Category: Revenue Models

As people grow older and become busier, somehow making genuine friends becomes really difficult.  Last week The New York Times tried to address this common lament with an article that laid out the key drivers of friendships and gave advice on how to make genuine friends as adults and avoid the trap of having too few inner circle friends and too many surface level acquaintances.

As I read through the article, two things struck me: first, the pillars were eerily similar to social media strategies and second, the how to advice were things that we all learned in first grade. Let me explain…

When we were in high school and college, friends were abundant and decades after graduating, these close friends remain to be just that: close friends. The drivers of these truly genuine friendships were: proximity, frequent unplanned interactions and comfortable environment to disclose information.  For marketing executives out there, let me translate these friendship pillars into your social media must-have themes.

• Close proximity: Be where people are (Facebook, Twitter, Pinterest, etc). Be on Mobile. Do things so that you make sure you are always seen (default home page, auto log-in, one click anything, etc)
• Frequent unplanned (two way) interactions: Post status updates (or better yet get Kim Kardashian to tweet about you). Make your app geo-local. Create content that is deigned to be a featured video, blog or post so that people will click or better yet adopt a push strategy. Hire a social media analytics firm to monitor your social media assets, and have them respond to complaints and compliments.
• Comfortable environment to disclose information: Credible privacy policy and messaging that you are not going to be a sell out or sell off their data. Show the good and the bad comments to add authenticity.

These pillars can turn into three nifty buckets to cleanly categorize and provide goals to all the various social media initiatives that you have going on in your company, but don’t stop there because it is only half of the story. If part one is just making sure that you are in the right context, no matter how manipulated it may be, then part two is how you actually behave once you are in a social media setting.  This is where the lessons from first grade start to kick in.

Take Leslie Berland, the SVP of Digital Partnerships and Development at American Express. She understood that social media, in all of its game changing glory, was about making genuine friends. First she got into the mindset of being the new kid at school (the school being Facebook) and for the first 9 months, American Express did not spend a dollar on advertising, but rather it sort of hung around and tried to take in the community. This is the first grader that that doesn’t run up to every kid during recess and tell them they should be his friend, but rather the kid who took the time to notice that the boy sitting next to him in class has the same Spiderman lunch pail. In the AmEx example, the Spiderman lunch pail turned out to be their Small Business Saturday Movement.  With 9 months of building an organic base and listening to their users, they knew that the Small Business Saturday initiative was going to be a hit with their friends on Facebook.  As she recounted in her Fast Company interview, “Facebook was going to be a side part [but] that was the first time we put a stake in the ground and said, ‘No, this entire program is going to run through Facebook.’ ” It turned out that Berland was right and saw a significant spike of in store sales and increased her “friends” and “likes” on Facebook.

In an innovative partnership, Dr Pepper Snapple Group asked MTV to launch a defunct brand, Sun Drop, knowing that they had to find an engaging way to re-introduce Sun Drop to a new generation. Ross Martin the creative master behind the campaign spoke at a recent TEDx conference on how the best types of work are ones that you do not expect something in return.  Or in other words, you don’t force expectations on your friends, but rather you let your friends be themselves and listen to what they do. This sounds like the kind of advice you would give to a first grader in that if you give Stacy half your cookie don’t then demand that she tell the entire class how nice your are. You have to do things in good faith, and be open to the unexpected in return. In the Sun Drop campaign, Martin created the awkward dancing Sun Drop girl and threw it out there – via YouTube, Facebook, Twitter, blogs, everything. And when people started to spoof the awkward dancing Sun Drop girl, they embraced it by making it a theme in their social media presence and aggregating the responses on their Facebook account. This then facilitated more “friends”, “likes” and other media coverage.

So next time you are in charge of a social media campaign – think like a first grader.

With this year’s TV Upfront ad negotiations closing out, with similar volume and pricing upticks, a big sigh of disappointment is ringing out in the digital start-up quarters around the city.

When I talk to most start-ups, I see great talent, I hear great ideas but when I ask how are you going to make money, my heart usually sinks a bit since the answer has more or less been “We will sell data and get those TV dollars!” Of course, this answer comes in many forms like, we are going to make the ad market more efficient or we provide the most targeted/geo/local/social data or the more obfuscated response, we are integrating the supply chain.  If that’s your answer, what else you got?

Don’t get me wrong, the TV ad model is challenged and all indications show a shift towards more digital ad spend with more targeted data backing, especially in mobile – but my huge caveat is that it’s probably going to take longer to happen than most pitch plans promise and that it’s probably going to be a lot harder than you think to hit milestones to woo your next round of investors.  Coming from a background where I thought long and hard on how to defend TV dollars but at the same time grow digital revenue, it really comes down to two things to make the ad jackpot real: standard accepted currency and easy backroom operations.

You see in TV – everyone has accepted GRPs as the standard currency and Nielsen as the currency keeper. Yes people want more targeted information, they want more ROI, they want more engagement, but they only need one accepted currency to transact business in the billions and to shift those billions around. With ads on mobile and online, CPMs exist but they all need to be qualified by level of engagement, or quality of content network/ social network or other triaging algorithmic data in the absence of quality networks.  The data you get online and mobile is deeper and richer, but that’s also a bit of the downfall because with too much of all those things you can’t equate GRPs to impressions. Well technically you can, but everyone has their own formula and in trying to optimize individually, a single formula does not become the accepted currency generally. See where this is going?

