Follow-my-customer

December 9th, 2007

The idea of creating products with customers is one that seems to polarize opinion. There are those who won’t touch it, and there are those who painstakingly design processes to incorporate customer-led innovation into their organizations. Then, there are companies that seem to do it effortlessly. What is their secret? I reckon I’ve cracked it. As with every good consultant, I am going to bring it down to a 2-by-2 matrix (click to expand):

Follow-my-customer matrix

  1. For developing new products for your existing markets (extension), your most loyal customers (in terms of customer tenure) are crucial as they have the passion for your products. It is among this group of customers that you are likely to find ideas for new products that you could offer. This could be from the customers taking the product and adapting it for alternative uses, such as in the case of Lego Mindstorms. Lego found that universities (such as MIT) were using their bricks as part of robotics experiments. By working with them on this, they created Lego Mindstorms – a robotics-based product that was popular for play and for academic uses. An alternative is customers who would like to see you offer a new product within the market. The most passionate (or proactive) of these customers may already be writing suggestions about products that you can offer, such as Detective Marketing’s Stefan Engeseth who suggested to Apple that they make an apple-shaped projector. In both cases, these customers should be given free licence to innovate with your products – even giving them resources to do so if needed. And, of course, they should be rewarded for successful ideas.
  2. When it is new markets for existing products (expansion), you need to enlist the help of non-customers, those customers who are choosing against your market. This is where Blue Ocean strategy – ‘the idea of reconstructing market boundaries and rendering the competition irrelevant’ – comes in to play. Understanding why people reject
    the market is very powerful and is an activity that frequently sits at odds with competitor-focused strategy. Exploring the reasons that these non-customers have for choosing against your market means understanding their alternatives. Consider the Nintendo Wii: Nintendo had all but lost the games console market, but it has destroyed the competition with the Wii, outselling the Playstation 3 by 4:1 and the Xbox 360 by 2:1. It is also the only one of the three that makes a profit on the base unit – the other two are both loss-making and recover that loss through games and accessories. Nintendo approached this by looking at how people who were not interested in consoles spent their time. They found that those people preferred to do sociable activities and/or physical exercise, so they created a physical interface that requires a lot of exercise to play it. I can vouch for this personally – I am in no way interested in the video-games market but I have bought myself a Wii and I enjoy it immensely. These customers should be consulted and given opportunities to explore and use the product, and their reactions carefully recorded. That way you will understand why they reject the offering and it will allow you to redesign the offering to become a viable alternative for them.
  3. New markets and new product lines (transformation) need the involvement of your biggest brand-fans. These are likely to be two groups of people: those who have the most interaction with you and also your earliest adopters. These people are close to your brand and will understand how you can make transformational moves that fit in with your core brand – that is, how to make sure that it is a coherent transformation that customers will find credible rather than just a shot in the dark. One such example of this is Tony Fadell, who suggested to Apple that they should create the iPod. This was a new product line and a new market for Apple, and they were reluctant to do it. At first they ignored him, so he got a job at the company in order to persuade them internally. This is an extreme example, but every brand has customers who believe in it enough to want to do business with it in other areas of their lives. Building up a good relationship with these customers will allow you to capture their suggestions, and more crucially bringing them close so that you can test new products and markets with them.

This is a segmented approach to customer-led innovation that involves different types of customer for different contexts. The key to using it successfully lies in communication. Understanding who rejects your market and why will prove valuable for expansion-based innovation products. For the extension and transformation segments, relationship outside of the sales context is key. Giving customers the ability to interact with you as a brand, rather than a business, will provide opportunities to bring those customers close, but to get the most value out of this it is crucial that each customer can lead and define their communications with you. That is a very cheap way of finding out what your brand means to your customers because in the end it is their brand.

Ebay at the crossroads (part 5)

November 8th, 2007

Having looked at the various options for Ebay to grow organically, let’s consider the final growth path: growth through acquisition.

This has been a controversial area for Ebay, as discussed in the introductory post to this series. It missed out on Paypal, then overpaid for Skype. M&A is a challenging area for Ebay due to the lack of any serious contenders in its marketplace. It could try a roll-up model buying all of the minority players, but this would not deliver anything like the growth needed to maintain its early trajectory.

