Traditional consumer electronics retailers such as Best Buy and Wal-Mart are no strangers to online competition. However, a new crop of online competitors has come to prominence and are taking pages out of the traditional retailer’s playbooks through national TV advertisements and employing new business models to brand themselves as the new home of value. Consumer electronics buyers have been trained to be price sensitive since the days of the newspaper circular and the internet only intensified price competition. Traditional retailers were able to brand themselves as more trust worthy, lower hassle, and competing well on price against many online entrants. A new wave of online competition, exemplified by Newegg.com, TigerDirect.com, and Quibids.com, is challenging these positions.

NewEgg, TigerDirect, and Quibids have all launched national television campaigns that seek to legitimize their brands. These campaigns add a sense of trust worthiness to the sites as well as greatly enhancing knowledge of the brand. In addition to traditional television spots, Quibids has become a primary sponsor for “Mike and Mike” a popular national radio and television sports morning show on ESPN. The companies all align on a heavily value oriented message that is carried through their entire online and offline presence. Older online players did not have the scale or advertising budgets to pursue such tactics.

Quibids poses a unique challenge for traditional retailers due to its discount auction business model. The site auctions unopened items that are typically close-outs or end of life products on a no reserve auction with penny bid increments. It then charges per bid placed and encourages users to outbid each other by a penny to get great deals. The deals advertised seem too good to be true and it remains to be seen if a broad based customer group will develop, but the competitive threat of a site that is paid by a large group of customers who are not getting anything, cannot be ignored.

This new crop of online competitor is well funded and pursuing traditional advertising outlets with a compelling value message in a market that is highly price sensitive. The traditional bricks and mortar incumbents must take notice of these competitors. As Millennials age and American consumers continue to become more comfortable with online purchases, traditional retailers will see their advantages over online players erode further. In order, to compete in this environment with the overhang of heavy rent payments and sales staff, retailers must innovate. Only time will tell who is successful against this new brand of online competition.


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I’m considering a career in the advertising industry. I find the field incredibly interesting, love the intersection of business and human behavior, and enjoy working with creative people. But in the back of my mind I have lingering questions about the field. Go out to any random bar, and surely you’ll be able to find someone who can list 10 compelling reasons why advertising is ruining society. On the flip side, you can probably also find someone in that bar who can list 10 equally compelling reasons for the economic value that advertising helps create. My interest about whether or not advertising is evil has risen this week in response to several news stories:

1) Google’s Anti-trust hearing with the FTC: In short, the search giant is being accused of abusing their market dominance and harming consumers in the process. One piece of this is how Google’s placement of advertising has evolved over time. Ten years ago, they barely featured any ads. Today, a google search looks quite different. For a company that makes nearly all of their revenue through advertising, it certainly seems that they have an incentive to increase the number of ads and decrease the number of organic search results.

2) Facebook’s new Timeline and Open Graph: Some have argued that Facebook’s new architecture has been enhanced mainly to create an amazing advertising platform. And when you realize that your actions will sometimes generate sponsored stories with your name on them, but without your knowledge, you can certainly start to see how it could be perceived this way. 

3) Disney targets babies: In the Adweek cover story this week, the magazine talks about how marketers are increasingly targeting babies to get early influence with a generation that will be using smartphones within their first few years of life. One story in this article was particularly interesting. Apparently Disney has partnered with a photography company that takes pictures of mothers and babies after they’ve given birth to offer the mom’s free Disney onesies in exchange for their email address. Back off, advertisers, the kid can’t even see clearly!

But you have to consider the flip side to all of these stories. Google’s incredible ad revenue has given them the money to create amazing products that have simplified and enhanced the human experience. They also give a lot back. For example, they’ve begun building low income housing (although it seems that this move will also generate healthy returns). Facebook timeline will arguably create a far more emotional and meaningful user experience that will transform our online social life for the better. And Disney has created more happiness in children around the world than any other brand I can think of, and for a lot of people, a free onesie is a welcomed gift.

So is advertising evil? Unfortunately, I think the best answer is still the unsatisfactory one: “it depends.” 

Certainly nagging questions remain about the motives of our most beloved brands. Is it that we’re unaware that we’re being marketed to that makes us uncomfortable? I don’t think so. My friend Matt Summers would actually argue that mystery and the unknown actually enhances brands in our minds. Or maybe it’s more the sense of deception doesn’t sit well. This seems feasible. Most likely its the proliferation of advertising that most alarms people. It simply seems to be everywhere today, from the baseball park to my friend’s blog to the delivery room.

