Tuesday, May 31, 2005

Why Does an Entrepreneur Do What He Does?

[tags: Entrepreneur, Pincus, VC, start-up]

Why does an entrepreneur do what he does? Clearly, there are easier ways to earn a living, resulting in a much more comfortable lifestyle. If we don’t realize this before our first start-up, we quickly learn that starting a job is very similar to the military recruiting tagline: “It’s not just a job, it’s an adventure.” Adventure is code for long hours, demanding work, emotionally demanding, poor pay, where success also requires an element of luck.

When you take a purely dispassionate look at the underlying economics, starting a company makes no sense. The odds of success are very long, the hours are long and the pay is sub-market. If your company is lucky enough and good enough to earn a liquidity event, the odds are good that your piece of that payout is small, especially if you build on VC funding. And if you take VC funding, odds are that you will be replaced as CEO by someone the VCs like better. Basically, as Mark Pincus points out, the economics of starting a company simply don’t make sense.

So, why do we do it again and again? It comes down to a simple perspective. Most people fear change. They prefer the status quo, which is no doubt more comfortable. We live in a short attention span world, where instant gratification is everything. The dream is the comfortable house, new cars and regular vacations.

Entrepreneurs are different. We embrace change and abhor the status quo. We see things the way they are and see how they could be better. Then we become obsessed with making it better. Our dream is to build something, to make a mark on the world, to bring our vision to life. We have a love-hate relationship with our companies. We love what we do, but we hate what it takes. It shouldn’t be that hard, but it is…always.

Here is the difference between a VC and an entrepreneur:

VCs see rewards; entrepreneurs see potential. VCs look at a seed and say: “But who will buy this seed?” Entrepreneurs see the seed and say: “With the right soil and nutrients, this seed will grow into a strong and productive plant that will provide wonderful food.”

VCs want productive farms, entrepreneurs are enamored with the empty plot and a sack of seeds…the potential is what excites the entrepreneur. Once you have a thriving farm, the thrill is gone.

Which of the following statements best describes you:

1. Give me a few great people and together we will beat extreme odds and build something that will change the world. If we are successful the rewards could be immense.

2. Give me a $200M fund and I’ll deliver solid returns by investing in great start-ups that already have solid products and customers. By diversifying risk I will personally make more than $1M per year over the life of the fund.

Only an idiot, or an entrepreneur, would jump at #1 over #2 every time. If you beat the long odds, you’re an entrepreneur. If you fail, history and your wife call you an idiot.

Friday, May 27, 2005

Word of Mouth Marketing III: GMail a Case Study in Building Buzz

[Applicable tags: WOM, Local Marketing, Buzz, Gmail, Beanie]

Gmail was one of the best word of mouth marketing campaigns of all time. The Gmail buzz was white hot, but I think that the Tyco Beanie Babies takes the first place prize because of how long they milked their buzz. Of course, both companies used the same basic word of mouth principles to juice the word of mouth marketing into a full-blown frenzy.

Gmail, Google's free web email, was not all that special. It lacked much of the functionality and maturity of existing free webmail from Yahoo and Microsoft/Hotmail. But, what I lacked in functionality and maturity it made up in storage space, providing 1GB and later 2GB of storage, when 10MB was the norm. In addition, Google was, and is a pioneer, and people were naturally intrigued by its new service. Finally, as a new service, the plum email addresses were still available. Instead of mikeho235@aol.com you could get mike@gmail.com.

Starting with these characteristics, Google implemented a flawless word-of-mouth campaign.

Step 1: Start Rumors
Google initially started with internal users only. Of course, these people talked about it. Then when they announced Gmail, they did so on April Fools Day!
Results: This created tremendous buzz. Was it an April Fools Joke? That question alone got them 3-5 times more press than they would have received by launching on any other day. The speculation about whether it was a joke or not ran wild.

Step 2: Artificially Constrain Inventory
People want what they cannot have. Google essentially told people it wasn’t ready for launch yet, but during the test phase they could get an account through invitations from friends already using Gmail. Then they limited each user to only 5 invitations.
Results: Almost instantly, everyone was looking for a friend with a Gmail account, so they could beg for an invitation. In other words, the people seeking invitations initiated the conversations, they created the buzz. I like to call this the Golden Ticket principle, after Charlie and the Chocolate Factory, where there was a frenzy trying to find the golden tickets in candy bars.

