Tuesday, 9 June 2009

Channel Selection for New Product Launches

I have been reviewing the go to market strategy for two ventures, both of which are trying to penetrate new markets. The first is an established B2B SaaS company that has a huge customer base of SMEs and wants to enter the UK market. The second, is a UK startup trying to launch an innovative new product in the B2C insurance space. Both decided to pursue a channel sales strategy which made sense on paper. But after detailed discussions, they agreed to re-evaluate their approaches.

A channel sales programme is a significant investment once the partner identification, contractuals and ramp up costs are taken into account. Done right, it offers the chance of rapidly increasing sales and generating positive buzz that propels the business to the next level. The wrong strategy can set you back a year or more and in the case of startups, be a life or death question.

This article reviews important considerations for identifying the right channel(s) for new product launches.

1. Which channels do your target customers use/transact through?
All organizations consider this question very carefully. What channels have regular contact with my customers? For example industry associations are venues where B2B SMEs regularly interact with each other and prospective vendors. SME decision makers have also developed trusted relationships with local resellers who are happy to position new products. In the case of B2C product targeting consumers searching for insurance, the internet is the best medium as many people compare prices online. Internet traffic acquisition channels include SEM (Google AdWords, Yahoo etc), display advertising and affiliate networks as well as direct partnerships with sites that attract relevant traffic. Typically, several channels will be identified that can be used to target customers for a single product.

2. Product Channel fit: Is the channel motivated and able to sell or service the product properly?
The next thing to do is match the prospective channels to the product category. It is important to decide beforehand if you want the channel to perform either lead generation, close deals or service the product, or all or part of these. The tradeoffs are that lead generation is a low touch activity, while closing deals and supporting customers can involve significant partner investment and hence revenue sharing.

Questions to ask include:
  • Has the product demonstrated success for its target customers in the channels that you have selected? Partners are more willing to promote and sell a proven product. In a new product launch, it is helpful to invest time in acquiring beta customers directly to serve as references.
  • Is the product simple for third parties to position? Does it require significant training on behalf of the partner? Groundbreaking or complex high value products are usually better left to a direct sales force which has undergone comprehensive training.
  • As a proportion of a channel's customers, how many fall into your target segments? Partner sales managers prefer to promote products that appeal to the broadest number of their customers. If your product appeals to less than 50% of a channel's customers, you may need to invest significant effort in proper segmentation.
  • Does it fit into the partner's portfolio, or even enhance the value of a bundled offering? In the case of an affiliate or partner website, does this product help the partner's positioning of their site?
  • What is the sell price of the product relative to the typical transaction through this channel? Can your product help the salesperson meet their revenue or margin targets? Is the affiliate revenue or margin share competitive relative to other products being promoted?
  • Does the partner sell or service products that compete with yours? Could your channel program be subsidizing your competitors' products?
Be wary of partners that have the customers you want to target, but have a different focus. I have seen several examples of channels that failed to deliver as the product was not a good fit with the rest of the partner's portfolio.

3. Is it economically viable?
Channels can be well aligned with customers and products but still be economically risky to pursue. Many of the questions in the previous category help you to identify the true costs of a partner launch.

Questions to ask to include:
  • How many transactions can this channel accomplish relative to the total cost of launching the product? How much work will it entail to modify the product to make it fit into the channel? How much is the cost of training and supporting the partners on an ongoing basis? Be sure to validate your penetration and cost assumptions with the closest substitutes.
  • What is the opportunity cost of launching in the channel and helping it get up to speed? In a fast moving market, will your competitors be able to steal a march on you through direct sales? In offline channels, there is sometimes a long lead time involved in getting partners to launch your offering. This is especially true of deployments with volume channels such as Telcos which have deployment roadmaps that extend into several quarters and require much preparation on behalf of the vendor.
  • What is the cost of failure? If the partner fails to launch or support the product on your behalf, how much more will you have to invest for a re-launch?
  • How does this compare with direct sales?
After going through this thought process, the B2B venture is evaluating a phased telesales through to reseller model, that allows it to achieve initial success quickly and then experiment with a channel strategy. The B2C venture has realized that SEM (Google AdWords/Yahoo etc) is too costly for the market they are entering. They are investigating a sales and marketing combination of affiliates, PR and social media to showcase the innovation their product can bring to the insurance market.

Tuesday, 26 May 2009

Facebook and Social Search: The Database of Suggestions vs the Database of Intentions

I was at a social networking networking event (I know... :-)) recently and ran into a couple of guys from one of the public UK broadcasters. When asked why they were attending, they mentioned their website had been getting a lot of hits from Facebook and they were interested in finding out how they could encourage this. This was real world confirmation of the trend which began with Digg. Social recommendations are becoming mainstream, and organizations are trying to capitalize on it.

