourself in as the brand name in your market niche if you continue innovating your product and business activities so that they continue to deliver more value to your customers in the niche. The more you improve your performance, the better you bake in your company as the leader!
- If you get large enough that you are going to enter a new niche, keep in mind the large company issue. You may want to create a completely new brand for your attack of the niche (not common practice with technology companies, but it should be!).
Well-run large companies are also well known and have brands and reputations that have complexity associated with them. The key for the emerging growth company is to own the brand and reputation for the market niche that you play in. If you do it right, you will attenuate Goliath’s strength, and gain an edge!
November 8, 2005
As I have been working on trying to frame out some of the strategies related to Funnel Economics over the last few years, my favorite is the strategy of companies putting much more energy into building better, simpler products (from the user perspective), charging less for them, and using very efficient sales and marketing approaches (rather than building an acceptable product and trying to have as high a price as possible through a value-based sale and aggressive sales and marketing efforts).
The Strategy Has Help Shape Many Success Stories…
Some notable example companies deploying the strategy are Microsoft and Intuit, which have been successful for a long time, and Google, Skype, Salesforce.com (and many others) more recently (the internet has been an important recent enabler).
How it Relates to the Funnel…
Funnel Economics is essentially the (inflowing) cash flow generated by “sales and marketing” activity divided by the “sales and marketing” expenses. If you shrink the denominator faster than the numerator, the limit is a singularity (the singularity is actually zero in the denominator, but try dividing a really small number by a really really small number on your calculator and you will see that you get a large number). From a business standpoint, if you aim for this economic singularity in a very large market, it could be a formula for a very successful company and huge wealth creation (i.e., take the previous number on your calculator and multiply it by a very large number and you get an even larger very large number).
The strategy has some really basic, but powerful elements…
- Make something useful and make it really, really, really easy to install, configure, use, and update. This approach increases the value to the user base, increases use, and reduces product abandonment. (The idea works with all technology products including, but not limited to, appliances, server applications and both browser applications and rich client applications so long as they follow the “really easy” principle)
- Constantly make the product better with rapid development cycles. Economically, this continues to increase the value to the user base (by better meeting their needs), gives the users something to “sing” about, and reduces the cost of customer service (the customers don’t need service, as the product works and is easy to figure out!).
- Design into the package one or more “features” that will compel users to tell people about it and influential people to write and talk about it. The most prevalent approaches either build in the network effect or have unbelievable usability or other characteristics that make people want to talk about them (see Jeremy Levine’s posting for a pretty amusing extreme example of this). If you can’t come up with any ideas here for your product, focus on points 1 and 2 (above) even harder. Economically, this leads to very low sales and marketing expenses, as others are doing the selling for you!
- Give it away free for beta and trial purposes, and price it competitively once the free period ends. No one wants to be oversold these days. Give it to the users and let them see if it is worth using, and make sure that they feel they are getting a great deal when you actually charge them for it (note that looking at advertising counts as payment here)! This approach increases conversion rates of prospects to customers (assuming the product works!).
- Make the “purchase” transaction as simple and easy as possible. For consumers, the extreme version of this seems to be the “micropayment” vehicle called “advertising” (at this point in time), although SkypeOut allows you to make a single credit card purchase that will last for a very long time and Amazon.com has one-click purchases, both of which are very simple and easy. For business customers, the credit card model or simple contract/billing model seems to be acceptable, although it would be great if something better came along. (Perhaps my friends at IPCommerce will create something to address this issue better for both consumers and businesses!). Economically, this approach increases value to the user and conversion rates of prospects to customers.
- Keep the sales and marketing expenses (the denominator) as low as possible, and put your resources toward the first five elements of the strategy, which should drive customer adoption. Economically, bringing this cost to zero creates the singularity! (Note: I expect that most B2B and many B2C companies will still need sales and marketing, at least in the current environment. The key is to keep pushing for the efficiency and to keep this cost as low as possible relative to the gross profit generated by the activity).
Don’t confuse this approach with just eliminating sales and marketing and calling it a day. If a company sets the right operating point in the right market situation, the company should still be growing, possibly explosively, just growing for reasons other than a purely aggressive sales and marketing effort.
To perfect the execution, you need to determine the optimal operating point…
I am a strong believer in the six themes outlined above, but there are four major issues that every company needs to address:
- The larger the market, the better the strategy works. Companies that sell to consumers and the universe of small/midsized businesses will have a better outcome than companies that only have a few hundred (or fewer) possible customers.
- Each company needs to find its optimal “operating point.” The best way to think about this is that each of the six elements above have knobs controlling them that company management can rotate to set the “level” for each element. The optimal set point for each element has to do with how sensitive user response is to that element (this gets more complex when you build in the issue of path dependent outcomes, which I won’t cover here). The ultimate goal is to have the right set points for each of the knobs. The core assumption that needs to be tested is that you can improve your results by decrease sales and marketing resources, increase resources spent on the product, and reducing the price (or eliminating it for a period of time).