Step 3: Reward Beneficial Behavior
Google did three things: (1) they handed out Gmail invitations to heavy users of their new Blogger software; (2) they randomly placed links to register for Gmail on their homepage, about one out of twenty pages ; (3) when the link for Gmail wasn’t on their homepage, there was a link to register for news about Gmail.
Results: Sheer genius! (1) The got more people to use Blogger, in hopes of getting an invitation, driving up their webstats. (2) They got more people to hit their website in order to find the "golden ticket" invitation. (3) They got future users to provide their contact information. So even though they hadn’t opened the floodgates, they were still collecting future users through this "registration for news".

As a fellow blogger pointed out, Chris Matthews wrote in his book Hardball, "when you've got bad news, get it all out at once, when you've got good news drag I out as long as possible." This is exactly what Google did with Gmail, and in the process they created a frenzy. People were even bartering real goods, services and money to get Gmail invitations, when there were free alternatives. I hadn't seen this sort of frenzy since the Beanie Baby craze. You might remember some of those Beanie collectors who thought they would pay for their children's college tuition with those "rare" stuffed animals…go figure.

Google was fortunate to have a platform for such an effort, by virtue of their wildly successful search site. But these same principles can be applied to any word of mouth launch.

For example, a new restaurant could remain "private" during its first three months of launch. They could invite friends and influential people to dine there free during the first week. This exclusivity will start the buzz. Then at the end of each meal give every party two "friends" coupons for an exclusive meal at 50% off the regular price; all the while restricting access to people who were referred. This will turn the initial guests into word of mouth machines spreading your coupons to their closest friends. When others call for reservations, inform them that you aren't open yet and take their contact info for follow-up (future customers).

I assure you that these activities will cause word of mouth to spread like wildfire. It will be the talk of the town: "Have you tried the new restaurant?" Meaning: Are you in the in crowd? 'Can you get me an invitation?" Meaning: Can you anoint me as being in the in crowd?

As this example demonstrates, you can proactively manage a powerful word of mouth campaign. But you must be able to back-up your word of mouth campaign with a high-quality customer experience. If you provide a great consumer experience then simply follow the principles laid out in this article. Create rumors, manage inventory and reward beneficial behavior. Good luck! More word of mouth articles to come...stay tuned.

Monday, May 23, 2005

Word of Mouth Marketing II: Preparing Your Business for a Word of Mouth Marketing Campaign

[Applicable tags: WOM, Local, Marketing, Cheers]

The simple premise for preparing your business for a word of mouth campaign is to turn customers into vocal fans. That’s what word of mouth really is, fans spreading the word to their friends. Start building a fan base!

The second piece of the puzzle is to make your business worth talking about. Your business needs to stand out in some way. You need to provide an experience that is unlike anything else. People don’t talk about things, they talk about experiences, so make sure that you provide a tremendous and unique experience.

1. It All Starts with The Customer’s Experience!
If your customer experience is positive, great, you make the first cut. If you provide a poor customer experience then word of mouth marketing will bury you. The old aphorism hold true: "A happy customer will tell two friends, an unhappy customer will tell ten friends". So get it right or your efforts to stimulate buzz will help those unhappy customers tell a hundred people.

What can be done about the customer experience? The customer experience is built upon these factors:
* Good employees
* Good product/service
* Good atmosphere
* Good results
* Good follow-up (training, support)

Take an honest look at these characteristics of your business and ask yourself whether they are superior to the competition. More importantly, ask your customers.

2. Solicit Opinions, Listen, Act & Thank Them!
It is basic human nature that we want people to listen to us and respect our opinions. Yet it is rare that people actually ask for our opinions and then listen to what we have to say. It is even rarer that they then act upon our feedback.

Solicit the opinions of customers. Ask them how you can make their experience better. Ask former customers why they left and what you could do to earn their business back. Don’t argue with them, don’t try to convince them, just thank them for their insight and do something about it. Once you’ve made the change, point it out and thank them for the feedback.