Social recommendations are tricky and all involve an element of trying to get your brand or product to go viral. Advertisers have to invest upfront in apps or games (such as the Whopper Sacrifice) or create compelling profile pages and then hope that they take off by word of mouth. It is much harder to pull off and target than simply buying AdWords on Google. However, a combination of search and social recommendations, that advertisers can measure in a CPCs has a chance of giving Google a run for its money. This is the premise behind social search.

To date, Google's dominance in search has not prevented new search engines from springing up. New entrants have differentiated themselves by sector (e.g. job search or housing), region (Yandex, Baidu), presentation (Kosmix) or ability to answer specific types of questions (WolframAlpha) amongst others. Those that have tried to compete head on (such as Cuill) have not fared too well. All had one thing in common - they have access to the same data as Google, which makes it that much more difficult for them to compete. How does social search differ?

Most importantly, social search has the potential to be highly targeted. Facebook, MySpace and others collect data such as their users’ comments, likes and dislikes and limit (or allows users to limit) what is publicly accessible. This additional data, should in theory makes search results more accurate – even Google agrees with this. Due to this, the blogosphere is awash with articles guessing how social search is going to affect Google's dominance. A recent article in GigaOM compared Google's search to looking for things in the library, and Facebook/Twitter driven search and recommendations as exchanging ideas in a coffee shop. While Google is great at indexing all published articles and can use your past results (if you let it) to make intelligent guesses to your current needs, it is never going to be as good as your friends' recommendations. To put it another way, if Google is the Database of Intentions (to quote John Battelle), then Facebook/Twitter could very likely form the Database of Suggestions.

The flip side of the coin is that determining the relevance of social recommendations may be quite difficult. Visitors to Google are signaling their intentions by making the effort to search for something specific. Users of Facebook may be driven by curiosity after finding a link on their friends' wall. Unless it is possible to filter this traffic, advertisers will have difficulty getting consistent ROI. Presumably, Google with all its PhDs should be able to come up with a model that works? Google has had a fair crack at this through its partnership with Fox, powering MySpace search amongst other things. However, Google executives have from time to time let it be known that this deal has not met expectations. A recent TechCrunch article provides actual numbers.

Besides relevance, there are also concerns about personal privacy and the damage to brands as dynamic user generated content (UGC) impacts the ability of advertisers to filter ads tied to objectionable content. However, the benefit of doubt has to be with the social networks. With an audience of 100s of millions and ranking in the top 5 sites in most countries, they clearly have share of eyeballs. Advertising dollars have to follow and this will stimulate innovation. They are also the victims of high expectations - after all, how many years did it take for Search 1.0 to evolve to produce an AltaVista or Google?

While social search is still on the horizon, social recommendations are already having an impact on SEO practioners and agencies. Agencies are beginning to talk about multichannel internet marketing, increasingly using not just SEO and SEM but also blogs, social networks, Twitter and others as a source of traffic. It will be interesting to contrast these different methods against SEO and to explore the effect they will have on the digital agency business model.

Tuesday, 19 May 2009

Game Theory and Software Business Partnerships

A recent discussion on game theory and sequential games triggered this article.

Managing partnerships with multiple players in an organization is a challenge, regardless of the economic situation. However, a down economy imposes specific strains on partnerships as organizations become even more focused on short term objectives. Projects that were in the process of getting into a growth trajectory are in danger of being pared back or terminated as the organization goes into survival mode. In addition, companies are subjected to disruptive events such as layoffs, which rob an alliance of the relationships that have been built over long periods. 

What can a partner manager do to ensure that their organization does not make an investment that is suddenly rendered useless as a result of a cancelled agreement? Game theory has something to teach us here.

As business partnerships are legally constituted and involve multiple interactions, their equilibrium state can be modelled as cooperative sequential games. However, if either or both partners become aware that the relationship is about to end, i.e. that the next game could be the last, they revert to looking after their own needs, resulting in a suboptimal outcome for one or both parties. What can a manager do to prevent this situation occurring? The answer is to engineer a contract that encourages ongoing cooperation and penalizes (premature) termination.

Some options:

1.     Deferred payment: In a deferred payment situation, one of the partners is a manufacturer or vendor, and the other a reseller. The reseller collects a fee immediately and is paid a deferred incentive. The incentive can be paid over multiple years and made contingent on a minimum number of sales per year. It can also be increased for each period where the vendor outperforms. If the relationship terminates prematurely, the deferred amount can be withheld. The net effect is that a successful reseller that brings in multiple deals, will have an increasing incentive to continue the relationship.

2.     Options: Options can be given over a period of years and programmed to vest only if the partner is meeting a baseline. Options can be more powerful than revenue as they give the reseller a stake in the overall business success of the vendor, without the risk of a merger. The risk of vendor underperformance remains however. A famous case is that of the early advertising deal between Google and AOL, which worked out extremely well for AOL, and was also the deal that ‘made’ Google.