This leaves Ebay in a position where M&A activity can only be about gaining capabilities or changing markets. Assuming, again, that it doesn’t want to change markets, what capabilities could it buy in?

One possibility is to buy in a site with the Amazon-style algorithms mentioned above. A more intriguing one would be to buy a web aggregator such as Netvibes or Pageflakes (it wouldn’t need to buy a widget-maker because this is relatively simple programming). It could do two things with this: firstly, it would be a very quick way to build the drag-and-drop functionality into its site, allowing users to tailor their own welcome page to the site, and therefore their own experience. This would be far more likely to make people creative in the things that they looked for in the site, and would therefore encourage people to buy more (as well as to return more). The other use would be to build web users more generally, be more creative on the widgets that it could bring out, and most importantly study how people are using the web (and what sites they are interacting with). That would be a fantastically useful facility for Ebay to build knowledge on interests and online behaviour.

If Ebay is to venture into M&A in a significant way again, it will need to ensure that there is a clear rationale for its purchase and an easily justifiable price for whatever it buys. Adding capabilities such as these would enable it to tick both of these boxes.

Ebay at the crossroads (conclusion)

This has been a long analysis of Ebay’s current position and options as I see them. I hope that it has been interesting and will present some valuable insights. Whatever happens with Ebay now will be interesting to observe. It is at a crossroads in its life – it was a pioneer and a great company. It has not pioneered for a long time. Let’s hope that the decisions that it makes now will let it become a great company again.

Ebay at the crossroads (part 4)

November 6th, 2007

So far, we have looked at how Ebay might increase its market organically by increasing its natural share of all purchases rather than passively awaiting buyers of auctioned (mostly used) goods. This post will consider how Ebay might expand into other markets. Let’s assume, probably accurately, that Ebay wants to keep its focus on the highly profitable market that it has to itself. So we will look at areas that it could grow around its core market and core capability.

The first that I can come up with is the online music industry. That is an industry that has grown massively over the last few years, and there are signs that it will continue to grow as people move away from physical formats onto soft copies of their music. There are two possible markets for Ebay for online music. The first is to create the same sort of market for second-hand music that exists for second hand records or CDs. There is no reason why people’s tastes would change any less for MP3s over time than for their CDs. They can sell their CDs, so why do they just have to delete their digital music (which may also be very valuable). Many downloaded tracks these days have codes embedded into them to make it difficult for them to pirate, and rightly so. How about using those codes as a way for people to sell their second-hand MP3s online? They won’t have the problem of being scratched or faded, they will still be in pristine order. It would need to rely on people deleting the track that they sell, but there is already a lot of trust needed in this industry and I’m sure that it wouldn’t be hard to create some technology to monitor this. This trade would also be future-proof: there is a prediction that as memory expands, players will eventually contain every track ever recorded, with the only download required being the activation code to unlock the track – these codes could be traded second-hand.

The second online music market that they could offer would be for amateur musicians to be able to sell tracks easily. Radiohead recently put its album on its site for download, allowing fans to decide how much to pay for the album. Ebay could offer new bands the ability to sell their music over a trusted format – linking in with MySpace or Facebook or other sites that put people in touch with acts. This would be a fantastically easy model for them to create, and could again use widgets (see previous post) on the bands’ websites to drive sales.

That covers music, but there is another way that Ebay could expand around its core market. Consider Blogger for a moment. Google’s core product is advertising. Google offers website owners the facility of placing its adverts on their sites, and it created blogger to get people to drive content for them to advertise on. Why doesn’t Ebay do something similar with hobby websites? It could create a WYSIWYG website editor for hobby sites that could have easy functionality to link in with Ebay widgets. That would build its brand, and allow it to drive content on which it could advertise its services as the best place to find private sellers of the specialised goods that relate to the site – whether equipment or collectors items or anything else hobby-related.

These are just two industries that Ebay could enter while keeping its core capability of putting buyers and sellers in touch with each other and charging a fee. What about if it wanted to keep the bidding format?

