What Is Product Management?

The role of Product Management has become increasingly popular in software product development over the last decade, as the software industry has embraced Lean and Agile methodologies, and with software development becoming increasingly productize’d and consumer focused.  Despite its rising popularity though, the role remains often misunderstood, particularly in relation to the core responsibilities of Product, compared to orthogonal disciplines such as user experience or project management.

Product Is a Strategic Role

Whereas Project Management is responsible for reporting and delivering on a defined plan, PRODUCT MANAGEMENT researches and defines what that plan should be – answering ‘what & why’, Understanding the problem space and how to solve it effectively & meaningfully.  This means understanding market dynamics to know when to enter a market, appropriate competitive positioning, and discovering product-market fit, creating meaningful value for customers.

The History of Product Management

Product Management has its roots in consumer product Brand Mgmt at Proctor & Gamble. Meil McElroy conceived the role in the 1931, in an effort to justify hiring new people, and argued it would be a role focused entirely on one product per manager.  That PM would be focused on understanding the intimate needs of the customers and tailoring a product to suit their needs.  They would be the “voice of the customer” within the organization and have end-to-end ownership of the product.

Overtime, the evolution of iterative processes have informed how to interact with customers, to better accomplish these goals.  In the 1950s, Toyota began to experiment with “Just in Time” manufacturing, which would reduce overhead of expensive warehousing and stockpiling of products that may not ever get used.  By the 1970s, they had tuned these new processes and developed a couple of important philosophies.

The first is Kaizen, which means continuous improvement and is the hallmark of what we know as lead methodology today (build, measure, learn).  The second is Genchi Genbutsu, which means ‘find the facts’, in other words, proactively work with customers to learn what they want and what’s needed.

These philosophies eventually led to the Lean movement that has gripped the software industry since the early 2000s, with Steven Blank’s book Four Steps to the Epiphany, and later, Eric Reis’s best seller, The Lean Startup.  These have become like a bible for modern day Product process, and describe an iterative approach for product discovery and optimization.

The Intra-preneur

Nearly every Product Manager I’ve met, is a closet startup entrepreneur.  Either they’ve previously built a startup, they’re working for one, or they’re planning to do one in the future.  It is only natural, as most Product Managers love building products, and are generalists that understand both the business and how to build a product.  With that in mind, it is interesting to compare the two careers.

Many aspects are the same, to the extent that some even regard the Product Manager as the “CEO of their product”. Personally I find the comparison a bit trite and that ownership often does not exist until you reach the upper ranks of the Product team.  Nevertheless, there is some truth in it.  The differences primarily boil down to appetite for risk and the potential upside.  Much of the day-to-day however can be similar.

Product Management Role In Context

The Product organization represents the market (external or internal), defines the right product to build and when to deliver. UX often is a subset of that Product org. Engineering responds with well-designed solutions. QA often is a subset of engineering, validating acceptance criteria.  The key difference between the Product org and the Engineering Org, is that Product seeks to answer the questions of what to build, why to build it, and when it is needed. Engineering focuses on how to build it and how long it will take.

The Roles of Product

There are many activities that fall under the umbrella of Product, that cluster into a few distinct roles. In smaller organizations, all those activities fall under the role of Product Manager and may even be a single person. But as the Product org grows, breakout roles emerge.

The Technical Product Manager is focusing on executing initiatives, and prioritizing work.  Confusingly (albeit reasonably) Microsoft refers to this role as the Program Manager.  The Product Strategist, sometimes referred to as a Product Planner, focuses on market strategy. User Experience (UX) deals with the human interaction with the system and details such as workflow optimization.  Product Marketing is the outbound evangelism and messaging that takes the Product into the market, driven by the strategy defined by the Product Strategist.

Product Roles & Activities

The Pragmatic Marketing framework has done a good job of capturing 37 activities typically associated with Product Management.  I’ve color coded those activities to illustrate how they typically group by role.  Product Strategy typically deals with the upper-left quadrant and is driven by understanding the market, the right product to build.  In a larger organization this is typically driven by Product Leadership.  Technical Product Management is the bottom left quadrant and focuses on fleshing out tactical requirements and executing on the product strategy.  The Agile Product Owner role is a subset of the Technical product Manager, focused on requirements, user scenarios and maintaining status updates.    Product Marketing meanwhile, is the right half and deals with launch and go-to market activities such as lead generation, channel marketing, and events.  This could be a single person working on a small startup product, or it could be spread across a Product group of 50, in the case of a large intricate platform.

Challenges of Product Management

Product Managers work with multiple groups within the organization in order to bring a product to fruition.  They often know more about everyone’s roles that surround product development than anyone else, yet they’re rarely the best at any of those disciplines.  It is often necessary to act as the ‘glue’ that fills the cracks between disciplines and binds them together to build cohesion and see a product forward.  For that reason however, it is not uncommon to encounter others with opinions or who think they should be the Product Manager.

It is easy to fall into being an ‘order taker’ in such contexts, particularly when interacting with executives or sales teams with strong personalities.  The Product Manager must systematically handle requests, put them into product context, and ultimately do what’s best for the product, and be able to defend that prioritization to those who challenge it.  .

It is also easy to fall into the trap of doing project management, wherein the Product Manager is spending too much time executing process or delivery. It is not uncommon for Product Managers to fill in and provide project management (being the glue) when that function is absent,  but it is important to remember this is not the core responsibility of Product Management. Too much time spent on tactical delivery will detract from the core responsibilities of the Product Manager, and reduce the actual value that Product is suppose to provide to the organization.

Conclusion

The purpose of Product Management is to fundamental ensure that the organization is building the right product, at the right time, for the right customers.  To achieve this, one must have a strong understanding of market neeeds, align with business strategy and  ideally will leverage modern product development methodologies to optimize output and reduce risk. The Product Manager must also resist distractions such as succumbing to orthogonal roles such as project management or obliging to prioritize the wrong features that are not aligned with Product strategy.  Instead, if the Product Manager focuses on the needs of their customers and finds a compelling solution to those needs, creating meaningful value for that customer, then they will have succeeded in creating maximum value for the organization, ensuring the team delivers the right product.

Evaluating Market Dynamics

market opporutnity

This article was originally posted on MindTheProduct.com.

How do you know whether a product idea is going to succeed if you build it and take it to market?  If you’ve ever been part of a startup, or if your organization has launched a new products, you know how precarious the effort can be. Sure, there is Lean methodology for discovering product-market fit, but that is a step that necessarily should come after researching and validating your market. Lean is only going add efficiency to your process if you’ve started with a solid understanding of the market and built your starting hypothesis upon that understanding.

To that end, my co-author and I from the book The Smarter Startup, have created a couple resources that should prove useful. The first is a conceptual model called the 6 Market Dynamics. Here we identify the criteria that must be considered when studying a market: The customer, product, timing, competition, financing, and team. Each of these aspects should be studied to evaluate viability of the market and your ability to create value and to be competitive.

6 market dynamics

Let’s start with the goal of identifying market opportunity. What we’re really looking for is some inefficiency in the market which suggests that customer needs or desires are not being satisfied. Or put another way value, defined as benefit minus cost, is not being delivered efficiently to the customer. By walking through each of these market dynamics we can start to get a sense of whether the market is efficient and whether our available financial and team resources will be adequate to bring more value to the market.

We have also built a more actionable analysis tool called the Startup Scorecard which introduces 3 heuristics for each of the 6 market dynamics. Heuristics are applied guidelines that are used in a subjective context, where empirical principles may not be practical.  They’re most commonly known in the fields of HCI and User Experience design as demonstrated by Jacob Neilson’s Usability Heuristics.   The Startup Scorecard provides a similar framework for validating market opportunity in consideration of 6 market dynamics: the Customer, Product, Timing, Competition, Finance, and Team.   We’ve defined 3 heuristics for each market dynamic, as a means for assessing the viability of an opportunity across each of the 6 market dynamics.

startup scorecard

Using the Startup Scorecard, assign a letter grade (A-F) for each of the 6 market dynamics represented on the scorecard, based on your evaluation 3 heuristics provided for each market dynamic. This provides a practical framework for evaluating opportunity and identifying strategic weaknesses which may signal market difficulty. The beauty of this approach is that a lot of difficulties that you may identify through Lean iteration can actually be identified very early on, just by spending a bit of time to evaluate the market strategically. there are also longer term challenges that may not even be apparent during product-market testing that will show up here (such as timing and imminent market consolidation).

Conclusion
The real benefit of tools like the 6 Market Dynamics and the Startup Scorecard is to have an objective and holistic set of criteria by which you can take a critical look at a startup or opportunity, rather than relying on instinct or a couple disparate pieces of advice you’ve gleaned from discussions or blogs – and hopefully avoiding the trap of Lean testing endless ideas or ‘pivots’ that you could have much more efficiently validated before writing a single line of code.

As the hype around Lean Methodology dissipates, and the tool settles into to its rightful place in the Product owner tool belt – its important to remember that Lean is a terrific tool for taking a hypothesis and developing Product-market fit; but it is not a reasonable replacement for strategy or basic market research. Hopefully the tools we’ve introduced here will help Product owners more easily step through those perquisite steps in the process.

These tools are made available and free to use under a Creative Commons license. To learn more about the Smarter Startup Framework and other related, please visit SmarterStartup.org.

Creating New Value

create value

This article was originally posted on MindTheProduct.com.

Why is it that some products take off while others fall flat? There are many tactical reasons we can point to such as timing, competition, or product-market fit. Fundamentally though, there is one consistent truth regardless of the reason we may determine: some products create value for the market they’re serving, and some simply do not.

Ask yourself whether your product addresses an unmet need or desire. There are two ways to address this problem – outside-in, or inside-out. Lean process has earned a lot of well-deserved accolades in recent years for it emphasis on working with customers and stakeholders to understand their logical needs and how best to solve them. It may not be the best tool for breakthrough visionary products however, as Steve Jobs once suggested at when he said “It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.” Howard Schultz from Starbucks also eluded to this when he said “If I went to customers and asked them if I should sell a $4 cup of coffee, what would they have told me?”.

When seeking to develop breakthrough visionary products, the opposite approach (inside-out) can be more effective. By looking at where existing demand (and competition) is and strategically forecasting where opportunity should be if you were to extend the value complex of an existing commodity product. This approach is reminiscent of the Value Innovation approach described in Blue Ocean Strategies.

To provide clarity on this latter (inside-out) approach, I created a conceptual model I call the Value Creation Plane. It can be useful for understanding the types of value creation and can be used for analyzing where value is currently being created in a given market and projecting how to extend that value in a meaningful way.

The Value Creation Plan

The Value Creation Plane starts with 2 spectrums that are juxtaposed on a Cartesian Plane. The X axis represents the Business Function spectrum, with Monetization (yield and asset management) at one pole and Innovation (technology, UX, etc) at the other pole. The Y-axis meanwhile represents the Perceived Value spectrum. At one end of the Perceived Value plane is Entertainment (Emotional Value) and Productivity (Logical Need) is at the other pole.   When we lay these two spectrums perpendicularly across a flat plane, we end up with four quadrants that represent the four positions a brand could take in creating value.

Value Creation Plane

How is this useful? Consider the scenario where you want to enter an established market but you want to innovate the market by taking it to the next level as Apple or Starbucks did.   You’d start by identifying the quadrant where the majority of the competition resides, and then determine how you can transcend to another quadrant, thus providing new value. The Value Creation Plan is a simple planning tool that will make this process easier.

Apple Example

In the case of Apple, they created new value around a boring commodity market for computers that focused entirely on quantifiable metrics of value such as Megabytes and CPU speed. Apple created new value atop this commodity market by taking what had been squarely in the bottom-right quadrant and shifting to the upper-right quadrant by appealing to emotion through design and user experience; something sorely lacking from the computer market until then.