Let’s say, for example that you solicited feedback, and twenty people told you to make a particular change. You make that change and then call each person individually and thank them for their wonderful suggestion. How does that make each person feel? It makes them feel good that you listened and did something. But more importantly, each of those twenty people now feels that they have an emotional stake in your success. They want you to succeed because they want their feedback to work. As a result, you now have twenty evangelists ready to spread the word for you.

3. Develop Relationships
People are used to being treated like nameless faceless customers. It just seems to be the way most businesses treat us. Now think of places you really love. Odds are they know you, they treat you like an individual, you belong. These are the places you remember and you tell your friends about. It’s like the song from the TV series Cheers "...you want a place where everybody knows your name."

The best way to develop relationships is to spend time with people, getting to know them and sharing information about yourself. Maintain a log about each customer so that you can ask about their kids, grandkids, pets, work, hobbies, vacations, talk about their favorite sports team, whatever. The more you treat people like special individuals and show them that they are important to you, the more special their experience will be. And the more special their experience is, the more they will morph from customer to fan.

Spend time with your customers getting to know them and helping them get to know you. Each time they visit get personal. For example, if you have a restaurant, start saving dog-safe bones from customer plates and place them in a branded bag. Each time a dog owner comes in, offer them a "bone for skippy". They will start visiting more frequently and they will tell their friends. You are no longer just a local business owner, you’re their friend.

Amazon is the most loved vendor on the Internet. This customer appreciation is what has enabled them to easily transition from Internet bookstore of choice to Internet vendor of choice. And why do we love Amazon? Because they collect a ton of information and feedback from their customers and use this information to make each customer’s experience personalized, fast and easy. Amazon offers 1-click ordering, personalized recommendations, customer reviews and ratings, the personalized greeting and much more. All of this is meant to make you feel like you belong. Like the Cheers theme song, they know your name. Maybe I should write a separate article on Build a Successful Business According to the Lyrics From The Cheers Theme Song...or maybe I just did.

If you can provide a great customer experience, solicit and act on customer feedback and develop friendships with your customers, your business is ready for a full fledged word of mouth campaign. In fact, whether you like it or not, taking these steps will build the buzz about your business. The next step is to implement programs and tools to take that buzz to the next level. I’ll address this in future articles.

Friday, May 20, 2005

Word of Mouth Marketing I: Word of Mouth Versus Traditional Marketing

Word of mouth marketing fuels far more transactions than any other form of advertising. A McKinsey study determined that word of mouth influences “slightly more than two-thirds of the U.S. economy.” Cap Gemini Ernst & Young asked car buyers what influenced them to buy a car and 70% said word of mouth while only 18% attributed it to advertising. There are numerous studies on the impact of word of mouth and they all suggest that word of mouth is about 4-times more effective than any direct (paid) advertising.

Word of mouth works because people trust their friends far more than they trust a paid advertisement. Focus on the degree of “complete trust” in the attached graph.

Most Trusted Form of Advertising Posted by Hello

Despite all of this evidence, companies continue to spend ungodly amounts of money on traditional advertising while largely ignoring the power of word of mouth. Why is this? There are a number of reasons as described below:

1. Control
Marketing people cannot control word of mouth marketing, like they can with traditional marketing. Traditional marketing involves crafting a message and then repeatedly slamming that down consumers’ throats at a high cost. Word of mouth marketing involves relying upon your customers to pass their messages to their friends. But you cannot control that message. Sure you can package it for them and spoon feed them, but ultimately they decide what they will tell their friends. This lack of control is very scary to marketing people whose careers are built upon protecting their brand. So the marketing folks fall back on traditional marketing in an effort to control the message and also, hopefully, influence the word of mouth messages.

Counterpoint: By investing time upfront, you can position word of mouth to succeed. Then you need to invest in nurturing it as it grows. You can reinforce the word of mouth messages through traditional advertising, but you need to find out what word of mouth marketing messages are working and then package and reinforce them.