But then, your product is amazing, the new and shiny object that everyone is talking about and all these marketers want to work with you! Yes, but the marketer is probably investing a lot of additional time getting the budget approved and convincing people internally right? And what about the agency they work through – do their media planners or their media buyers seem to pop up in the meetings? Getting on marketers’ radar is easy but to make them repeatable business they need to start making tradeoffs internally and perhaps need to dig into other budgets, like say the big TV ad budget and come to terms with what’s an acceptable way to compare the tradeoffs. You may have 5 studies showing how great you are, but then 5 other studies show how great it is to spend with another group.

TV operating systems come from the sixties: they are clunky, not that customizable, involves tapes (yes tapes!) but they work with relative simplicity because they are connected to Nielsen and to the agencies who are in charge of placing the orders, confirming delivery and paying the bills. That’s how during the Upfront negotiations an ad exec can do a $500M dollar TV deal on a napkin at midnight and go to sleep super happy. Ask that same hard dealing exec if he closed a $500M dollar deal on display ads or mobile ads, and you would hear people fainting in ad ops who are in charge of trafficking and delivery. It’s just that much harder.  Just as everyone is coming up with their own currency, there is mass proliferation of digital ad technology – case in point the Lumascapes that provides us a snapshot of the crowded space (you need a magnifying glass just to make out all the players).

But now what about search? Well this is where Google gets mad props – they settled on a super easy to understand notion of clicks and search terms in their walled garden of analytics and from the beginning through the self serve model they made the backroom complexity invisible and didn’t rely on anyone else’s backroom. And since they owned such a large share of search, they had the swagger to serve up this ambitious feat. Oh and to top it off, they didn’t start off trying to get the big Brand TV Ad Dollars, they got (and still get a majority) of spend from the long tail of SMBs who became the champions of clicks and search and drove up pricing for AdWords that laid the comfortable foundation for big brands to then start shifting dollars from print and direct mail.

So the lesson? Understand the market ecosystem currency and backroom operations and not just focus on your product innovation. Yes, you only need to be successful on a small scale to make it a win, but if your success depends on big scale guys, know the hoops that they need to go through to give you money.

Over the past several months I have helped a few start-ups put together revenue models to help them raise money and prepare to go live in market. I’ve tried to ground the optimists with market valuation comparisons and have tried to push the conservatives with the same in market comparisons. There is always the tension of wanting to value the company really really high, but at the same time understand that the natural law of VC investing physics need to be considered.  At the end of the day, the only true valuation is the one where someone pays for it (acquisition or IPO).

Today TheStreet’s Debra Borchardt posted this Forbes article  that from a back of envelope calculation, Pinterest is worth $7.7Bn.  The article lays out the comparison of Instagram’s $1bn and LinkedIn’s $10Bn market cap, triangulates that with traffic, time spent, demographics and WholeFoods successful case study, and boom out comes $7.7bn.  However, she did note that a valuation done by Worth of Web estimated Pinterest at $267M, and based on the consistent undervaluing of Worth of Web methodology to Yelp, the real number based on that methodology should be more like $3.4Bn.

Fascinated by all the numbers thrown about? Me too.

Are any of these numbers right? Probably.

Why are the numbers so different? The balance between the speculation and execution. Speculation because some people see the big audience posted by Pinterest and sees it as an inevitable trove that will be monetized – and all else being equal it is worth what others have been willing to believe on Instagram and LinkedIn (that’s like meta valuation – valuations based on valuations based on valuations from investors valuating on something similar but not exactly).  Execution is more about what have marketers in particular been willing to pay for this audience on a per CPM, time spent, CTR, affiliate lead gen, etc. Hence, if the company can execute at market average with their audience, their valuation is more based on the spending market (that’s like more of a chop chop shop valuation of how much are all the parts if we sold it off piece by piece).

For all the start ups out there – it’s helpful to get both numbers the speculative meta valuation and the execution based chop chop valuation. Sometimes they are far apart, sometimes they are close and sometimes the pieces are worth more than the whole.

Last week I finished the Steve Jobs bio by Walter Isaacson and this week I’m finishing In the Plex: How Google Thinks, Works and Shapes our Lives by Steven Levy.*

The similarities between the two are startling and if Isaacson were to forgo the beauty in simplicity mantra of Apple, he may have had a similar tagline.  Both books are written with a journalist touch, trying to tell an objective comprehensive story citing multiple direct and indirect sources but at the same time a clear sense of fascination permeates the text and the sense that they were witnessing something really great.

Reading the books back to back gave me an interesting sense of the awkward relationship of Google and Jobs. From Jobs’ perspective it was unequivocal that  Google had been evil in entering into the smartphone business by stealing iPhones magic while the Eric Schmidt was on the Apple board and while Jobs was mentoring Sergey Brin.  From Google’s perspective they never admitted to such outright deception but  made it pretty clear that it was a natural evolution and if you were smart enough, you should have seen it coming.

This difference, seemed to get to the heart of how two companies that are so often compared to each other are so different. Apple is a deeply personal company that believes that their magical leaps forward are just that, magical and hence of and belonging to the magician (Steve Jobs) and wouldn’t have been created without him.  Google, on the other hand,  lives in an optimized mirror world where logic rules and the seemingly magical leaps are a natural evolution of lots of small things smartly coming together and scaling out (e.g., they just execute better).

I’m almost finished with In the Plex and will follow up with another posting. Some reflections in store about Apple and Google  will be on the nature of creativity ? What motivates more challenge of problem solving or vision? Really interesting stuff! Stay tuned.

* a shout out to TED who sent me the book as a must read!