LinkedIn Example

LinkedIn is another intriguing example.   Social networks like Facebook already existed and were thriving in the upper-right quadrant, but LinkedIn applied the concept of social networking to something more logical and productive – business networking. As such they leveraged the effectiveness of social networks but in a way that created new and non-substitutable value for those who needed a more logical and practical application. Consequently they thrived even as Facebook dominated and while other social networks collapsed in Facebook’s shadow.

apple and linkedin

Starbucks Example

Starbucks meanwhile took the coffee commodity market (bottom-left quadrant) and shifted to the right. They created a premium version of the commodity product and then built an entire value complex around it. If you are looking for a remote office to get some work done, you now have a table, WiFi, and an electric outlet. Or, if you’re looking for a place to socialize on a Friday evening, you can buy a Carmel Macchiato in lieu of going to a bakery for a pastry. And because of all of this additional value, the use case fundamentally shifts from simply needing a cheap/quick coffee infusion, to rather satisfying other use cases of productivity and socializing, and as such, they’re able to capitalize on coffee without being anchored to the commodity at its core (coffee).

Conclusion

At the end of the day, the only products that matter are those that introduce additional value to their respective market. The best way to ensure you’re generating such value is to focus on addressing an unmet need or desire. If you’re philosophically aligned with this fundamental truth, then you’re already ½ way there. As for the rest of it, consider the type of opportunity you want to go after and whether the outside-in or inside-out approach is the best for defining your initial product vision. There may even be opportunities to combine these approaches, though pursuing a breakthrough visionary product will probably require strategizing a bit deeper and developing your prototypes to a more production ready state before engaging customers.

 

Six Dynamics of Startup Opportunity

6things

This article was originally posted on Inc.com.

What are the keys to startup success and how can you know if a startup is likely to succeed? A study by Inc Magazine and the National Business Incubator Association found the failure rate to be as high as 8 in 10 businesses, so it is a worthy question to ask before investing significant time and resources into your new venture.

After years of researching this question with Dr Zhang, my co-author from The Smarter Startup , we developed The Startup Opportunity Scorecard. It is a simple tool for evaluating startup ideas against a set of startup heuristics, to ensure you’re accounting for the important dynamics that drive startup success. We’ve defined 18 heuristic principles that are based on generally accepted best practices, and grouped them into 6 major areas upon which a startup is scored:

1. Customer – Always start by identifying a prospective customer and an unmet need or desire, that the market has not sufficiently addressed. What can you provide that is so meaningful that someone will gladly pay you for it? Ideally the customer you identify will represent a market that matches your own needs and ability. If you’re well funded then likely you’re looking for a large scalable problem to solve. If you’re a solo bootstrapping entrepreneur, a less scalable niche opportunity is more likely to bring you success as you can service that niche with a lifestyle business, and not worry so much about getting pushed aside by well-healed competition. Think both in terms of satisfying a need and whether this is the right size market (segment) for you to address.

2. Product – The product you’re creating needs to directly answer the unmet need or desire of your customer. Stay laser-focused on solving that problem and don’t ambiguate the solution with a lot of additional features or messaging that confuse or dilute the value of you’re providing. As you begin to design your product, stay vigilant against anything that could represent a barrier to adoption such high switch costs, a steep learning curve, or a lack of integration with workflows the customer may already be using. The costs (monetary, learning curve, disruption) all need to be low enough that there is still a net value to taking up your solution, compared to the nearest alternative (value = benefit-cost).

3. Timing – Every market has a lifecycle and every opportunity thus has a limited window of time before it expires. In the beginning of a new innovation, markets are easy to enter and a technical solution is the primary challenge – anyone who can solve the problem can find opportunity. Conversely, there is also a risk in being too early to a market since chasing unproven markets can lead to dead ends, or worse, a viable opportunity that will not bare fruit for years to come; a much longer ramp than most startups can finance. The typical startup is best served with a “fast follower” strategy where by you identify new interest by a set of customers that is already occurring but is still early enough that the need or desire for the solution is not yet satisfied.

4. Competition – It is the imbalance of excess competition compared to new customers entering a market that make a mature market turn unfavorable for new entrants – this is the dynamic usually seen in the latter half of an innovation’s lifecycle and why we prefer to focus on newer market opportunities. What we’re looking for is indication of market inefficiency – that a market has not yet sufficiently met the (potential) need or desire for a solution. New or fragmented markets for example, or old stagnant markets that are ripe for disruption. In such a market you’ll have the opportunity to develop a differentiated positioning strategy.

5. Finance – How much up-front investment of capital (sunk cost) will this product require to develop? Do you anticipate large gaps in time between accounts payable and accounts receivable (working capital float)? Both of these scenarios represent financial risk that you need to weigh against the potential benefit you’re anticipating. Every business requires money to get started but the goal should be to minimize the risk / cost where possible, and to weigh those burdens against the potential for returns. Think of this in terms of building an efficient investment machine – our goal is to achieve maximum output (profit) with the minimum possible inputs (risk and cost).

6. Team – If this is competitive warfare, how confident are you that your team can win the battle? Assuming you have limited resources, you should opt out of any battles you are not confident you can win, and preserve them resources for later opportunities. Someone on your core team needs to intimately understand the nuances of the customer you’re addressing, if you are to solve their need or desire. You’ll also want a technical expert on your team who can devise a well-crafted product that answers the need. Consider also whether you have access to favorable sourcing and distribution relationships you’ll need to remain competitive.

With these six dynamics in mind, take a moment to grade the opportunity using the Startup Opportunity Scorecard. Give it an A-F grade for each of the above criteria, using the following scorecard as an example:

startup opportunity scorecard

The power of such a framework is that it provides a holistic vantage point from which you can assess an opportunity before jumping in with both feet, rather than simply following your instincts and succumbing to your own blind spots, or listening to a wise maxim that turns out to not apply to your situation. By going through this process and objectively evaluating an opportunity, you can often identify weaknesses and perhaps even predict the reason your startup will fail, before you begin. If you are able to focus your efforts on only the battles you are most likely to win, then you’re already one step closer to winning the war.

ProductCamp.LA Was a Success!

pcla

Los Angeles hosted its first ProductCamp this month and by all accounts the event was a success! Despite being held on the rainiest weekend in 3 years, we had a full house 200 digital product managers and entrepreneurs join us.  The event was jointly hosted by Shopzilla and Fandango who share a floor in West LA and organized by the Product Managers Association of Los Angeles (PMA.LA), the local professional organization for digital product professionals.

What is ProductCamp?

ProductCamp is an “unconference” event modeled after Bar Camps that have become popular in the Silicon Valley tech community. The concept with a bar camp is to bring interested professionals together for a day of networking, and knowledge sharing. Consistent with other unconferences, ProductCamp is a free event for interested professionals who come together for a Saturday to share what they know.  The format has become rather popular and has spread to just about every major market in North America and Europe. That’s why it is so surprising that Los Angeles, the second largest city in the country, still didn’t have a ProductCamp, until now!

How Does it Work?

Unconferences are intended to be an event “of the people, for the people”, meaning members of the community propose topics and the community votes on who is going to speak.

In many of the events such as ProductCamp Silicon Valley, an attendee is given a page of stickers at morning registration and asked to vote on the proposed session wall.  During morning general session, the team quickly counts the votes and schedules the remainder of the day based on vote count. The result is something of a hybrid between a casual meetup and a formal conference.

Why it Worked?

There are a few reasons why ProductCamp.LA worked well.  First, the PMALA is a free professional network of 900 digital product professionals and was able to leverage these connections to both get the word out as well as to attract quality speakers for the day.  We also made a conscious effort to pre-plan as much of the event as possible.  We proactively invited people we knew would be great speakers.  We used online voting a couple weeks prior to the event to cut down on day-of chaos and also to ensure every speaker had sometime to prepare their session, knowing they were going to speak.  We also took an added effort to stream as much of the event as we could, which allowed us to reach many of the folks on our waitlist.

What’s Next?

The PMA.LA plans quarterly meetup events around Los Angeles, which are hosted by digital product companies around town and the next one will be in early June.  Anyone interested in joining our community should signup at www.pma.la to be notified about the next event; this is also the best way to learn about next year’s ProductCamp which we’ll begin planning this Fall.  Anyone interested in volunteering or hosting a PMALA meetup event can contact us directly at web@pma.la.

Thank you so much to the digital product community of Los Angeles for helping us make ProductCamp.LA a success.  In just a single event, we’ve put LA on the digital product.  It is our hope that this is the beginning of many positive steps toward a more product centric approach to digital technology and media here in Southern California.

The Artisan & The Opportunist

artisan and opportunist

What is likely to happen if an engineer starts a consulting business? What if the person were in business development instead? I’ve seen this story play out more than a handful of times and the pattern has become predictable. To illustrate the outcomes, I’ve written a fable:

Once upon a time, there once was a talented engineer who was outstanding at his craft.  He had a degree from a top school, was passionate about technology, and proud of being a top-notch engineer.  He would spend his free time learning the latest techniques and enjoyed being the subject matter expert at work. One day the engineer was in a meeting with a vendor in which he realized that he could be making a lot more money as a consultant than remaining an employee. So he struck out on his own and began a small consulting firm, marketing his services to local companies who could benefit from his expertise.

Around the same time and on the other side of town, a business development professional was sitting in a similar meeting and came to the same conclusion that he should start a consultancy of his own.  He also went to a good school and was good at what he does, but he did not possess the engineer’s passion for technology, nor did he spend any time learning the latest techniques or technology trends. Instead, he was much more interested in staying connected with people he had met, hearing what they were up to, and learning about how to raise money – something he found much more exciting.  To start his new business though, he needed help from an engineer.  Because he is good with people and skilled with sales, he was able to coax one of the junior developers from his firm to come him on this new journey.

This is the classic story of the Artisan and the Opportunist. The Artisan is a skilled crafts-person who knows the work better than anyone else, whereas the Opportunist may not know or care about the work itself, as they’re focused on building the business and sales.  Both have strengths and weaknesses they must contend with.  Which entrepreneur is more likely to succeed?

In the beginning, the Artisan will likely struggle with a lack of network connections to call upon as customers. His top-notch trade skills may eventually lead to a great reputation that minimizes the need for him to do sales, but that assumes he ever gets off the ground to begin with. The Opportunist will likely have an easier time generating early deal flow since he already has a deep network and know how to work those connections.  The Opportunist also benefits from distribution of labor since they can focus exclusively on developing customers while someone else does the work.

Fast-forward two years. Assuming the Artisan was able to hang in there, he’s presumably established a great reputation now and enjoys more work than he can handle. He has even brought on a couple other high-end engineers to help him yet he struggles to fully delegate to his team.  And because his business is built on a few personal connections with vendors, his clients all expect him to personally oversee their project.  Even if he wanted to fully delegate to his team he couldn’t because his clients want him personally overseeing everything.

The Opportunist meanwhile has their own successes and challenges after the first two years. Because they have so many more connections, they’ve built a broader and more diversified customer base rather quickly.  The Opportunist does not want to turn down any client that he’s worked to build and so they hire engineering talent quickly to cover the demand. And because the Opportunist is mindful of profits, he continues to hire junior level talent to maximize profit margins.

As a result though, the Opportunist’s company is developing a reputation for low quality work, which is starting to hurt them, and internally they’re beginning to buckle from growing so quickly and not taking the time to sort out proper systems to manage the throughput or methods to manage quality of output.  Their talent gets frustrated by the internal chaos and lack of opportunity to do good work or grow professionally.  The company develops a problem with high turnover, which creates an ironic feedback loop, eroding those higher profit margins and further contributing to their quality issues.