- Once you set your initial operating point, it is easier to move away from the singularity than toward it. That is, it is easier to move from a simple product to a complex product than a complex product to a simple product and it is easier to add sales and marketing activities and expenses than it is to subtract them! As an example of an extreme starting point, the concepts around Web 2.0 are essentially the extreme version of the strategy aimed at consumers. (I particularly liked Charles O’Donnell’s posting “10 Steps to a Hugely Successful Web 2.0 Company” as an example of the web 2.0 themes). In my view this is a great starting point for these types of companies, as it is the extreme from which to start turning the dials to tune in the optimal operating point.
- You can use this strategy against your competitors (and they can use it against you). Some people say that Google is out-Microsofting Microsoft. Essentially, the point is that Google has set its operating point closer to the singularity and it will be difficult for Microsoft to respond (harder to move toward the singularity!)…It will be interesting to see what happens. It will also be interesting to see if someone eventually out-Googles Google (perhaps Microsoft?)!
I have seen these themes in place in companies selling to consumers, small businesses, and large enterprises in all areas of information technology (infrastructure, applications, software as a service, etc.) and entertainment (particularly gaming). The strategy can be deployed in different forms at different operating points by every company selling to any customer segment (so long as it is a large enough segment!)…All you need to do is focus on aiming toward the economic singularity (also, make sure that you start closer to it than your competitors do)!
October 28, 2005
Even with all my ranting in board meetings about the topic, I continue to be amazed by the lack of focus on the economic aspects of the sales and marketing funnel (A.K.A. Funnel Economics).
Funnel Economics is essentially how much money do you spend on the funnel (in the form of sales and marketing expenses) vs. how much money (in the form of Gross Profit) drops out of the funnel? In this sense, Sales and Marketing is a money machine (remember that magic trick where you put a dollar in, turned the handle, and you got $10 out?) when done right (and a money sink when done poorly). Somewhat more complex issues include:
- What are each of the components of the funnel and how do they contribute to the economic results?
- How have your Funnel Economics changed over time?
- What are the marginal Funnel Economics?
- And, most important, How can you maximize the Funnel Economics? (this is actually the most important question, but you need the answers to the other issues to accurately address this one.)
My argument for putting more energy against understanding and improving the Funnel Economics is that it is the most important (and complex) factor in determining the growth, profitability, and, indirectly, ultimate valuation of an emerging growth technology company (yes, the product, pricing and services are really important too, but they factor into the funnel economicsâ€¦more on this below. And, yes, many companies get acquired for their technology, before they get a chance to scale up their funnels, but this is the Expansion Stage view).
When to focus on Funnel Economics
In the early stages of a companyâ€™s life, the processes should be creative in nature and informal (this also involves very few high quality highly passionate people trying a huge number of things before settling in on â€śwhat worksâ€?â€¦probably where a lot of the â€śmagicâ€? takes place). Forget about funnel economics at this stage, as you should be making something and getting some people to use it! Most important at this stage is moving down the sales learning curve as far as possible (although you will need some simple form of Funnel Economs to understand how far down the curve you are.)
As a company finds its footing and is ready to scale up its sales and marketing resources (the Expansion Stage), measuring and managing the funnel economics are a extremely important activity (you are about to amplify them, possibly significantly, so you had better be able to predict the results accurately).
Itâ€™s all about Sales and Marketing Management
Many Factors Extenal to Sales and Marketing Influence Funnel Economicsâ€¦
Market and product factors are highly important in determining the order of magnitude of funnel economics. For example, a high growth market with an extreme pain point where the company has the best solution, a natural ability to have a network effect and the ability create a viral effect would probably have pretty rich funnel economics (add any Web 2.0 concepts that I am missing, as the web 2.0 crowd has done a great job of clustering important concepts and giving them a tag that generally represents many good principals).
â€¦But Sales and Marketing management AND the company CEO can have a tremendous effect!
From a sales and marketing management perspective, however, most of the market and product factors are fixed, at least in the near term. The key is to understand how the sales and marketing activities influence the ultimate economics of the company (are you getting $1 for each dollar dropped in or $10?)â€¦especially important are maintaining and improving them as the company grows!
I have seen many companies make significant progress understanding and managing their Funnel Economics (and many technology companies building products to help them with various aspects of the analysis). I have also seen many companies punt on these issues or not keep careful track of their development which has resulted in a lot of wasted capital!
Hopefully, all companies will adopt this approach and do it wellâ€¦until then I will keep rantingâ€¦