2. Standard
Traditional advertising is the standard. Everybody does it. Just as in the old days, you couldn’t get fired for buying IBM, you can’t get fired for investing in a tried and true marketing medium. Studies show that in the 1970’s the average consumer saw 700 ad messages per day; now they see 3,000 ad messages in a typical day. I probably see (read ignore) 3,000 messages in about an hour of surfing the Net, so undoubtedly, that number needs to be updated to reflect the reality of the web. In any case, advertising is accepted as the standard. The best and most profitable companies in the world spend a ton on traditional advertising. Every company wants to be huge and profitable when they grow up, so they figure they have to invest in standard advertising too, albeit on a smaller scale.

Counterpoint: In response to this barrage of advertising messages, consumers are becoming increasingly numb to it. And as consumers become numb to traditional marketing, word of mouth marketing becomes even more appealing by comparison. This explains why advertising dollars are starting to shift from television (a push media) to the Internet (an increasingly interactive media). The interactivity of the Internet supports word of mouth marketing in a way that the TV never will. Expect more companies to shift their advertising dollars to the Internet as they come to realize what a powerful tool it can be to build word of mouth buzz, and how that translates into offline purchases.

3. Industry Support
Media sales people and advertising companies can provide all sorts of metrics about the return on your advertising dollar using traditional media. But ask them for metrics on word of mouth and they look at you like a deer in the headlights. Despite its impact on the economy there are no standard metrics for quantifying ROI for word of mouth advertising. Of course, this is because most word of mouth is free, there is no financial incentive to build these metrics. This scenario is similar to the vitamin industry. For years Linus Pauling proclaimed the benefits of high-dose vitamin C, but there were few studies on vitamin C because the drug companies have no incentive to fund such studies. Instead drug companies fund research about proprietary drugs that make them a ton of money. Advertising people are the same way.

Counterpoint: Don’t just walk into your bosses office and tell her that you want to invest a certain amount in word of mouth, because most people just assume that word of mouth is free and traditional advertising is where you spend money. Instead, build a plan for starting and fueling positive word of mouth advertising. To most people, the thought of investing in word of mouth advertising is tantamount to buying air. In later installments, I’ll explain how and why you need to invest in building buzz. In lieu of standard ROI graphs, you’ll need a comprehensive plan. Hopefully these posts will also provide supplemental support.

4. Cross Functional Demands
Traditional advertising falls largely under the control of the marketing department. Marketing can create a advertising campaign independently and then deliver it fait accompli to the rest of the organization. Word of mouth relies on a well orchestrated organization working in concert to fuel word of mouth. In some cases your preparation work will highlight organizational weaknesses that must be corrected prior to launching a word of mouth program. If they aren’t fixed they will torpedo the effort. As a result, you’ll need buy-in from the entire organization. This can be daunting, as the saying goes, kind of like herding butterflies. But the rewards can be huge.

Counterpoint: Hey, I write for the “local” market, meaning small businesses. It’s a whole lot easier to implement a company-wide word of mouth program when company-wide means 10 people, than it is when it means 10,000 people. But that aside, you need a comprehensive plan that will garner the support of your CEO, then he can sell it to the organization. If you CEO isn’t capable of doing this, get a new job, your company has no future.

While word of mouth requires a degree of faith, there are many things you can do to create a winning foundation, start it properly and then fuel it in a positive manner. In later installments I will address these next steps, showing you how to prepare your company for word of mouth marketing, launch it and nurture it. In many ways, building word of mouth is like building a bonfire. The first step is to prepare the area. Then you assemble the pieces: match, paper, kindling and large logs. Then you light the fire, not just in one area, but in several areas to ensure success. Finally, you throw additional logs on as necessary to keep it going. This installment explained the value of a word of mouth “bonfire”, later installments will explain the steps for building one.

Thursday, May 05, 2005

Harnessing the Power of Coupons to Achieve Your Business Objectives

Most people think of coupons as merely a discount that vendors offer consumers in order to increase their business. This perception misses the core value of coupons, which is the ability to use a special incentive to drive favorable consumer behavior.