The inevitable outcome for either of these businesses is less than ideal. The Artisan’s biggest challenge was finding those first clients but if he overcomes that challenge, then he’s likely to go on to build a nice lifestyle business for himself. But because he’s so busy doing the work, he’ll struggle to ever build a business of significance and thus is unlikely to ever grow beyond a couple assistants.  The Opportunist meanwhile is more likely to build a business with real profits and something they could sell for a nice profit a decade or two later, but with a higher risk profile. They’re dealing with the mid and lower range of the market where they’ll see higher margin compression as those lower-end engineering skills inevitably commoditize. And because profitability is predicated on constant deal flow, any disruption to that flow such as a recession could be fatal.

Neither the Artisan nor the Opportunist will reach their fullest potential if they only play to their own strengths and ignore their weaknesses.  The Artisan must embrace the Opportunist mindset and spend more time building a business rather than just doing the work.  The Opportunist needs to temper the impulse to grow quickly with some attention to detail or the very growth he’s succeeded to create may become precise his onw undoing.

Imagine though what would be possible if the two worked together to create a meaningful sales pipeline around a position of quality.  They could build a dominant brand in their industry – one where reputation reinforces sales efforts, engineering talent is easier to recruit and retain, and higher-end projects in a premium segment of the market, where margin compression and market volatility are less of an issue.  Like so many things in life, balance is key to building a thriving and sustainable business.

Why Are Some People Lucky?

Key To Innovation

Why are some entrepreneurs luckier than others? You are not imagining it-some people truly do have better, more predictable outcomes than others. Some serial entrepreneurs may have several successful hits in a row, and others may struggle through several businesses and never get traction.

The popular thought is that if you work hard, you will succeed. This may be true for many smaller service businesses–an accounting firm, say, or a dental practice–since there isn’t a lot of mystery about market timing or product-market fit. For these businesses, the model is well defined and there are numerous predecessors that serve as models. For innovation-driven businesses, however, the outcome is much more uncertain. You can work hard, but you may not succeed. Even more vexing are stories about reluctant entrepreneurs who succeed despite themselves.

Clearly, there is more to the story than simply working hard. The key appears to be your ability to encounter and recognize opportunities. In a 1999 psychology experiment at Harvard University known as “Gorillas In Our Midst,” Dr. Daniel Simmons asked a number of study participants to watch a group dribbling basketballs and to count the total number of times the balls were dribbled. Halfway through the video, a six-foot tall man in a gorilla suit walked slowly through the spectacle, stopped in the middle, and pounded his chest a few times, before walking away. Afterwards, the study participants were asked who saw the gorilla. Surprisingly, more than half of them did not.

A later study by European Sociologist Dr. Richard Wiseman expanded on this research in a book called The Luck Factor. In Wiseman’s seminal study on the subject, he asked a group of participants to count the number of images inside a newspaper. They were given two minutes to complete the exercise, and most people used the full amount of time given to count and doublecheck their answers. A couple of participants however confidently completed the activity within mere seconds, both of them having the right answer. It turns out that, on page two of the newspaper, Dr Wiseman had taken out a one-half page advertisement that read, “Stop counting. The answer is 43. Tell the experimenter you have seen this and win $250.”

These studies illustrate a concept called inattention blindness. When we’re too focused on solving problems, we often do not observe the opportunities right in front of us. Ironically, the answer to improving your luck, then, is not working harder-it actually might be the opposite. If you find that you are always doing “heads down” work and frustrated that you’re not reaching your goals, it may be time to turn off the computer and go to an industry networking event or mingle with your customers. Have a drink and engage in conversation. Not only might you have the opportunity to reframe the problem in a way you hadn’t thought about before, you might even make a few connections who can help you reach your destination a little faster.

When you are trying to innovate and create new opportunity, it is important to be able to step back to see the big picture. Sometimes, it is only when you’ve stepped back and stopped thinking about the problems you’re trying to solve that you can see things from a new perspective. So don’t forget to take a little time to step back from productive work. You might feel guilty, but it could be the only way you’ll see opportunity right under your nose.

Web 3.0 Has Already Begun

Web 3.0

This article was originally published in ACM Interactions Journal, Sept 2013.

A lot has changed since the release of Apple’s first iPhone in 2007. We have witnessed a profound shift in user behavior, away from desktop computers in favor of new form-factor devices. The enabling technology has also brought about an entirely new class of Web-enabled applications and architectural ideals. Meanwhile, monetization opportunities that capitalize on these changes are appearing. It is from a confluence of these changes that we assert Web 3.0 has begun.

We will support this assertion by looking at the types of changes that occurred during the Web’s previous era to support labeling that Web 2.0. We then apply those criteria to show how comparable changes are once again occurring, thus justifying the acknowledgement of an entirely new generation of advancement on the Web. Let’s start with a close look at Web 2.0.

In the opening remarks of O’Reilly’s first Web 2.0 conference in 2004, Tim O’Reilly and John Battelle defined Web 2.0 as “Web as a platform,” in which software would be built upon the Web rather than as a desktop application [1]. In response to this idea, Jesse James Garrett wrote an essay a year later in which he coined the term AJAX (Asynchronous JavaScript and XML), popularizing a client-side technique that became accepted best practice for implementing O’Reilly’s vision of the Web as a platform.

Concurrent to these technological revelations, use patterns online were also changing. With the rising popularity of social sites such as Friendster and MySpace, users were starting to contribute to the Web’s content, in contrast to previous, more passive use patterns in the Web 1.0 era. Blogging was also gaining in popularity, driven by the introduction of WordPress and Google’s popular AdSense network in 2003. Eventually this explosion of social sharing via profiles, articles, comments, and conversations would culminate in what Facebook would later, in 2007, call the social graph.

Interestingly, there was no single innovation that completely represents Web 2.0, yet most agree it was a pivotal time. Reflecting upon the above statements, we identify three significant forces that converged around 2004. Specifically, there was a convergence of new technologies, new user behavior, and new monetization opportunities. Table 1 compares the three generations of the Web from this multifaceted convergence.

web3-table

To make the case that Web 3.0 has begun, let’s discuss the enabling technology along with new use patterns and monetization factors that have arisen in the past few years.

Emerging Technology

Whereas Web 2.0 could be technologically characterized by the proliferation of Web services, one could argue that Web 3.0 is characterized by a proliferation of new form-factor devices, leading to new use patterns of the Web. In 2007 Apple introduced the iPhone, which would become the transformative device of its generation. In 2010 Apple released the iPad, which at a technical level is merely a larger version of the iPhone, but which evolved its own use patterns when introduced to consumers.

Concurrent to these activities, Google had been developing Android, which provides an open source alternative to Apple’s higher-priced devices. Hardware developers such as Samsung and HTC have developed popular lower-cost devices that leverage Android and provide a significantly lower-cost commodity alternative, which is helping to drive quicker adoption of these new form-factor devices. In fact, the rate of adoption for these devices is occurring so quickly that sales of them are now higher than that of traditional desktop computers.

There is significant anticipation among technologists and investors alike that a fourth new form factor will soon take hold, the Internet television. Many in the media are anticipating the release of such a device later this year, pending the resolution of licensing issues with the pertinent media companies. In anticipation of this, venture capitalists such as Marc Suster, who is investing in Los Angeles-based entertainment companies like Maker Studios, believe that television is ripe for innovative disruption. If they are right, this could emerge as yet another significant new form-factor device, representing another use pattern.

Another hallmark of a new Web era is the type of applications running on these new form-factor devices. Unlike previous Web applications, which were typically thin-client applications, we are seeing the reemergence of thick-client architecture for specific-use apps. In this context, rather than loading an HTML interface from a remote server, a device launches a native application that runs locally, providing a significantly improved user experience. The native app still utilizes stateless remote Web services, but state persistence and intelligence about location and user interface behavior—the true application logic—occur within the local native app.

The mobile Web is also making strides toward thicker-client applications. HTML5 has standardized the implementation of geolocation awareness and local persistence storage, enabling an HTML-based document to now manage its own session state and geo awareness, rather than needing to defer to the server to manage application-level functionality. The inclusion of the vector canvas further enables HTML5-based applications to create rich user interfaces and data representations without needing to call back to the server.

Microsoft’s new Windows 8 operating system takes notice of the power of HTML5 and now allows developers to create first-class HTML5/JavaScript-based Metro panel apps. This reflects the rise of technologies such as PhoneGap (Apache Cordova), which enable the compiling of native apps written with Web-standard HTML5 and JavaScript technology. Regardless how it is built, the trend is still the same—a thick-client application that relies upon thin stateless Web services, a clear departure from the thin-client architectural idealisms of only a few years ago.

Another significant technology that has influenced this new generation of Web use is the geolocation ability of the devices. This technology has given way to an entirely new class of applications that has substantially influenced use patterns and emerging monetization opportunities.

When cellphones began to include GPS capabilities in favor of the older triangulation method, it dramatically improved the accuracy of location awareness and opened the potential for real-time location updates being used for commercial purposes. When the iPhone introduced a meaningful software platform along with this potential, an explosion of location-aware software applications could begin.

When HTML5 was introduced, it included a provision for a geolocation API that Web browsers needed to implement, giving even HTML5-based applications the ability to be location aware. Most commonly, services such as Skyhook Wireless implement this by looking up nearby wireless access points and cross-referencing them for location data. It is also suspected that Google collected such geo-referenced Wi-Fi data while driving its cars around to take photos for the Street View service, thus providing another source for geolocation lookup.

New Use Patterns

As a result of the massively disruptive innovations that have taken place with emerging technology, users are no longer bound to their desktops in order to use the Web; the online advertising industry has started referring to this phenomenon as the “four-screen user” [3]. They are looking for opportunities to stitch together the entire user experience across numerous devices, both synchronously and asynchronously.

We continue to see increasing splintering of activities across our four devices, commensurate with the nature of those activities. Productive work and research are still primarily performed at a desktop device, but our phone is now frequently used for looking up location-based information, such as maps to nearby stores or houses for sale. When the iPad was launched in 2010, it introduced a new form factor that immediately appealed to the household for casual Web surfing, sharing photos, and other activities characteristically performed from the couch. And of course there is the much-anticipated Internet television, which seems poised for imminent release.

The introduction of new form factors surely will not end with the completion of Apple’s i-series of products, either. There are many apparent extensions of this proliferation of Web activity further into applied devices. Products have already been introduced that enable control of your home’s heating and lighting from a Web application, and industry thought leaders have begun talking about Web-enabled machines that are self-aware of efficiency and the need for repair.

Another meaningful trend we have observed in the past five years is the growth of context-specific applications. What arguably started with API mashups in Web 2.0 has matured into very useful apps that leverage specific meaningful segments of the Web for a specific purpose. For example, one click on the weather app on your mobile phone or tablet and you can see information about today’s weather, without ever needing to open a Web browser or enter your location. Or you can get directions to a destination based on your current location.

Beyond location, applications are learning our preferences and adapting accordingly. Google, for example, has begun factoring our search preferences after observing search results we click and recommendations made by others we are socially connected to via our Google+ accounts [4]. While this is a natural evolution in its service at some level, the fact that we’re using devices that maintain state for us means we no longer need to log in to those applications when we navigate to them. Instead, we merely click the search button on our device and the personalization of our results happens automatically.