But all is not lost. In the face of this proliferation, there is a real opportunity to do good by creating value for consumers. To educateentertain and engage. Given the advent of the digital age, this is more possible than ever. This gives me real hope about the direction of advertising and I’m excited to be a part of it.


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March 2011: A team of industry veterans from LinkedIn, PhotoBucket, and La La. $41 million in Series A venture capital funding. Top tier firms including Sequoia Capital and Bain Capital. Massive PR exposure. A declined $200 million offer from Google before the product even launched.

May 2011: Confused customers. A product pulled from the market. Co-founders and executives leaving in droves. A failed PR campaign.

So what happened? The new location-based social network for photo sharing, Color, promised the world that it would “transform the way people communicate with each other.” Admittedly, the team made a lot of mistakes during product development and launch, but all the basic elements of a “good” investment were there: an experienced team, an interesting idea, a large and fast growing market, advanced technological capabilities, and nearly every resource needed to succeed. Yet investors are looking at significant financial losses and reputational damages because they discovered at a late stage that a critical assumption in the business model was flawed.

Do people really want to share photos with strangers?

A sarcastic review recently posted in the iPhone App Store illustrates how many seem to feel about the concept of publicly sharing photos: “Speaking of strangers, all you lecherous anti-social creepers need to run down to your local swimming pool, beach, playground, or shopping mall – the free Color app is the perfect 21st century electronic voyeur.“ While many entrepreneurs believe the strategy of a) developing a “good enough” product b) getting it out into the market to gather feedback and c) improving through an iterative process is the most effective way to successfully launch a product, I believe that a proactive approach to testing and addressing critical business model assumptions, such as the aforementioned assumption facing Color, is much more effective and both time and cost efficient.

The current corporate and venture capital staged funding processes seem to be fundamentally flawed. It is not that entrepreneurs and investors are asking the wrong questions, it is that they are not focusing enough on the order in which they ask the right questions. While investors may not always have the ability to dictate terms due to competitive, speed to market, or co-investor pressures, I believe that redefining the staged funding process to focus more on efficiently mitigating risks in order of importance can be beneficial to all stakeholders involved.

Last year, in a Harvard Business Review article entitled Beating the Odds When You Launch a New Venture, Innosight Managing Partner Matthew J. Eyring described the concept of addressing “Deal Killer” risks as early as possible and “Path Dependent” risks as soon as they are encountered. Building off of this idea, I propose to investors a new approach to staged funding: Test Based Staged Investing.   

Test Based Staged Investing (TBSI) still involves identifying attractive opportunities such as Color, but instead of the typical process of staged investing (see Exhibit 1 for comparison), TBSI explicitly and methodically tests the most critical “Deal Killer” risks in the earliest funding stages and addresses “Path Dependent” risks as they arise.

Exhibit 1: Comparison of Typical Venture Activities

Stages:

Seed

Startup

Second (or A)

Third (or B)

Bridge/Pre-IPO

Typical Staged Funding

Ideation

Market Research and Business Plan

Feasibility

Team Building and Prototyping

Market Validation

Commercialization and Business Development

 

Growth

Process Planning and Product Diversification

Scale

Execution and Financial Predictability

Test Based Staged Funding

 

Test Planning

Assumption Prioritization and Test Plan

High Risk Tests

Team Building and “Deal Killer” Tests

Medium Risk Tests

Medium Risk Tests and Business Development

Low Risk Tests

“Path Dependent” Tests and New Test Plans

Scale

Execution and Financial Predictability

In the case of Color, both investors and entrepreneurs could have saved significant time and money by breaking down the business model into its fundamental elements, identifying and prioritizing the critical assumptions that support the model, and developing tests to validate those assumptions.

For example, Color might have identified “People want to share photos with strangers” as a “Deal Killer” after mapping out their business model and subsequently tested it by creating a low cost website describing the concept, driving traffic to it via PR efforts, and measuring interest through social media metrics, sentiment tracking, and the number of individuals signed up to be notified at launch.

Don’t think that would not work? A recent startup named Hipster just did it. However, assumption testing does not always need to be “innovative”. The most important test most startups will encounter involves creating a prototype or proof of concept to address the critical assumption of “We can actually build it.” Whether addressing the former or latter, TBSI groups and funds the most important tests in the first round, measures and evaluates the results of these tests, and invests in further rounds of testing if critical business model assumptions hold to be true or if the model is flexible enough to adapt.