Coupons are not merely a discount. In the heyday of the Internet bubble a company created a clean and technically savvy approach to couponing. They arranged with credit card clearinghouses to deduct a certain percentage of purchases from participating vendors. Then this Internet start-up sent email alerting these card holders that they would automatically get discounts at participating vendors. What behavior did this drive? None. The cardholders continued to shop at the same stores as before, and they would simply get a pleasant surprise that their bill was lowered through discounts at participating vendors.

In this case, the vendors offered an across the board discount to consumers, with no reinforcement that the consumers were even aware of the discount, or that it was modifying their behavior in any way. While this approach avoided the “messiness” of couponing for both the consumers and the vendors, it failed to modify behavior and was therefore a complete failure.

Now let me give you another example. Coffee shops have large fixed costs in terms of staffing, equipment and rent. They have very low variable costs attributable to coffee and cups. One local coffee shop found that they were extremely busy during the morning and evening hours, but the place was dead during the middle of the day. With a high fixed cost structure, any additional business during these slow times would go almost directly to the bottom line.

So the savvy coffee shop owner offered a coupon that deeply discounted coffee from 10am – 3pm. This offer caused traffic to increase during this time by 25%. In this case, the coupon achieved the objective of modifying consumer behavior in a manner that was very favorable for the business, without impacting the profitable business during their busy times.

Let me give you another example of the power of coupons. Amazon found that their average transaction was under $10. So they instituted “FREE Super Saver Shipping” for orders over a certain minimum. The actual threshold has been dropped from $99 to $49 to $25. When was the last time you went to Amazon to buy one book and were tempted to buy one or two more to get free shipping? They get me every time! This offer drives favorable consumer behavior. It increases the average order size from sub $10 to well over $25, and the incremental profit more than pays for the shipping. It also makes consumers feel good about shopping online since they don’t have to pay for shipping.

Amazon has recently taken this one step further by offering free shipping for a year for a flat $79. Once the consumer pre-pays their shipping, they are mentally locked into buying from Amazon for a year. Wouldn’t you feel silly paying for shipping from a competitor when you’ve pre-paid for Amazon? And when comparing prices, Amazon now has lower prices because you don’t have to pay shipping there. Frequent buyers might feel good about this bargain, but Amazon may be selling the sleeves from their vest, because of the broad use of free shipping on the Internet.

A coupon’s value, whether it involves a coupon code or a printed coupon, is whether it drives favorable consumer behavior that achieves the advertising company’s business objectives. Let me offer a quick list of business objectives and the offers that achieve them:

Grow your customer base by attracting new customers:
This is especially common with new businesses and those that have excess capacity.
• 15% Off of Your First Order
• Sign-up Now and Get 3 Months Free
• Free Introductory Lesson

Drive repeat business and increase customer loyalty:
• Your 5th Sandwich is Free
• Your Second Session is ½ Price
• Every 5th order is 50% off

Sell specific items or services:
This is used to introduce new products/services, increase sales of high-profit items, sell excess inventory, etc.
• 15% Off All Dive Computers
• 10% Off Our Gold Package
• 2004 Snowboards 70% Off (while they last)
• 50% Off Previously Viewed DVDs
• 15% Off Our New Line of Sports Wear

Increase business during slow times:
• 33% Off Midweek Rentals
• $.50 off any Coffee Drink Weekdays 10AM – 3PM
• $3 Off Haircuts Weekdays 10AM – 3PM
• Early Bird Special 15% Off All Entrees Before 5PM

Capitalize on seasonal or special events:
• Bare Root Fruit Trees $10
• Monday Night Football: $8 Large Pizza
• $1 Beers on Fight Night
• Prepare Your Pool for Summer $75

Increase your average transaction size:
This is very popular. Think “Meal deal” and “Supersize” at fast food restaurants. Maximizing revenue per customer is a proven winner!
• Free Delivery on Purchases Over $200
• Buy one Entrée, get the 2nd Entrée 50% Off
• Free Cup of Coffee with Purchase of a Bagel
• Take $50 Off Any Complete Ski Package
• $50 Off MS Office When Purchased With an HP PC