Apple’s introduction of Siri with the release of the iPhone 4S was an interesting increment as well toward Tim Berners-Lee’s vision of intelligent machines that understand the Web and perform actions on our behalf. It is a spin-out from the SRI International Artificial Intelligence Center, and is an offshoot of the DARPAfunded CALO project. After you issue a verbal command to the phone, Siri will process your request and respond by either answering a question or taking a requested action, such as initiating a phone call, setting an appointment on your calendar, or playing music.

Enabling Monetization

Perhaps what has driven the rapid innovations of the Web more than anything else is the potential of generating profit. In Web 2.0 this was manifested by well-funded ventures seeking to capture a market share in the social ecosystem, which would enable monetization on a large scale as a media portal, as well as bloggers figuring out how to monetize their own content through Google’s AdSense network.

The acceptance of “Web as platform” also unlocked the potential for subscription-based online software as a viable alternative to the up-front licensing of a traditional software product. And indeed, those three areas where new monetization opportunities were present are where the majority of the innovation occurred during Web 2.0. In Web 3.0, we see an entirely new crop of monetization opportunities emerging, as we will discuss here.

The app store is a new monetization vehicle that has arisen in the past five years and has fueled much of the development of mobile devices. The Apple App Store began a new era of monetizing software as a product. It allows third-party developers to create extensions (apps) that take advantage of Apple’s platform and sell them into a marketplace that is prominently positioned for the users of the platform. The concept has been profoundly successful; the store now boasts more than 900,000 apps.

The idea of an app store has caught on with competitors and in other verticals as well. Google Play Store is the analog for the Android ecosystem (and now offers as many apps as the Apple App Store), and Microsoft recently launched its own app store for Windows 8. For B2B platforms, Magento has the Connect marketplace to extend its ecommerce platform; SalesForce introduced Force.com, facilitating extensions to its core cloud services by third-party developers.

In an effort to provide “frictionless” checkout opportunities for customers, physical stores are beginning to leverage mobile-based solutions to enable easier checkout. Companies like Starbucks are now offering the ability to make a purchase by simply tapping “pay here” or by scanning a QR code displayed at the point of sale. The system works with Square’s eWallet program, which links directly with the customer’s credit or debit account.

It is an interim solution, however, that companies like Square aim to improve. In an interview with CNN, Jack Dorsey, CEO of Square, said that their plan is to eventually not even require the user to take their phone out of their pocket. The user would merely say, “I’m Laurie, and I’d like a cappuccino,” the proximity of the device would be detected, and her account would be charged in the background [5].

The one issue remaining for mobile commerce is how to simplify making purchases online, since the small screen and lack of keyboard make it prohibitively difficult to complete a long checkout form. Though this remains a problem at the time of this writing, a solution will inevitably come as a result of this foray into mobile commerce.

The increasing amount of time that Web users spend on new form-factor devices is creating a challenge for content creators, who are finding that their content does not monetize as well through these devices. According to Mary Meeker of Silicon Valley-based venture capital firm Kleiner Perkins, the effective CPM (cost per 1,000 impressions) for mobile devices is five times lower than that of the desktop [6]. Not all devices are created equal, however, with tablets generally delivering higher eCPM rates than phones. Nonetheless, the point remains that the ad-banner and paid-click advertising models may not best fit the use patterns of these new mobile devices. Where one window of opportunity closes, however, another opens.

Geo IP fencing is one such opportunity that takes advantage of hyper-local targeting to serve ads relevant to your physical context. Whereas Google had success with AdWords advertising by dynamically placing ads into contextually relevant articles, GEO IP fencing enables the advertiser to specify a physical boundary within which an advertisement will appear, thus enabling ads to appear only when they are geographically relevant. For example, imagine a cafe offering 10 percent off a morning coffee if you come in now. This ad could be shown within 100 yards of its store, enticing pedestrians to stop in and take advantage of the offer.

Conclusion

It has been only six years since the iPhone was first released, which set into motion many of the changes we have discussed. It is difficult to grasp the extent to which the Web has changed in such a short period of time. When reflecting upon all of this change, one has to wonder if it is sufficient to declare that an entirely new generation of Web innovation has occurred since Web 2.0, and so we sought to answer that question here.

Through reviewing the innovations most commonly associated with Web 2.0, it appears that what defines that generation really comes down to a convergence of three things: new enabling technology, enhanced monetization opportunities, and consequently new categories of products that resulted in new use patterns for end-users. By evaluating these criteria, we observed that indeed a significant transformation has begun that could be described as a generational advancement. And so we conclude, affirmatively, that Web 3.0 has already begun.

Authors

Neal Cabage (nealcabage.com) is a digital product strategist, technologist, and author who has spent years leading the development of online products. He has worked with top online brands, spoken at leading industry conferences, and founded and sold two online startups. He co-authored The Smarter Startup (Pearson New Riders, 2013) and is a contributing columnist for Inc.com.

Sonya Zhang (sonyazhang.com) is a professor at the College of Business Administration, Cal Poly Pomona. She holds a Ph.D. in information systems and technology, an M.S. in computer science, and an M.B.A. Her research focuses on Web development and optimization, eCommerce, and Internet entrepreneurship. She has published in top journals and conferences, as well as co-authored The Smarter Startup.

4 Steps to Higher Conversion Rates

buyers-shoppers

This article was originally posted on Inc.com.

Imagine you could increase your website’s sales volume by 20 to 30 percent without spending an additional dime on traffic acquisition. And now imagine how much you could grow your business if your margins allowed you a higher cost-per-click (CPC) or cost-per-thousand-impressions (CPM) ad spend to acquire customers while turning a profit. This is the power of conversion rate optimization.

If you’ve never optimized your website’s conversion funnel, there’s a good chance you are paying more to acquire a customer than you should. In fact, it is common to see 20 percent to 30 percent increases in sales volume after optimizing your conversion funnel, and it’s not unheard of to see triple digit improvements in some cases. The idea central to conversion optimization is to make better use of the traffic you’re already paying for. You can accomplish this by looking at your sales conversion funnel to identify points of friction that can be smoothed out, either by better engaging users or by removing bottlenecks where people are getting stuck. The most critical step in the process is to define your customers and to experience your website through their eyes. Once you’re in tune with your customers and able to empathetically identify possible issues, you begin to hypothesize what problems may exist and what would solve those problems.

Once you define your hypotheses and create test scenarios, you can use split A/B testing tools like Optimizely or Unbounce to randomly serve different versions of pages within your conversion funnel, allowing you to test your theories. As time passes, the tools collect more data and run more tests. You begin to better understand what types of changes your customers are going to respond to, and your test design improves. While much of this is specific to your own customers, there are a few fundamental concepts that can drive better testing from day one:

1. Understand Your Customer
Every demographic is different and the ideal conversion funnel would be designed to anticipate the needs and challenges of that group, so you can keep them focused on your goal of completing a sales transaction. A relatively new approach to interface design called User Centered Design (UCD) addresses this need by providing a set of conceptual frameworks for stepping through the process of understanding the customer. With UCD, you would begin by creating a “persona” and then define the scenarios and use cases of how the customer would interact with your system. This will guide you through the process of digging a bit deeper than you otherwise might have and result in the sort of insights that will yield better design decisions.

A persona is a one-page card that concisely defines the typical user in your demographic. In this exercise, you would define the user’s age, profession, occupation, emotional needs, and frustrations. The second step is to create a set of Scenarios that describe the Persona’s external context and what motivates them to interact with your website. For example, if you are selling printer cartridges, you might describe how they just drove all over town looking for replacement cartridges and came home frustrated that no one had the right size. You would then define a set of use cases to state exactly how they might interact with the website based upon a deeper understanding of why they visited the site in the first place. For example, they may go directly to the search field and type in the printer model number rather than navigating your catalog in search of cartridges. This understanding would drive a very different user experience–and likely higher conversions–since it better engage the user in immediately solving their problem.

2. Pay Attention to Page Flow
Look for problems in the flow of your conversion funnel to see if there could be functional issues or some cause for confusion. A great way to test for this is to sit down with a few of your customer prospects and ask them to navigate the website. Give them the goal of purchasing a certain product and then stand back and watch where they get stuck. Sometimes, this is as simple as button placement on the page. Or, you might be asking for too much information, such as requiring users to create accounts in order to buy your product. More concrete roadblocks include not accepting the method of payment that is preferred among your target demographic. It might also be simply a matter of convenience: To make it easy on customers, look for opportunities to reduce pages and steps in your funnel and deliver the customer to the goal point as quickly as possible.

Another great way to identify problems is through the proactive use of a Web analytics tool to identify bottlenecks in your intra-page flow. Using tools such as Google Analytics, you can define conversion funnels that map the sequence of pages that a visitor is intended to flow through, from the initial landing page all the way to the transaction “thank you” page. By properly tracking and visualizing the conversion funnel, you can easily see where you may be disproportionately losing too many people at a certain stage of the funnel. This can help you figure out which pages or interaction events you should be focusing your optimization efforts on.

3. Hone Your Message
The words you choose in your titles, product copy, and especially the semantics of things like action buttons can have a significant effect on user engagement. Much of effective selling comes down to understanding the needs of the prospect and connecting with them emotionally to motivate action. Presumably, we already understand the prospect’s needs from the user-centered research described above, so now its time apply emotional motivation. The core emotions you need to address in your conversion funnel are fear, desire, and complacency.

To address fear, consider how you can leverage your brand’s authority as a market leader if you are one, or how to leverage social proof to decrease suspicion if you are not. Showing the logos of well-known partners or clients can be an effective way to leverage brand credibility of others when you’re just getting started. To address desire, emphasize how close you are to solving an important problem. And for complacency, consider how you may demonstrate scarcity of your product, such that they have a motive to act now. Amazon does this effectively without appearing manipulative by alerting customers when stock is running low and letting them know they can have the book within 48 hours if they order now, but it could take longer if they do not.

4. Take a Tactical Approach to Design
Graphic design is visual communication and can also be a method by which to more effectively engage a user. Simple layout decisions, such as removing the navigation bar, limiting the number of options between which users must choose, and the use of negative–or empty–space around an object can all help hone the user’s attention on the intended item of interest. Making action buttons larger and placing them above the page fold can also have substantial impact on the user’s likelihood to take the intended action. The sorts of tactical design choices are the visual equivalent of the salesman knowing just what to say–and what not to say–at the right moment.

Color is another effective component of visual design. It not only has the ability to draw attention to something, but carries with it the ability to elicit deeply associated emotions and thoughts. Blue and green have been historically important to the survival of the species, since they are associated with food and water. For this reason, blue and green are universally regarded as calming and soothing. Orange is generally regarded as an exciting color, which elicits action and is one of the best colors for converting buttons. Other colors, including red, carry cultural meaning and need to be applied with recognition of the specific audience you are addressing. In western cultures, red is associated with warning and alert. In the Middle East, it is associated with evil. And, in China, it is a lucky color, eliciting the opposite emotion.

The fundamental key to success with conversion optimization is to understand your customers and to commit to a philosophy of ongoing testing and improvement to zero in on precisely what works with them. It is a process, not a one-time tactic, but the impact to your return on ad spend can be significant.

Product Innovation Isn’t Everything

starbucks

This article was originally posted on Inc.com.

How was Starbucks able to build an empire in just 35 years by charging premium prices for what is essentially a commodity? The coffee purveyor’s legions of loyal patrons seem to find significant value in what it offers, to the point that it has become one of America’s most beloved brands. Others, meanwhile, are perplexed by the fact that someone would pay $4 for a cup of coffee, standing in a long line for the opportunity to buy something that could be created at home for much less. Starbucks founder Howard Schultz has said, “If I went to a group of consumers and asked them if I should sell a $4 cup of coffee, what would they have told me?“

So how does Starbucks pull it off? Because it offers more than just coffee. It prepares premium custom beverages made to your precise order, excellent customer service, and beautiful stores with comfortable chairs and free WiFi. For many, a trip to Starbucks is as much about the experience as it is about the caffeine. For others, it is a matter of convenience-they can always find one nearby when they need to connect to the Internet. All of these things add value beyond the coffee itself, which enables Starbucks to sell one of the World’s most commoditized products, at a significant premium. For those who value these benefits, Starbucks is contributing significant value, well worth the $4 per visit.