3.     Sharing board members: A famous example is that of HP and Cisco sharing board members. Carly Fiorina, then CEO of HP, was a Cisco board and during her tenure, HP emphasized Cisco’s products over it own. Weaker commitments can be made using shared non-executive directors.

4.     Vendor Lead Program: A strong lead generation program by the vendor can ensure that the relationship is two-way. Apportioning high quality leads to resellers that deliver the most sales is a great quid pro quo and can be a powerful motivation for them to stay in the relationship. This is especially useful if the reseller has multiple offerings as each new customer has a value over and above that of the immediate (vendor) deal. In these types of programs, it is important to track lead conversions and review the program with executive sponsors.

5.     Joint marketing program: The vendor and the reseller agree to run marketing awareness activities on an ongoing basis. This could include marketing events such as customer workshops, with incentives for meeting targets on customer attendance. This is a variant on the vendor lead program.

6.     Shared employees/infrastructure: Vendors can offer to sponsor employees dedicated to their products at the reseller premises. Employees are jointly recruited and trained and their remuneration is shared. Having made an investment, neither party is likely to want to prematurely terminate the relationship. This can be repeated with infrastructure, for example a testing facility, which is specific to the vendor.

The litmus test for any partnership is value creation. The above measures are not substitutes for this. However, in a partner situation with multiple priorities and limited resources, a calendar of ongoing revenue and defined activities will win out over short-term expediency. 

Tuesday, 21 April 2009

Online advertising in a Free Media Future Part 2

There are many innovations underway in online advertising, and more, higher quality media could accelerate these, namely:

  1. Better Targeting: The fundamental rule of marketing is that in order to maximize revenue from a customer base, you have to engage in segmentation. The more information you have about your customers, the more finely you can segment them. Innovations in customer profiling for advertising started with site contextualization. Since Google AdSense started using contextual advertising, most ad networks have followed suit. Behavioral Targeting is a recent innovation but has caught on quickly, with currently about 25% of advertising networks using it. In the first generation of BT, much of this targeting was done at a very high level, such as a website visitor is male, in the age group 35-45, is interested in automotives and looking for insurance.

However, networks such as Adconion are pushing the envelope further using a combination of contextual and in-depth behavioral targeting with many subcategories. Larger publishers are beginning to use collaborative filtering, a form of social targeting, to fine tune their on site advertising. With greater use of multi format mobile internet traffic (smart phones and netbooks), especially with regards to consuming media (Comes with Music from Nokia, iTunes etc) geo-targeting will also increase.

Once ad networks and publishers become adept at profiling customers using these techniques, advertisers will be willing to pay premiums.

  1. Tighter Privacy Controls: This is paradoxical with regards to the first point. However, in order for advertisers to target website visitors more accurately, these self same visitors will have to share highly personal information voluntarily. Visitors will only do so if there is some form of guarantee that this information is not retained for long periods of time, or shared widely. Therefore, in order to finely target website visitors, advertisers will have to ensure they not only respect privacy, but are also seen to do so.

Some moves in this direction involve customers having a ‘private wallet’ which contains detailed information. Website visitor then opt to share this information on a site specific level for a certain duration. This technology will become more widespread with consumers understanding that sharing private information with for example an online newspaper is a way to ‘pay’ for being able to read premium content. They will also understand that this allows them to be targeted or remarketed ads which might save them money on their online purchases.

  1. Lower barriers to entry for new publishers and advertisers: User Generated Content (UGC) is well established today and many internet users have created and uploaded some content, be it blogs, photos or video. This trend is already accelerating with camera and internet equipped mobile phones ready to record and upload content instantly.

Currently, UGC content presents huge problems for large brands which pay the bulk of advertising dollars today, as they do not want to inadvertently associate themselves with objectionable content (adult, racist etc). As contextualization becomes better able to screen and categorize content, more content will be acceptable to the larger brands. This in turn will make it simpler and quicker for unknown artists to monetize their efforts, enticing more people to participate, creating a virtuous cycle.

As with all trends, smaller players should benefit disproportionately. Better filtering and targeting will make advertising even more accessible and attractive for smaller organizations. To lower ad network cost of sales and service, the self service online advertising model pioneered by Google AdWords will become widespread across display. This will provide small and medium sized businesses, SOHOs (small offices, home offices) and ordinary consumers access to local ad inventory. It could become commonplace to advertise clearance or garage sales or even charity cookie baking for a very low cost and effort.

  1. More transparent pricing: Current online advertising pricing breaks down broadly into CPA, CPC and CPM. Online properties such as LinkedIn, which attract high income professionals, can command high eCPMs (effective CPMs) upwards of $25. Remnant inventory can be paid eCPMs close to zero.