Simplify your business process with regular specials:
This is particularly relevant to restaurants because they can simplify their kitchen prep time by offering daily specials.
• Take $1 Off Our Daily Lunch Specials
• Daily Dinner Special Only $8.99

Capitalize on customer traffic from nearby events:
• Rockets Pre-Game Special $2 Beers
• Show Your Movie Ticket Get $1 Single Scoop
• Giants Lunch Box Special $4.99

Generate customer referrals:
A great way to grow your business is through customer referrals. And a great way to stimulate customer referrals is through coupons.
• Bring a friend and get 25% off your order (one discount per pair)
• Refer a friend and get a 15% rebate
• 1 month free when you refer a friend

I could go on and on with coupon offers that drive favorable consumer behavior. Best of all, consumers that receive these special deals feel special. Using coupons makes people feel like smart consumers. It also creates an appreciation for the business that is offering the discount, because they really want you to try their business. And people love telling their friends about bargains, so coupons can fuel positive word of mouth: “We had a wonderful meal at Mike’s Bistro on Harbor, and we saved $20 on the tab, you really should try it!”

Coupons also offer businesses a unique advantage over every other form of advertising. Shopkeeper John Wanamaker was famously quoted saying: “Half the money I spend on advertising is wasted; the trouble is I don't know which half.” With coupons, redemption makes it very clear what works and what doesn’t. No other form of advertising provides this level of transparency and accountability.

Obviously, coupons can be much more than a simple discount. When done properly, coupons are a powerful tool in any business’ marketing arsenal. One of the more popular uses of coupons is to introduce consumers to the company. It is important to note that coupons can be used to create customers, but it is up to the business to turn those customers into fans.

Wednesday, May 04, 2005

The Next Challenge Facing Newspapers: Internet Coupons

Various Internet sites have been feeding upon print newspapers like sharks feeding on a dying whale. The Internet sharks have fed upon the newspaper’s franchise on news, editorials and classified ads. The next course in this meal is coupons. Can the newspapers, in their weakened state, fend off the assault on their coupons, or will this provide yet another meal for fleet of foot Internet companies?

Let me just quote a few facts that paint a picture of the fate of the newspapers:

* The combined weekday circulation of all U.S. dailies has dropped from 62.8 million in 1985 to 55.2 million in 2002. That gives it the lowest penetration of any medium. That trend is accelerating due to the impact of the Internet. (Forbes)

* "Newspaper readers are dying off faster than they can be replaced," said industry analyst John Morton. "It's a trend that's been exacerbated by the Internet. It's a fairly deep problem and it's not going away."

News aggregation sites like Google and Topix have cut into the newspaper’s franchise on day-old news by providing richer fresh news for free.


The blogs have torn into the newspaper’s franchise in editorials. Instead of getting only the opinions newspapers deem fit for print, Internet users can get diverse opinions on any topic through blogs.

Classified Ads:

As mentioned in one of my previous postings, classified ads are simply much better on the Internet. Here are a few facts that support this point:

* According to market researcher Classified Intelligence, San Francisco bay area newspapers lose $50M - $65M in classified revenues annually as a result of Craigslist’s free online classified ads.

* In 1997 there were 141M classified ad listings in newspapers and 4M in eBay, by 2003 there were 602M listings in eBay and 120M in newspapers. (Morgan Stanley)

Media baron Rupert Murdoch spoke to the American Society of Newspaper Editors April 13, 2005 about the impact of the Internet on newspapers, and all but proclaimed the death of the newspaper as it exists today.

“…We today face the more immediate challenge of transforming our offline classified businesses into online marketplaces. And not just for the traditional cars, jobs and real estate categories. What we’re learning is digital natives increasingly are finding their dates, their plumbers and their restaurants online.”

This brings us to the next major section of the Internet to come under attack by the Internet, namely coupons. Pick up any local free newspaper and it is apparent that local advertising funds these operations, and a good percentage of the local advertisements are coupons users can clip and redeem. Coupons also comprise a significant number of the run of press (ROP) ads in major newspapers. On top of this, the coupons in the Sunday newspapers, called free standing inserts (FSI), represent a multi-billion dollar business. But coupons, just like classified ads, are much better on the Internet.