Amazon.com is a subtler example of what’s possible when we look beyond the commodity. It is not selling a premium version of a product like Starbucks, nor does it have a physical presence on every street corner. It does, however, contribute significant incremental value beyond that of its competitors. Most of us shop at Amazon.com because we know it has the world’s largest inventory, the fastest shipping, and one of the best return policies. And, because it is now the largest retailer in the world, it also has significant pricing power and is thus able to offer some of the best pricing.

If all of these benefits seem trivial, ask yourself if you would buy from a smaller online store you don’t know much about, even if the product is the same price. Perhaps you have a bias toward supporting the small businesses or the underdog, but that aside, would you pay the same price for a product from a store that has slower shipping and an unknown return policy?

In 1979, Harvard Professor Michael Porter introduced the concept of the value chain, suggesting there are multiple layers to your business, each of which contributes to the total value to your customer. Direct activities, including sales, clearly contribute to revenue, and activities such as IT and customer service provide indirect, long-term value. The presence of all of these services form an integrated value chain that makes some brands more professional and valuable than others. The investments these companies make in their infrastructure cannot only make them more efficient and bring down cost, they have the potential to add value for their customers by improving the purchase experience, reducing risk, and addressing other needs that the customer may have but are being ignored by the market.

Starbucks and Amazon.com have both built an empire around selling commodities, but they invested heavily in the indirect benefits surrounding their offerings, thus providing more value than their rivals. Put another way, their innovation is the value chain they wrapped around the commodity products they sell, not the products themselves. After all, innovation does not always mean technical wizardry or superior craftsmanship–creating a more valuable delivery or purchase experience can be fertile ground for innovation too.

How can you take a page from Starbucks or Amazon? First, you have to appreciate the irony of selling a commodity and yet become so differentiated in the process, that you rise above the commodity trap that plagues so many businesses. Therein lies a subtle, yet crucial, distinction. Everyone in Silicon Valley seems to be “innovating” a technology product, but not many are creating meaningful differentiated value that gives them a leg up on competitors. That is unfortunate when you consider that many technology products become commodities eventually.

The bottom line? If you spend all of your resources innovating a product that is bound to become a commodity, you won’t have a defensible market position down the road. In fact, all of your resources will have been spent fighting a battle you are unlikely to win in the long term, unless your successful at being acquired during market consolidation, which is unlikely. That’s why innovating the value chain around an existing commoditized product, rather than innovating the product itself, is sometimes a better strategy. That’s especially true if you’re entering a crowded space and lack the timing or resources to become a leader when the market matures.

3 Keys to Effective Online Marketing

inc1b

This article was originally posted on Inc.com.

Online marketing is a complex and competitive landscape. Gone are the opportunities to easily drive quality free traffic or to buy traffic for nickels and dimes and monetize it for dollars. It is still possible to make a healthy return on your online marketing spend, but it requires a much more precise and disciplined approach.

In the book The Smarter Startup, I described a three-step optimization model for potentially driving considerably higher returns on your online marketing ad spend. By paying attention to a few important details, it is possible to improve your ad spend returns by 500 percent, compared to what many small business and startups are doing currently. To demonstrate how you can do so, let’s walk through each of the steps:

Step 1: Traffic Optimization
Acquiring traffic is where it all begins. Are you doing it effectively? As described in my recent article about inbound and outbound marketing, “What Online Marketing Strategy is Right for You?” the number of online marketing channels has proliferated in the last few years, but not all of them apply to your business. Every business needs to define its online marketing strategy as fundamentally about convenience and price (outbound) or authority and expertise (inbound) and choose the right channels accordingly. Applying the wrong channels for your business model may work in certain situations, but will eventually lead to frustration and difficulty achieving positive returns.

Assuming you’ve selected the proper channels, you also need to take the time to optimize the use of those channels. Is your message resonating? Are you getting the click-through rates you need? If not, try different versions of your ads until you find a winning combination. Try different messaging, images (if applicable), and targeting (keywords, devices, demographics). Cull whatever isn’t working as you add new testing scenarios and you’ll eventually realize significant improvements. It’s not uncommon, in fact, to double your performance with various marketing channels after spending some time to optimize.

Step 2: Conversion Optimization
Once the traffic arrives, what are you doing with it? Hopefully, you’re sending it to a landing page designed to maximize engagement, rather than to a generic home page. Most sites can achieve 30 percent to 50 percent improvements in conversion rates by systematically testing different versions of landing and checkout pages (A/B testing). But if you’ve not spent any time and are not following the basic best practices already, it is entirely possible you could double your results (or more) here.

When dealing with landing pages, the basic goals are to (a) sell your product or service and (b) remove anything that could distract or deter visitors from filling out your signup form or buying your product. Remove the navigation and ancillary sidebar. Then, provide sufficient in-line information and instruction so the visitor doesn’t need to seek it out. Think in terms of trying to guide kindergarteners on a straight line from point A to point B and you have the basic idea: remove all distractions and tell them clearly what you want them to do.

If you want the user to fill out a contact form, for instance, make the form as simple as possible and don’t ask for any unnecessary of overbearing information. If it’s a purchase decision, give as few options as possible to choose from. And once customers leave the landing page and continue on through a conversion sequence, apply the same logic, keeping users focused and driving them toward the goal as quickly and simply as possible. My column “4 Ways to Turn Visitors into Buyers Online” provides a more in-depth look at conversion optimization.

Step 3: Customer Retention
It continues to amaze me how many Web-based businesses make an online sale and consider the relationship with that customer to be over. The beautiful thing about converting an existing lead or previous customer is that you’ve already spent the money to acquire this prospect and if you’re able to convert them, the profit margins are significantly higher than having to acquire another 50 or 100 leads (assuming your conversion rate is 1 to 2 percent).

Assuming you are a typical business–that is, you have 30 percent net profits and spend the same amount on marketing and customer acquisition costs–the net profit potential of an existing customer is roughly double that of a new customer. If you are able to convince roughly half of your existing customers to buy again, then you’ve effectively doubled your net profits here again.

The Compound Effect
When you take these steps in aggregate, they amplify one another. Let’s say you started by spending $100 to acquire 100 customers and your earnings are $100 from that 100 customers, meaning you’re break-even to start. With traffic optimization, you were able to double your effectiveness, which means you’re now making $200 from the same $100 you spent. And from conversion optimization, let’s assume you achieved 50 percent improvements again, which compounds your results to $300. Finally, if you convinced one half of your customers to buy from you, either by nurturing non-converted leads or achieving a repeat customer, let’s say you doubled the output once again, bringing it to $600. There you have it: the compound effect of efforts to improve traffic quality, conversion rates, and customer nurturing/retention.

Of course, results vary based on a myriad of factors, including marketing assumptions, scaling of sourcing, and fulfillment costs. And the tree steps described above take time and money that aren’t reflected in my admittedly crude calculations. But this simplified example should give you some sense of what’s possible and why minding the details makes a world of difference with online marketing.

Inbound vs Outbound Marketing

marketing-strategy

This article was originally posted on Inc.com.

As recently as a few years ago, online marketing meant one thing: search marketing. And there were only two flavors of search marketing: search engine marketing (SEO) or paid search (PPC). Today, there are seven distinct online channels that can be leveraged as part of your overall marketing mix: content marketing, social marketing, ad retargeting, paid search, product feeds, affiliate marketing, and e-mail marketing. More channels are appearing every year as companies continue to innovate the online experience. How can a marketer predict which channels will work for them and determine how best to leverage those channels?

To answer this question, take a step away from the details and consider how you would have engaged your customers a hundred years ago. In 1898, advertising pioneer St. Elmo Lewis developed a four-step model for writing effective marketing copy called AIDA. The name is an acronym that describes four steps to convincing someone to buy from you. First, you must get their Attention (A), then build their Interest (I), create Desire (D), and finally, you must inspire Action (A). More than a century later, this model is still useful for demonstrating how the dialog with your customer changes from first introduction to the eventual sales event and how your messaging needs to be different depending on what stage of the process you’re engaging with a potential customer.

Consider how this model applies to your sales conversion funnel and how you would engage customers differently at the four stages of the funnel. Most businesses naturally align with either a “high funnel” or “low funnel” marketing strategy, not both. Is your business one that is more focused on qualification and brand building? Or is your product or service a known commodity for which you’re merely competing on price and convenience? The answer to this question is where you must start to define your online marketing strategy.

In my recent book The Smarter Startup, I introduced the following two marketing models that reflect this difference in high funnel versus low funnel engagement:

Inbound Marketing

If you sell custom services or high-end products, you must expect that your customer is going to do some research to qualify you before they select you as their provider. They may look for reviews on Yelp, ask colleagues for references, or spend time researching online before they decide whom they will contact. The window of opportunity with these customers is high in the conversion funnel, and so you must focus on capturing their attention (A) and interest (I).

The online marketing channels that lend themselves best to engaging this type of customer will reinforce your reputation and demonstrate knowledge and quality. Content marketing lends itself particularly well here. Consider writing articles for popular online magazines and contribute to online conversations where they are occurring. Think about how to enable brand advocates to share your message with their own social and professional networks via social platforms like LinkedIn and Twitter.

Because this type of conversion funnel can last weeks or months, it is critical to stay in touch with your customers to keep your brand top of mind. If you’re engaging them high in the funnel, they’re likely not ready for a purchase yet, but it would be reasonable to request an email address or social follow. This will give you the opportunity to continue sharing your knowledge and commitment to quality as they proceed through their decision process.

You might also consider retargeting ads, which track a visitor’s movement online and can continue to show your ad wherever they go online after they’ve visited your website or otherwise engaged with your online content. These ads are available through many ad network providers, including Google AdWords, and are a great way to stay top of mind.

Outbound Marketing

Outbound Marketing focuses on the lower funnel prerogatives of desire (D) and action (A). Rather than building a brand that demonstrates quality and knowledge, you would instead focus on optimizing the transaction event, driving traffic, and optimizing conversion rates. Your messaging should typically reflect this with time sensitive offers and prices discounts. For the outbound marketer, there is little value in establishing expertise or commitment to quality, since the product is often a known commodity. The goals of outbound marketing thus are to get in front of as many customers as possible and to convert those customers before they leave their website.

The online channels that work best for online marketing are the ones that serve these low funnel prerogatives most efficiently. Paid search (PPC) for example is excellent at pairing specific advertisers with customers searching for something very specific; a signal they may be nearing the bottom of the funnel. Product feeds and affiliate marketing programs, meanwhile, are two vehicles that enable the outbound marketer to get their products into popular product comparison directories, where customers can easily compare product features, and provider prices and shipping.

E-mail marketing can also be useful as a follow-up mechanism, as it is with inbound marketing, though the goal is different and its use less critical. Rather than nurturing a lead by helping them through a long and complex discovery process, the outbound market merely re-markets existing customers with special offers in order to hopefully win additional business.

The bottom line? It is important recognize the purpose of each of the online marketing channels, how it is consumed by the public, and how each one may be vary in efficacy for the message you are trying to communicate. For a channel to be effective, you must pair it with appropriate messaging, and for that message to be well received, it must reflect the appropriate stage in the conversion funnel your customer is currently in.