Following the Test Based Staged Investing process can benefit all stakeholders in a business venture and minimize the risk of an embarrassing late stage failure. Both entrepreneurs and investors better understand a venture’s business model, develop more focused and effective plans to test the model, and limit their financial losses, reputational damages, and opportunity costs. Even when ventures fail at an early stage due to an unavoidable “Deal Killer”, entrepreneurs and investors can institutionalize this knowledge and avoid future investments that rely on the same fundamental assumptions. By following the principles of TBSI, investors can more easily realize when it is time to “cut losses” or double down on an investment, which frees up capital for new or promising ventures and likely boosts returns.

While Color raised enough money to recently “pivot” its product into a Facebook integrated solution, I still believe the fundamental assumption that individuals want to share photos with strangers is flawed. If this turns out to be true, it may be just a matter of time until the company is eventually “killed”. However, if its stakeholders can learn from their mistake and follow the principles of Test Based Staged Investing for future ventures, I have a feeling we will be seeing them again very soon.


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The future of Social Networks

Google built a 25 billion dollars company based on the principle that “the user is never wrong”. Neither is their data therefore nor is the matching algorithm. The war that has been going on with Facebook does not only oppose those two giants’ interests, it is also a competition over a stable definition of the Internet through two different ideologies. Google has spent the past 14 years to index and to roam the web, opening it as much as possible and opting for an end-user data classification augmented by folksonomy permitted by Google+ and +1. In the meantime, Facebook has moved from a trendy sealed social network to an omniscient social platform. The company tries to expand its reach everywhere and is now bringing the web into almost all of its applications. Facebook wants as many users as possible sharing as much information as they can either they like it or not as demonstrated by its recent invasive new features. The new “like” button now displayed on a million of websites places a cookie on your computer that allows Facebook to know everything about your off-Facebook behavior whether you clicked on “like” or didn’t. Furthermore until privacy advocates revealed it, Facebook had been collecting data on non-Facebook users through the “connect on Facebook” button set on many websites. Facebook and other social networks are now gathering tons of information about users that are giving the company intelligence to send more and more targeted advertising. Which of those visions of an opened and socialized Internet versus a content-sharing-focused web where only matters the information you share with each other will prevail in our way to use data and the Internet in the next decade? Can we imagine that within a few years we could be searching the web not through an algorithm but through our friends’ recommendations? One thing’s for certain though, as Mark Zuckerberg recently declared, “social is going to become the default mode of the web”.

As the technology journalist Dan Gillmor explains it in a recent paper[1], users control over the web-based products and services they subscribe for such as Facebook or Google+ is extremely low: those services providers can change the product as they want and “the more our products contain software the more likely it will be that these products are not really ours anymore”. What option is left to the outraged and captive consumer? Take it or leave it, which is basically a non choice as long as Facebook network effects remain unequaled. Let’s assume that the new changes that appeared on Facebook users’ walls leading to an increment in the data flow they receive might outrage a substantial number of them. Let’s assume leaving is not an option yet. How will users’ behaviors be affected and therefore will be Facebook advertisers?

As the web is getting more and more social, a constant stream of information more and more overwhelms users. Advertisers not only put more content online, but following their CMO’s advice they make the content “interactive” requiring more users time and attention. Danah Boyd, a Berkman Center Fellow and a social media scholar, considers that …when the information being shared is social in nature, advertising is fundamentally a disruption[2].“ In other terms, distributing more personalized content will only lead to an “information overload” and won’t product the results that marketers expect. If she is right, how Facebook users will react? The online marketing agency Syncapse released recently the public engagement data for 300 of the top brands on Facebook over a one-year period starting in July 2010. And for its CEO, “the results show clear decline in average engagement. Engagement on the Facebook walls of leading brands is down 22%.”[3]. This doesn’t mean that users are spending less time on Facebook. On the contrary, Facebook clearly dominates Yahoo and Google sites on time spent online. Its chart is rising month after month and has occupies now 16% of the average time an American spend online. Although it doesn’t mean Facebook users exposure to advertising rises proportionally. Today, most of the search done on Facebook is people search and interacting with friends is users main activity (on an average day, 22% of those users comment on another’s post or status, 20% comment on another user’s photos, 26% “Like” another user’s content, 10% send another user a private message).