There is tremendous variability in the market for the same inventory and publisher blogs are full of complaints that a particular network is underpaying them. This is partly driven by the fact that there are information assymetries that work against a standard pricing. Ad networks have varying levels of sophistication when it comes to targeting technology. Large ad networks such as Google AdSense have access to many advertisers and publishers, being both deep and broad. While many ad networks are open about the revenue split, AdSense can be opaque, as some small advertisers and publishers have little information and hence choice.

There are moves underway to disaggregate pricing from the rest of an ad network’s other activities. Companies like Quantcast are trying to categorize a publisher’s audience, and this information could easily be used to assign a market value. Over time, this could enable publishers to determine what their target price should be, and ad networks could openly take a margin of this for service or access.

More inventory, better targeting and lower entry barriers which will give rise to specialization and disaggregation, which could in turn result in a level playing field with more accurate and open pricing.

  1. Some advertising formats will become indistinguishable from media: In the offline media world, we are already familiar with soap operas and product placements – media created by merchants/advertisers for the purpose of selling their product or increasing brand visibility. This process is already in full swing online with YouTube videos and Facebook games that are in effect product placements.

An interesting effect of this is that some ad networks have started producing quality content, so that they can monetize it (the traditional strategy of moving up the value chain). Not only is this a great way to differentiate yourself with proprietary content if you can do it well, the advertising (whether overlays or product placement) is guaranteed to be very highly targeted.

Ad networks, agencies and media planners will cooperate much more closely in the future. The choices available to advertisers will change from 15 different types of ad formats, to a spectrum that starts with static ads and ends with highly interactive role playing games that may well outlive the original campaigns.

In Summary

It is difficult for us to conceive these changes in today’s environment. Online advertising growth is slowing down, albeit not as quickly as offline. Startups that tried to survive on an advertising only model are being asked by their VCs to rethink their plans, or having the rug pulled from under their feet. It is beginning to look like the dot com crash all over again. However, I think that changes in online advertising are going to enable new business models we can only begin to imagine and much of it is going to be driven by the structural shift underway between free and paid media consumption.

Wednesday, 15 April 2009

Online advertising in a Free Media Future Part 1

I attended a recent event at the RSA in London on New Media Futures. I had gone to listen to Gerd Leonhard the Media Futurist, whom I have heard in the past and greatly admire. But I had a bonus listening to Richard Titus (ex-BBC, now Associated Northcliffe Digital), and chatting to him about data driven targeting. The discussions during the event triggered this 2 part article.

The Future of Media: More free than today
The advent of the internet has caused much angst in the traditional media creation world. From newspapers to music to movies, all believe they have been done badly by. It is well known that even quality papers with large circulations such as the New York Times cannot support an editorial team on online revenues alone. In the music industry, illegal music downloading has curtailed revenues for firms such as EMI. And with each new blockbuster being available on Pirate Bay within days of its release, the big movie studios are feeling the heat.

During the RSA event, Gerd laid down the case that the media industry has no choice but to experiment with different business models where content is available free and subsidized by complementary revenue streams. One example of this is Google’s agreement with major record labels, offering free downloads and streaming to consumers in China and sharing advertising revenue with the labels. This model has been hailed by the music industry for its creation of revenue streams in a region in which accessing content illegally is the norm. Read Gerd’s blog on this here. Another example is Tourdates (www.tourdates.co.uk), a venue for bands in the UK to showcase their music, manage their profiles and connect with fans. Many up and coming bands offer their music free, and make money by touring and merchandize. Nokia’s Comes with Music is an example of an service that shares hardware revenues with media suppliers in return for limited duration free content. In all cases, the content is free, but it drives revenue in complementary areas.

What will be the impact on online advertising?

Firstly, it is important to note, as in the examples above, that advertising is not always the only or best way of monetizing content. However, advertising (search, display, affiliate etc) is versatile and can co-exist or serve to promote the retail of merchandize, paid downloads and tickets. Ad networks and exchanges have turned advertising into a market, albeit imperfect, with buyers and sellers driving demand and supply. So, when large amounts of high quality media inventory are available free and without the stigma of being illegally shared, the average unit price of advertising will certainly drop. The short term answer is that advertising rates suffer as there is a glut of inventory.

In the medium term, however media consumption increases, as more price elastic customers (and those with guilty consciences J) sample a wide range of media. And as more time is spent on the internet (as opposed to offline) viewing or listening to online media, more ad revenue starts chasing this inventory. Online advertising is still a maturing industry, and the influx of additional revenue will increase competition and speed up the pace of innovation, driving value for advertisers and publishers. Over time, the market will also adjust to absorb this new inventory, equilibrium will return, with more stable pricing.

In the second part of this series, I will look at specific trends underway in online advertising and the effect of Free Media on these.