To demonstrate this mismatch, consider what would happen if you try to intercept someone low in the funnel who is researching graduate schools by offering them a 20 percent discount if they enroll today. Or conversely, what will happen if you are an e-commerce website that sells batteries and you spend the majority of your budget writing content that positions you as a battery expert or worse, you begin flooding Twitter and LinkedIn with battery discount codes. Chances are good that St. Elmo Lewis would not approve.

Adapt or Die: The New Technology Landscape

Adapt or Die

This article was originally posted on Inc.com.

A decade ago, building a website was difficult and expensive. WordPress didn’t exist, nor did the tens of thousands of free plugins and low-cost design themes that can be installed at the click of a button. Today, when someone creates a “brochureware” website or blog, there’s a good chance they’re starting with all of these resources already assembled. The job that remains is to simply integrate and customize.

The same is true of just about any Web application you may be looking to build. There is a plethora of open-source and hosted platforms that make it possible to setup well-designed, and even enterprise-grade, solutions for e-commerce, customer relationship management, and just about any software model you can describe, for a fraction of the time and cost of what was needed before. Cloud-based data and service APIs, meanwhile, are available for just about everything you can think of, often for a low monthly fee. Or in the case of Google Maps, free in many cases.

The net result of all of this inherited innovation is a better quality product for considerably less time and cost, as much as 5 to 10 percent of the prior cost, in fact. A typical e-commerce platform would have cost $100,000 to build in 2003, but it is now possible to build something comparable for $10,000 or less. And for the smaller online retailers who don’t require deep customization and don’t want the hassles of running their own technology stack, it’s possible to set up a hosted online store through Shopify, Volusion, or Magento Go for as little as $15 per month and a couple of hours of setup.

How did we get here so quickly? In one word, commoditization. In a 2003 Harvard Business Review article, Nicholas Carr boldly asserted that, “It is difficult to imagine a more perfect commodity than a byte of data. As information technology’s power and ubiquity have grown, its strategic importance has diminished.” To the ire of the IT leaders of the time, Carr argued that information technology is no different than technologies that had come before it, and it would see the same fate. Consider the jet engine, which was the “high tech” of its day and very expensive to build, employing many of the world’s best engineers at high salaries to develop. Today, that problem is solved at a commercial level, and it is just one of the many parts assembled by airline manufacturers who inherit the technology and build products around it. That is where the market is in the aerospace industry today.

As we witness the solving and inevitable commoditzation of an increasing number of software challenges, we are seeing an explosion of new Web and mobile applications in its wake. Start-ups and hobbyists alike are taking advantage of the increasingly powerful inherited technology stack in large numbers. NetCraft estimates there are approximately 15 times more active Internet host names today than a decade ago and there are now 900,000 apps in Apple’s app marketplace, a feat accomplished in the last 5 years alone.

In the midst of this explosion, we are also seeing capital reach more early-stage ventures than ever before, having a further amplifying effect. Accelerator programs like Silicon Valley-based YCombinator are providing mentorship and seed funds to scores of new start-ups every quarter in exchange for a small equity stake. They also prepare these early stage start-ups raise additional funding at the end of the program.

This approach has allowed accelerators to play the odds across a spread of big idea start-ups, without having to shoulder the risk of investing too heavily in a failed business. Because this approach has proven out so well, there has been an explosion in start-up accelerator programs across the United States since 2005, with an estimated 200 to 300 programs now operating across the country.

The implication of all of this activity for technology start-ups should give prospective founders pause. The fundamental challenge a decade ago was technical in nature. The technological and financial barriers to entry limited competition and required engineering wizardry both for the development of the platform and even to master the available online marketing channels available at the time: SEO and paid search.

Now, with many of the technical challenges behind us, the prevailing problem is competition. No matter what your idea for a website or an app, there’s a good chance you’ll find 10 other start-ups who are already in the market, and a couple of those are likely even funded and already on the ground running. Simply building another great product in this climate is not enough. It is time for technology entrepreneurs to begin developing a deeper appreciation for the art of marketing and the nuance of strategy, if they hope to compete in this maturing marketplace. The objective in this new world is to connect with customers and solve their problems through the use of technology, not innovating the technology itself.

SEO Is Dead!

seo-dead

This article was originally published on Inc.com.

Search engine optimization has changed significantly since the earlier days when the term was first coined and industry leaders are beginning to hint at a fundamental philosophical shift that would effectively render the traditional SEO as a dead or dying craft. It is time to re-imagine what it means to manage search engine rankings.

Some history to put this into context: Since it’s inception, SEO has been tactical and reactive by nature. Optimizers would determine what a search engine uses to qualify a site and find the more efficient means by which to satisfy that requirement in order to perform well in a search engine’s search results. The tactics employed by practitioners have evolved over time, reflecting an evolving coyote-versus-roadrunner game in which marketers try to reverse engineer the ranking algorithms of popular search engines like Google and Bing, in order to make their website more favored and thus higher ranked by the search engines.

In the earliest days, search engines relied heavily on webmasters’ use of HTML meta tags to identify keywords related to the content of each page on the site. A search engine would then prioritize rankings based on characters such as keyword density (the number of occurrences of the keyword on the page) in order to determine ranking order. When Google was introduced in 2001, it revolutionized search engine relevance by looking at inbound links to determine quality and significance of a document. The concept was modeled on the academic notion that the number and quality of the citations for an article was a good measure of the article’s significance.

This was an important step forward because webmasters were already gaming the search rankings through a method known as “keyword stuffing.” A site would place as many as a hundred repetitions of the same keyword at the bottom of the page and make it the color of the background, so users would never see it but the engines would.

Eventually, the emphasis of SEO shifted from on-site content, to the offsite effort of link building. In the beginning, webmasters would simply maintain a “links” page somewhere on their site and trade reciprocal links (I’ll link to you if you link to me). Google figured this one out, and the practice became more complex with link building services offering three-way reciprocal linking, a method that was a degree more sophisticated and couldn’t be detected, for the moment. And as the search engines became more savvy as to the quality of links, the tactics continued to evolve and cottage industry services began to emerge to service the demand for increasingly sophisticated link network implementations.

The tactics have continued to evolve and become more complex since then, as search engines have become increasingly able to debunk efforts to manipulate or influence rankings. In 2009, Google released an update called Vince that marked a significant philosophical shift toward biasing large and well-known brands in the search result. Later that same year, releases followed that enabled the search engine to begin factoring user behavior as an indication of quality of a site, such as how long a visitor would stay on a referred website before returning to the search results. In 2010, the search engine began factoring in social signals, looking at how frequently a website is mentioned in the social sphere. All of these new criteria have set the stage for increased scrutiny of websites based on offline reputation and what end users actually think of the websites. Collectively, these efforts signaled a move in favor of overall long-term brand reputation and user preference, and away from the tactical methods that had been used and gamed so pervasively up to this point.

And then the storm came, as Google began rolling out more frequent and more aggressive updates that both strengthened its search engine’s ability to both detect quality signals beyond simply looking at content and links, as well as taking dramatic steps to reign in quality of those criteria. In 2011, Google’s first Panda update was released, which made sweeping changes to the search results, wiping out more than 12 percent of its index, due to perceived low quality content. Numerous releases followed. Then, in 2012, Google’s Penguin updates began discounting the sophisticated inbound link structures that have been built.

Today, it is not uncommon to hear about online businesses that have built successful online media websites that have done well for years, but then suddenly see a loss of half of their traffic overnight. In many cases, these businesses thought they were playing by the rules, but have ignored one important point: Their entire business is predicated upon ranking well in the Google search results, and outside of Google, they oftentimes do not exist. By Google’s new definition of quality, this premise positions the website as probable spam that should be removed from its index.

For this reason, the zeitgeist of the SEO world has recently started to make a fundamental philosophical shift. Until now, the craft of SEO has been markedly tactical and reactive in nature–just figure out what the search engines want and adapt to it. But thought leaders in the space have begun hinting that tactical reaction isn’t going to work much longer. In fact, it may already have become cost-ineffective for many businesses. For this reason, online businesses need to begin thinking beyond search rankings now. What is going to work in the future will be the traditional business and brand building efforts that have been the foundation of building a business for centuries.

7 Business Model Personalities

Business Model Personalities

This article was originally posted on Inc.com.

A well-defined business model should clearly articulate your function in the market, including how you make money, what inputs you depend upon, who your target customers are, and what value you are creating for them. It is a structural representation of how your business functions that concisely articulates what opportunities and challenges you will encounter with this business. If your business were a black box machine, this would be the instruction manual.

Models have become a popular expression of business strategy. Names such as “Network Effects Business” and “Razor and Blades” have come to describe popular models that companies have successfully used to become market leaders in their industries. Unfortunately, the wisdom behind these models tends to be diffuse, without much holistic context that compares one to another. As a result, they are difficult to use and understand, and thus few small businesses and startups take full advantage of them. In our book, The Smarter Startup, my co-author and I took a different approach. We defined a conceptual framework that distills and organizes the fundamental personalities of models and illustrates their relationships from one to the next, a framework we call business model archetypes.

Our model was inspired by work done by the early 20th century psychiatrist Carl Jung, who theorized that there are a few fundamental personality templates from which we all inherit and build our own personalities, which he called personality archetypes. We applied this concept to businesses, observing that there are three primary business personalities: product creators, service provides, and traders, who bring together supply and demand.

Secondary business model archetypes come from combining personality attributes of two of the three primary archetypes, which yields three more types: the brokerage (a company trades as a service), the subscription (a company that turns a service into a product), and the marketplace, which turns the act of trade into a product. Finally, there is a seventh archetype we call the ecosystem, which combines all three primary archetypes.

Business Model Archetypes

The seven archetypes are abstractions that describe the fundamental behaviors of business relative to one another. Since they’re abstractions, it may not be immediately evident how to apply them. To this end, we attributed two “prototypes” for each archetype to demonstrate their applicability. A prototype is a more literal demonstration of the abstract archetype that reflects an actual business model you’re likely to observe in real life. For example, you’ll see on the above diagram that e-commerce and lead generation are prototype examples applied to the trade archetype. Both types of companies bring together buyers and sellers, and make money by selling for a premium to cover the cost of their services.

Each of our business model archetypes has strengths and weaknesses, and just about any business you might be considering would give you the option to pivot in at least three different directions as you discover the best opportunities in your market. To demonstrate, let’s say that you were interested in developing software and wanted to build a business around that. You might consider developing a software product, something that you buy and download, such as a premium plugin for a popular CRM or eCommerce platform. You could then pivot to Software as a Service, or SaaS, subscription model, in which you manage and continually improve the software and sell the right to use it on a monthly basis, rather than selling it outright as a product. Or, you could think about creating a software service agency that develops custom e-commerce or CRM solutions for other businesses.

Each of these options would be viable and suitable to a team with a software development background. Which option is best for your business is an important question that depends on the timing and competition of your market, your ability to obtain capital to quickly scale your business, and the competitive advantages you may have going in. The product archetype is perhaps the most scalable and profitable option, and often allows you to sell your service into a specialized marketplace. But it’s also highly commoditizable, so you must be careful to look at timing and competition closely. By contrast, the service archetype is more difficult to scale, but involves a lot less risk and isn’t as vulnerable to market consolidation.

Whichever archetype you settle on, you should consider the options and put yourself through the exercise of considering your competition, your sourcing, and your target customers. Once you have a solid idea of which archetype you want to leverage for your business, you can look at other popular business model frameworks, such as Alexander Osterwalder’s Business Model Canvas, which will walk you through articulating the important dynamics of your business.

However you go about it, the important point is simply to do it–take the time to understand your strategic options and to articulate your business’s foundational strategy. It will give you the clarity you need to understand how to position yourself in the marketplace, and optimize for efficiency and profits.