Consider these facts:

* There were about 350 Billion coupons distributed last year in the United States, with a redemption rate of about 1%.

* 77% of the US population uses coupons and there were 16 coupons redeemed for every man, woman and child in the U.S. last year.

* According to the Newspaper Association of America, 42% of the Sunday newspaper readership is due to the FSI coupons.

* Online content drives 4 offline transactions for every 1 online transaction, 98% of all commerce is offline, and 80% of that commerce is concluded within 20 miles of where people live and work. In other words, online content has a large and growing impact on local sales, which is where the real money is.

* Internet coupons currently represent less than 1% of the total coupon market, but their use grew 111% in 2002 and 365% in 2003.

The trends are pretty obvious, couponing is big business, and it is moving online at an accelerating pace. The reasons are simple, online coupons replace the entire coupon clipping, saving and management headache. You simply search for the coupon you want and print it when and where you want. If you’re at work and want a coupon to save on lunch, just print one from the Internet. What could be easier?

Until now, newspapers have acted like fish out of water when it comes to the Internet. The majority of the newspaper websites are pretty weak, and that’s being generous. Unless they start fending for themselves, newspapers will soon become lunch to yet another breed of Internet competitor attacking their local advertising and couponing franchises.

Monday, May 02, 2005

The Internet is Transforming Branding

Definition of Brand: “A product, store or service with an identifiable set of benefits, wrapped in a recognizable personality.”

-- Roger Blackwell

A company’s brand is critically important, because it is their public face, it forms the consumers’ impression of the company and their products. Yet it is increasingly beyond any company’s ability to control.

Companies nurture their brand. They spend a ton of money on naming, logos, packaging, celebrity endorsement, event sponsorship, advertising, the list goes on an on. But more and more today, it is what companies cannot control that defines their brand more than anything, namely the information and buzz found on the Internet.

The Internet, combined with increasingly powerful search engines, has put the world’s information at the fingertips of the average consumer. Now instead of relying on a well crafted corporate brand, consumers increasingly get the real skinny on the Internet. Consumers can get all of the facts about the product, consumer reports, various online reviews, shopping comparison engines even put items side by side with the competition; in fact there is a flood of information about almost any item.

Brands are comprised of two main elements:

  1. Function: the quality, price, performance, etc.
  2. Emotion: how it makes us feel

In lieu of hard facts, consumers would traditionally rely more on feelings, or they would rely on the perception of function. For example, you might say Sony makes good quality products. Why do you say this? Because Sony has crafted their brand to reflect an image of quality. But now you can get MTBF (mean time between failure) information about various products on the Internet. So, instead of relying on advertising to tell you who has good quality, you can see it for yourself. That is the power of the Internet.

There is also the issue of the buzz on the Internet. Opinion sites, user ratings and comments, blogs and social networks can make or break just about any brand on the Internet. If Sony releases a buggy product with inferior performance, all of the money they’ve spent on building their brand takes a backseat to the buzz.

Let me provide an example:
You are looking to buy a mountain bike in the $800 price range. Which source of information carries the most weight with you?

(a) Celebrity endorsement
(b) An ad in a mountain biking magazine
(c) Branded websites
(d) Recommendations from other consumers
(e) Recommendations from trusted friend

A recent study by Forrester/Intelliseek Research found that the options above are rated in the order of importance, with (a) being the least trusted and (e) being the most trusted. Answers (a) and (b) above represent the old-school method of corporate branding (building, nurturing and controlling). Option (c) is the middle ground because it is still corporate controlled, but it focuses more on product information. Options (d) and (e), the most powerful mechanisms for forming consumer opinion, are out of the control of the corporate branding geniuses.

In short, the Internet provides consumers with immediate access to an increasing body of factual data and user feedback. This is causing a shift in power from the corporate branding gurus toward consumers. Branding is falling a distant second to functional elements. This means that inbound marketing (figuring out what people want) is becoming increasingly important relative to outbound marketing (figuring out how to sell what you have) as we become more informed consumers. The Internet is fostering a consumption meritocracy where to old adage “build a better mousetrap and the world will beat a path to your door,” is finally becoming a reality.