The risk for Facebook is that its users might adapt their behavior to the new Facebook features: they could post less content (meaning less data and less relevant information for advertisers) and self-censor themselves to avoid going through way too complicated privacy settings. One might argue that Facebook dominancy could take a slight decrease of its frequentation. The problem for Facebook is not as much what they are loosing as what their competitors are gaining. Facebook is not anymore this quiet virtual place where you could hang out with your friends. It is now a huge and noisy bazaar where it has become harder and harder to find your group of 50 friends among the average American 648 Facebook social ties and the ubiquitous advertising. Is it what users want? Apparently not considering the success of Facebook circles. What about the other options? Path, a social network that limits to 150 the number of your friends and focus on close ties, has only half a million users and has somehow become an other Facebook application that allows you to work your way around the complexity of your privacy settings within the mother ship. Google+ has become a ghost town by not achieving to give users a good reason to move their data out of Facebook. None of Facebook competitors seem to be in the “winner take it all position”.

Does it mean that Facebook is the utmost and final version of social networking? Certainly not. Interacting with people you know closely will remain one of users priority. But so will interacting with people you don’t know yet. Online dating has made it popular for a long time but hasn’t explored all of this concept’s possibilities. Aside from the niche and specialized online communities, there is certainly a market for other behaviors and needs based on the concept of social discoveries: 1) how to meet people you don’t know 2) how to move from weak ties to close ties? It could be enough for Facebook monopole to open up to other competitors who will bring in other philosophies (such as Anybeat which provides very clear and user friendly privacy settings) and who knows, pave the way for a different social network market that would finally make the best out of Internet possibilities.

[1] Dan Gillmore, The Guardian, “The Facebook Template: when net freedom meets market force”, September 2011

[2] Danah Boyd, UX Magazine,  Streams of content, limited attention”, February 2010

[3] Michael Scissons, AdAge Digital, “Four things Mark Zuckerberg should tell every CMO”, August 2011


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Subsidizing Beta Sign-ups

Build It and They Will Come

Hipster.com set the bar high. 10,000 beta sign-ups in 2 days.

Their launch site displayed a picture of the Golden Gate Bridge and the statement “Something cool is coming to San Francisco. Enter your email address and we’ll put you on our invite list.” But here’s the twist, once people signed-up they were offered early access if they referred three friends. Their CEO claimed that 2/3 of their sign-ups came from referrals.

The idea seems easy enough: provide people an incentive for referring friends to sign-up. Zero cost to Hipster.com and very little effort required on the part of the user for them to earn their reward. While it lacks the luster of PayPal’s strategy of paying each user a $10 referral fee, it has proven to be effective for a number of start-ups.

So, when I went to launch my own beta page, the Hispter.com approach seemed like the perfect way to build my email list prior to launch. In turn, we had a basic webpage designed, plugged-in a web-service to handle all of the referrals we were going to receive, sent out a few launch tweets and ta-dah…

In two days we generated 400 sign-ups. Nowhere near 10,000. Additionally, almost all of the sign-ups originated from our direct and social marketing efforts rather than by referrals as in the Hipster.com case.

Lessoned Learned

While admittedly, I did not expect to generate 10,000 sign-ups in two days, I was surprised that referrals accounted for less than 5% of our email addresses captured. In comparing our efforts to those that were successful, I’ve discerned the following are essential ingredients to driving results:

The initial bump

 Hipster.com benefited from being featured on TechCrunch.com and Hacker News, while ultimately this only accounted for a small percentage of their total sign-ups, it no doubt helped to build a significant starting point. The moral here is, be aggressive with getting your story covered out of the gate.

Influencers

If driving referrals is the name of the game, then reaching those people that are most likely to talk about your product is key. In the case of Hipster, the initial media coverage gained the attention of several prominent high tech pundits that in turn used their social presence to blog, tweet and refer their large network of followers to the launch page. Figure out who your influencers will be and target them directly.

Get your message across

This is perhaps less obvious than it sounds because launch pages, by their nature, are usually very elusive. However, you have to construct a concise and enticing message that will garner enough interest for someone to not only share their email address, but also suggest to their network that they do the same.

Targeting and Invite Codes

After falling short of our initial sign-up goal, we refocused and were able to dial-in our social media strategy to better target the type of person that would be interested in our product. Additionally, we created unique invite codes that guaranteed early access. Invite codes made it easier for them to claim the early access incentive upfront and thus removed the friction of having to refer friends on the backend. This ultimately provided more of an incentive to sign-up and the invite codes provided us a deeper level of analysis.

Next-up

Product launch is right around the corner, and leading up to it we’ll be conducting a new and refreshed beta push. This time though, we’ve created a well thought out strategy with the intention of surpassing Hispter’s meager 10,000 user sign-ups…


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