Image excerpted from The Smarter Startup by Neal Cabage and Sonya Zhang. Copyright © 2013. Used with permission of Pearson Education, Inc. and New Riders

Helping Others Is Good Business

Helping Others

This article was originally posted on Inc.com.

When you decided to become an entrepreneur, what reasons motivated that decision? For some people it is the opportunity to make a lot of money, the freedom to live by their own convictions, or to live a certain lifestyle. While these are great personal goals, too much focus on these things can lead you down the wrong path.

The decisions we make every day build upon our existing goals, values, and beliefs. We call upon these foundational thoughts to inform the decisions we make so that we don’t need to re-evaluate every detail and consequence every time we make a decision. Imagine how your product or service offering might be affected if your decisions are driven primarily by a desire to become wealthy or to set yourself free from mundane work. Do you immediately filter the options by what has the biggest immediate profit margins? Or, do you limit yourself to opportunities that you could do from a laptop while traveling the globe? If this is your focus, then are you actually solving any problems? Are you contributing value or focusing on extracting value?

Contrast this with setting your attention upon helping others. If you start by talking to prospective customers to understand their pain and find a problem they need solved so badly they will pay you for a solution, that’s a customer who not only will be thankful and loyal over time, they’ll likely spread the word and do your best marketing for you. That loyalty and vitality is startup gold, but is rarely accounted for in our early calculus of the best opportunities.

If you’re focused on calculating profit margins, you will likely miss the nuance of what problems truly need solutions. You’re also less likely to connect with a base of customers so deeply that they spread the word on your behalf or stick with you after competition enters the market. You’re less likely to realize the real opportunities, because you are less likely to be solving a real problem.

If you’re focused on high margins and high volume, this will often lead you to a market that is already peaking and nearing consolidation. Volume usually comes from the market having matured and high margins attract competition. One should be wary of this scenario-if it’s too good to be true, there’s a good chance you’re late to the party. This is the classic problem with chasing money: You’re one step too late and end up facing market consolidation before you’re ready to contend with it. Any value you may feel that you are contributing is likely redundant or inferior to others already entrenched in the market.

A similar challenge awaits if you limit yourself to looking for opportunities that fit your lifestyle. If you limit yourself to opportunities that you could pursue in your free time or while trekking the globe, for example, there’s a good chance you’ll land upon a thin business model that’s easy to setup and quick to generate cashflow, but never invests in building your value chain (better sourcing, delivery, customer service, etc). Affiliate marketing, drop-ship e-commerce websites, and “me too” mobile apps that add minimal new value to the market are examples that come to mind.

With these businesses, you are only contributing a thin layer of value over the top of other businesses who have made the necessary investments and own the entire value chain; you are putting a metaphoric cherry on top of someone else’s ice cream sundae and pretending it your own. But this won’t last for long. Businesses that facilitate your profit margins will eventually capture the inefficiency you’re exploiting, particularly if you do not make significant investments to reinforce your long-term value and capability to stand on your own as a business.

Neither chasing money nor chasing a lifestyle gives you the opportunity to build a lasting or meaningful business. They are temporary opportunities that only exist because of a gap between market demand and what suppliers are yet able to provide. Once the inefficiency of the market is corrected and there’s no longer that temporarily gap between supply and demand, the jig is up. And if you are focused on enriching yourself rather than helping others, this is the sort of opportunity you will most naturally align yourself with.

If you are serious about starting a lasting business, stop focusing on your own goals and instead focus your attention on serving others, discovering their needs and how to help them. Think about how to create significant value for a core group of people and how you can help them live a better life or accomplish their goals. This approach will naturally align your efforts with the market and put you a step ahead of competition, rather than always being a step behind. Who knows, you may even sleep better at night, knowing you’re making a difference somehow.

Timing is Everything

timing

This article was originally posted on Inc.com.

Timing is everything. You’ve likely heard this said many times before, but a clear explanation of why is rarely forthcoming. And, since timing is so important, how can you identify and take advantage of good timing?

New opportunities typically arise because of new innovation that either inspires or enables others to enter a market. With the web in particular, the enabler is typically a new platform that brings people together and makes it possible for entrepreneurs to monetize those crowds. For example, Goto.com introduced Pay Per Click (PPC) advertising in 1998, which led to an explosion of e-commerce activity. In 2003 Google AdSense brought about an explosion of ad-driven content websites and blogs. In 2007, Facebook created a platform for social apps and companies like Xynga were born. And in 2008, Apple introduced the app store for the iPhone, and Google followed shortly after with the Android store.

If you are an online entrepreneur, this gives you some idea of where to look, but the opportunities do not last forever. Shortly after Overture launched its paid search platform, Google launched AdWords and brought paid search to the mainstream, and the demand for this service grew quickly. Those who arrived early were able to buy traffic for pennies on the proverbial dollar and had a significant opportunity to build a new business. Competition in the AdWords auctions rose quickly however, and it wasn’t long before the costs of traffic exceeded the profit margins for many small businesses.

As for Apple’s app store, there was a clear opportunity for those who were early to provide the interactive content the market was demanding, but within only a couple years the app store had already become congested with excess content and discovery of new apps quickly became a problem for those who were not already established or who were not providing the very best and most popular content. Today, more than 700,000 apps are available in the app store and 50 percent of the revenue is generated by only 25 developers.

The Internet is unique in its ability to proliferate so many new product platforms and ecosystems so quickly, yet those opportunities are equally fleeting. Each of the platforms mentioned has gone from brand new innovation to a mature market that is difficult for new startups to enter, within just four to five years, suggesting the opportunities online move quickly and startups must be able enter the market and scale quickly, if they are to remain in the market for the long term. After all, once the market is mature, the cost of participating will be significantly higher than in the beginning, and only those who have secured the best sourcing, best talent, and distribution options, will have deep enough profit margins to participate.

To illustrate the significance of entering a market early, consider the Innovation Adoption Curve that was introduced by Everett Rogers in 1962. In this model, Rogers describes how the market slowly uptakes new innovation in the beginning but quickly accelerates towards a peak which marks maximum competition, before eventually decelerating once market consolidation sets in. If we assume the entire process of market uptake takes 10 years, that would be consistent with the observation that many of these online platforms go from new opportunity to saturated within four to five years.

In response to this challenge, a young startup might be inclined to be as early as possible in catching an opportunity. This works sometimes, but is not without it’s own risk. Sometimes the great new innovation or platform your betting on never takes off, and if you’re a young startup with limited resources, that can represent a substantial risk. It is also interesting to note that many successful companies were not the first to enter their market either – they’re often “fast followers” who were able to enter the market soon after someone else validated it, thereby avoiding R&D cost and the risk of non-adoption. This is the case for almost every major innovation in Silicon Valley: Google didn’t invent the search engine, Facebook didn’t invent the social network, and Yelp didn’t invent online reviews.

In 1991, Geoffrey Moore added to the Adoption Cure by identifying what he believed was the perfect time to enter a market, something he called the Chasm. He concluded that entering at the cusp of early adoption and early majority was ideal, because the market was sufficiently proven to reduce the risk of investment, but still provided the opportunity to scale sufficiently before consolidation set in on the back half of the curve. If applied to the online platform opportunities, that means we need to watch new emerging platforms closely and if they appear to be gaining traction, then you need to enter those markets within the next 1-2 years after its introduction.

At the end of the day, timing is merely a function of finding the right balance between supply and demand and these are merely techniques for accomplishing that goal. You need to find the sweet spot when demand exceeds supply to make your job easier and provide the runway you’ll need to take off, before a market consolidates. You can afford to get a lot of other things wrong if you get your timing right.

Framework for Evaluating Marketing Opportunity

poem

This article was originally posted on MindTheProduct.com.

How do you know whether a product idea is going to succeed if you build it and take it to market? If you’ve ever been part of a startup, or if your organization has launched a new line of products, you know how precarious the effort can be.

Some would advocate using the ‘Lean’ method to arrive at a product market fit. The basic premise is to seek input from customers early in the process to ensure you are building a product people actually want. This allows you to challenge your assumptions and go see for yourself what the problems are you purport to solve.

While there is a lot of validity to this approach if you have identified a viable market and are merely seeking product-market fit, it may not be the best tool for discovering market opportunity. Lean is a great approach to optimization, but it does not help you determine risks or propensity for success when evaluating a brand new product or market concept.

One of the biggest challenges faced with new product innovation is the lack of heuristic models or best practices for discovering product opportunity. This is partly because the market is dynamic and it is difficult to pin down anything truly actionable before the opportunity has changed. But it is also because no heuristic models (set of best practices) has really been defined.

That is the challenge that led to the creation of the ‘product opportunity evaluation matrix’ or POEM framework. It is a conceptual framework that accounts for fundamental market dynamics in order to help startup entrepreneurs and product managers to think through the conditions of the market, to determine if an idea is likely to be successful or not. It can be used to identify strengths and weaknesses for an individual idea or to compare overall strength of several ideas to determine which opportunities are most likely to bring success. By taking this approach, one can take a more informed approach to determining whether to build a new product in the first place, rather than building it, hoping customers show up, and iterating and ‘pivoting’ repeatedly until they do.

The framework is comprised of five forces that drive market opportunity:

  • Customer
  • Product
  • Timing
  • Competition
  • Finance

Five generally accepted truths are stated for each of the five forces and the practitioner is asked to grade their product concept (A-F) for each of the five truisms. An averaged score is then derived for each of the five forces. By going through this exercise, the practitioner is required to account for all of the significant dynamics that may determine the propensity of a product to succeed in the market.

scorecard

To illustrate how this is useful, consider the metaphor of how cell phone service providers detect location of a device. Each cell tower can detect an approximate distance of a cellular device from the tower, but can only determine a radius around the tower. Adding a second toward provides directionality and by the time you add a third, you have the basis by which to triangulate a location with a fair degree of confidence.

poem-triangulation

It is a similar concept in that opportunities in a dynamic market are always moving and changing, and you need a few points from which to reaffirm where opportunities might currently be. Doing a reasonable evaluation of externally facing factors such as customer, timing and competition will tell you where opportunities are. And by looking at internally determined considerations such as what product you are proposing and your financial means to provide this product to the market (at this time in the maturity cycle), will give you a much stronger understanding of where the best opportunities are for you or your company to pursue.

The purpose and application of the POEM framework is similar to other open source conceptual frameworks such as SWOT and The Business Model Canvas. In the case of SWOT the practitioner loosely define the strengths, weaknesses, opportunities and threats they face in their current market, relative to their competition. This is helpful for strategic planning within an organization. Alexander Osterwalder’s Business Model Canvas, meanwhile, has become a popular tool for defining key elements of a business such as partners customer segments, and applicable channels. With POEM, the purpose is similar, but its application is to provide structure and guidance to the discovery of new product opportunities in the market.

poem-infographic

The POEM Framework is a free-to-use open source resource that has been published under the Creative Commons license. To learn more, please visit POEMFramework.org. There you will find a detailed explanation of each of the criteria and how to use them. You can also take an interactive quiz for an easy and fun way to try applying the framework for the first time.

Are We In a Startup Bubble?

Startup Bubble

This article was originally posted on VentureBeat.com.

Have you noticed how many online startups there are again recently? While it’s great for overall innovation, it can create a challenging ecosystem for budding entrepreneurs. I’ve spent more time than I care to remember, evaluating various businesses, looking at models, and seeking opportunities where I could compete. Invariably no matter what idea I find and no matter how niche or arcane it is, it’s likely there are already more than a handful of competitors already in the space.

Just a few years ago, may of the simplest online opportunities were still viable for new entrants with relatively little capital. Today, I see excessive competition everywhere I look, and nearly every niche seems to have at least 1 or 2 well-funded competitors. The other day I was joking with my wife about the issue, and we came up with a business idea (as a joke) that we thought would be a good litmus test — a dating CRM. Afterall, a busy dating pro needs to keep track of all their dates right? (joke). So we looked online, and to our horror, there were several, one of which appeared to be a serious product.

This kind of crowding isn’t what you want to see if you’re about to take a major career gamble.

So why has the market become so congested? Consider what has happened with venture capital investments in Internet startups. Only a decade ago, the expense of getting a startup off the ground was very high. With the cost of servers, and having to write all the low-level code from scratch, it was entirely likely to require millions of dollars to get a company off the ground. As hardware commoditized and foundational software became open source, the cost and time to get off the ground has reduced substantially. Investor Mark Suster wrote an interesting piece on this topic, suggesting that the capital cost of launching a new startup has gone from a million dollars to only $50,000.

I’ve heard it said anecdotally that only 1 in 1,000 Silicon Valley startups would be considered a “success” five years later. A little more promising, I also heard Founder Institute CEO Adeo Ressi indicate that startup success was closer to 3%. I don’t know what the actual number is, but this serves to illustrate just how high the risk is and why the lower cost of investment for VCs is such a good thing. Rather than spending a million dollars on a single business, you can spread that same million dollars across many young startups and significantly increase your odds of reaching positive ROI. That’s why we saw Y-Combinator launch a few years ago to provide early-stage mentorship and $20,000 of investment for college students who want to take a chance on a startup.

The Y­‐Combinator model has proven so successful that it has attracted much more money into the ecosystem and there has been an absolute explosion of startup accelerators across the country, all proliferating the same mentorship + seed capital model. The net result is that you have often multiple tech entrepreneurship factories churning 20-50 out cohorts of new startups every quarter.

With geek now being chic and success stories such as Facebook and Google inspiring movies and careers around the world, the allure of becoming a startup millionaire is today’s equivalent of becoming a rock star. And the Internet has torn down many physical barriers that once precluded other nations from competing. Now you see merchants selling directly from China on eBay, and SaaS companies providing compelling online software solutions directly from India and Eastern Europe. No wonder it feels so crowded!

But let’s focus back on the maturing of capital markets and their contribution to this phenomenon. In the traditional investing cycle, initially, a few investors would reluctantly invest a little money in a company that already had a proven model and track record. With a nearly guaranteed return on investment, they saw healthy returns and confidence built. In the next cycle, more investors observed this success and tried to step ahead of the conservative late-stage investors to get in on the easy money. They accepted more risk and lower returns. This process continued until we had a very mature market in which too much money was chasing too few ideas, all trying to step ahead of one another. And eventually we got to where we are today — money being thrown at every college kid with an idea and no track record. Now imagine what happens with the newly passed JOBS Act, that will make it easier for small businesses to attract angel funding from non-accredited investors, particularly through crowd-funding.

But everything goes in cycles, and I can’t help but wonder if this wave is already cresting. While there’s been opportunity for venture capital firms to spread their risk across numerous startups and increase their odds, doesn’t the proliferation of incubated startups actually challenge the success potential of each one of them? And how long does it take for the aggregate return-on-investment to once again find its historic equilibrium?

It was less than a decade ago that Wall Street was touting financial innovation and Congress was touting easy lending that would make it possible for more Americans to become homebuyers. This, of course, opened up capital to home buyers and investors that created the housing boom and eventual bust. But all it really did was bring more people into the market place and temporarily distort opportunities; a distortion resolved a few years later.

So how long will it take for this bubble to correct? As aggregate returns begin to marginalize and the over-supply of startups begin to cannibalize one another, other investment opportunities such as real estate may become more attractive again and provide healthier alternatives for the early ‘smart money’. The ultimate consequence is going to be a downward leg for a number of years for startups. It won’t be the end of the world, but it will mark the end of an easy-money cycle and a period of exaggerated perceived opportunity.

For would-be entrepreneurs looking to invest in a startup today, it may be worth taking a hard look at whether this is the best time to take the plunge. Isn’t it after all the height of a market cycle when the opportunity looks the best and when everyone is convinced that ‘things are different this time’?

When a Niche Consolidates

For many months I researched and profiled various companies looking for an opportunity to build a product/service that would provide an opportunity for me to build and scale a business.  After an exhaustive search, I finally landed on an idea:  real estate.  Specifically, I saw an opportunity to service real estate agents as they struggle to establish an online presence.

The particular opportunity that I felt I saw was an innovation vacuum due to 6 years of low revenue in the industry.  In an overly saturated online World where angel funding is thrown at every college student with an idea, I was hoping to find a niche where no one was looking.  Real estate seemed perfect since it isn’t really ‘sexy’ after so many years of struggle.  Equally important however, marketing solutions for real estate agents is a massive billion dollar a year industry.  The quality of services and products is not that high and margins seemingly healthy. Once I finally stumbled upon the niche, it appeared it was all systems go!

But there was a massive under-current forming underneath me and I didn’t realize what it was until 2 weeks ago.  Apparently Zillow.com, the major online media site for real estate search and content, and decided to begin offering marketing solutions for real estate agents. More importantly, it launched a significant suite of tools and resources nearly identical to was planning, and made it available, for free. They now offer a CRM system, significant training materials, and a free WordPress-based website (which real estate agents love), complete with numerous content widgets and an IDX feed of houses the agent can display on their site.  The IDX feed is particularly notable because the vendor fees each regional MLS charges to access their IDX feed is non-trivial, adding $20-25 to each agent account on average, depending on scale.

Looking closer at the Zillow program, it is not just $25 per month they’re absorbing, there are also hosting and development costs and a free domain name they are subsidizing for new Realtors who sign up.  Its a great value for agents who sign up, but a clear loss-leader on a massive scale.  From what I have read, Zillow’s goal is to become the dominant destination for Realtors seeking online marketing solution.  Or put another way, they are establishing a Freemium platform, upon which they’ll offered paid services.  The free part of the product effectively neutralizes competition and allows them to establish a dominant mindshare; a position well worth the $5-10 million dollars in cost to them, and something that will pay off in spades later, with higher conversion rates and lower advertising costs for their services.  More importantly, the margin compression asserted by their impossible economic model will inevitably starve out a majority of the small companies currently services Realtors, creating a much less crowded table which is easier to dominate.

What I am describing is a classic case of market consolidation. Well, the part wherein a company can offer better service at a lower price is classic competition which leads to consolidation.  Subsidizing a new offering from other business units and recently acquired IPO capital in a way that renders your competition downright impotent to compete is arguably anti-competitive and monopolistic, but I won’t digress any further in that direction.

The reason for sharing this story is because it presents a learning opportunity for observant marketers and entrepreneurs.  Just because an opportunity exists today, doesn’t mean it will still exist tomorrow.  In fact, there is a natural cycle in business wherein a new innovation generates new opportunity, entrepreneurs seize on the opportunity in a vacuum of competition and do well.  Their success inspires new entrants, the market gets crowded and ROI is squeezed.  Eventually a “winner” of the competition will assert itself, another “winner” will respond, and all the small competitors are washed away in the waves of competition that overwhelm them.  By this time, the opportunity for innovation and entrepreneurship in the field is exhausted and those who competed inevitably go to work for the ‘winners’.   This is a phenomena first described by the Rogers Innovation Adoption Curve and well applied here.

If I were to apply it to entrepreneurial opportunity, I would say there are are 5 distinct phases:

1. Innovation – Shortly after an innovative disruption occurs, there is significant opportunity for an entrepreneur to introduce new ideas and products.  Because there is virtually no competition, an immature product is acceptable and very little marketing strategy is required ( brand strategy et al).

2. Proliferation – Soon after the world realizes the opportunities the early movers have discovered, more and more entrepreneurs will seize on the idea.  The market will soon get crowded.  Marketing sophistication is now required and products need to be more polished and mature to compete (more features, etc). For these reasons, the cost of entry is now a lot higher and may even require significant capital at the later stages.  The market is still healthy but increasingly difficult to enter.

3. Consolidation – During the proliferation period, 2-3 large brands likely pulled ahead through better product or marketing efforts.  These brands are now in a position to begin major advertising campaigns, major new product innovations, or reduced pricing as a result of scale.  In some more aggressive cases, they may seek to undercut competitors by offering product at impossible price points and take the loss in order to starve out competition, in an effort to accelerate the consolidation phase. Typically one brand will initiate the war but a second and possible third will respond in an effort to prevent the one brand from dominating them.

4. Nichification – After consolidation occurs, the dominating brand(s) will have created a platform or “ecosystem” that they control.  AT&T did so with the telephone networks, NBC and CBS for television networks, Microsoft with the desktop OS, Google with online search, Apple with the IOS/iTunes ecosystem, Magento with eCommerce, and WordPress with blogging, YouTube for online video and Facebook with the social graph.  Once those dominant platforms are in place, there is very little hope of a small entrepreneur challenging the platform.  Instead, many entrepreneurs find opportunity, albeit smaller and more contrived, by developing “glue” to augment the experience of those platforms in the form of extensions, ‘apps’, themes, or content. Consulting is also still a viable opportunity at this stage of market maturity.

5. Completion – Eventually even the the entire innovation wave will be exhausted an even the niche glue opportunities on top of the dominant platforms will have been exhausted.  There is always some room for innovation but the field will again get crowded, margins squeezed, and the platform owner becomes increasingly aggressive in their efforts to control and monetize the platform, further undercutting the entrepreneur.  When all of this happens, the entrepreneurial battle for the wave is over, and many of those who participated will go to work for the dominant brands.

As frustrating as it is to observe, it is also fascinating and predictable.  In my particular experience with real estate, I observed a large opportunity that seemed to be taking a rest for the past 5 years.  I took this as a sign that the above progression was perhaps paused in that industry, providing me an opportunity to go back in time so speak, compared to a more accelerated wave otherwise online.  I believed we were in the early stages of Proliferation in only marketing solutions for real estate agents, making it a good entry point, particularly when working without significant investment capital. In fact, we were much closer to the end of the proliferation phase than I realized, and Zillow moved quickly to accelerate the consolidation phase.  So essentially we went from stage 2.5 (midway through stage 2) to 3.5 (midway through stage 3) almost over night!

As for where opportunities still exist in the niche, I believe a couple of competing platforms will exist, providing opportunities to create “glue” solutions.  The questing is of course how open those platforms will be for entrepreneurs to participate.  In Zillow’s case it is curious, though I see a clear competing platform emerging called Spark Platform, which appears will mount a meaningful battle against Zillow and seems to offer ample opportunity for entrepreneurs to become involved.  Consulting, training, and guidance also remains a clear opportunity, as there are a lot of Realtors out there who are now waking up to the reality that 90% of real estate searches begin online, but haven’t a clue how to put that fact to work for them.

Conclusion
In every market segment, there is likely to be a similar pattern at work.  It is critical for entrepreneurs to realistically assess where things are at in their market and determine their odds of success, before beginning. Raising seed money is becoming increasingly important as we get deeper into the proliferation phase, and so is the risk of being undercut by a dominant player.  If a consolidation event has already begun, be realistic abut that fact and adapt to the prevailing platforms, or don’t even bother competing.  I realize it is en vogue to be David and take on Golliath among tech entrepreneurs these days, but for every Mark Zuckerberg story, there are probably thousands of shattered dreams that litter that one path to success.  More people will not achieve the massive hit of a Facebook, but still stand a good chance of a mid-size success, but only by being realistic and adapting to their environment.