There is another market that it could enter to do this: venture capital. At the moment, VC is a very time-exhaustive process for the investor and the prospective investment. That is fine in the case of large and very complex investments in very specialised areas, but as with every market there would be a lot of mid-sized and smaller sized investments for which this structure simply isn’t efficient. Ebay could create a forum for these people to pitch their investments online – possibly even using finding (at last) an integrated use for Skype in holding an online pitch and Q&A session (over sound and/or video). The VC investors could then bid for the investment, and whoever offered the best deal would win. This would create a far more efficient transaction process for minor investments, opening up the market for the prospect and giving the investor more time back to find other investments.

This could even be expanded into financial services – what about wealthy people lending through Ebay? If people’s credit reports were loaded into their profiles, then potential lenders could set their risk appetite, and then bid on the interest rate that they were willing to offer people credit at. Understandably, this would be a far more complex market with far more sensitivities, but if people are already using Facebook to lend money to each other, there are signs that there is an appetite for it to go this way.

These options would allow Ebay to grow a portfolio of more specialised business, any of which could grow to be massive. All it takes is the imagination and a bit of web development. As we know, Ebay is not short of web developers.

Ebay at the crossroads (part 3)

October 28th, 2007

The last post looked at the recommendation algorithm side of how Ebay could increase its share of all purchases. This post will look at the other key way in which they could do it – viral exposure.

One of the most striking symptoms of Ebay’s strategy is its apparent passiveness. I suppose that this is a feature of its lack of a serious competitor, but it is still striking. In order for it to get revenue, it relies on people deciding to buy something, then deciding that they might buy it on Ebay, and then looking for it. Its marketing only encourages this process – it does nothing to try to gain a greater share of all sales and purchases.

One of the key components of today’s internet is the ease with which sites can be incorporated into each other. There is no greater example of this than Netvibes or Pageflakes – web aggregators that allow you to put RSS feeds alongside modules of other sites to give you your own personalised web dashboard. Sitting next to a feed of the news stories you are interested in, you can see (at a glance) your webmail accounts and your facebook account too. To the uninitiated, these modules are called widgets.

Widgets go beyond RSS feeds – they are small graphical modules that can be incorporated into any website very easily, and their look is controlled by the source website. For an example, see my Amazon book store, above. That is a widget – a potted version of another site, with limited functionality, that acts as a summary of what that site has to offer and a way of getting through to that site. They are very, very easy to create and, because they give information about the benefits of the source site, they drive more (and better quality) traffic. Ebay has some widgets – it allows Netvibes users to manage their accounts through modules. But it doesn’t appear to have any widgets that go beyond servicing, and it is missing out on the opportunities that widgets provide for driving more business.

Consider my Amazon book store as an example of this. You will all have heard of Amazon, and you probably shop there for some of your book (etc) purchases. Amazon recommends things to you every time you view something (and stores your purchases and views to recommend possibilities to you when you first enter the site). It is very good at doing this, so why would it want to let me put a widget on my website and pay me commission for anything that gets bought through it?

Because of the power of my recommendation. This site is very specific about what it covers, so it will attract a particular interest group. I probably mention some books in my posts anyway, so why not let me link to them and get the sale right away? Sites that are general will probably not have their widgets explored so deeply (oo-er missus), but even if they do Amazon might get a sale that it wouldn’t otherwise have had – so it works as a system. It is in essence a very open-ended form of affiliate marketing.

Imagine a site about rock tumbling. If you don’t believe me that there are sites about such things then look here and be pleasantly surprised. This site actually has a trading area. It doesn’t seem to be doing much trade. But imagine if Ebay could take some of this trade by creating a little widget that this site could incorporate, which would contain the latest items for this interest group and an easy listing function for sellers to use too. Not only would they earn something, but they might find that the market in tumbled rocks actually grows. Ebay wins, rocktumblinghobby.com wins and rock tumblers everywhere win. Bear in mind that Ebay has incurred as good as zero cost in doing this. Now multiply that by every hobby site on the internet and it becomes apparent how much potential there is for Ebay to gain exposure. Not only more listings but more sales. Perhaps it could pay a commission to the widget holder, in the way that Amazon pays me, for each listing and/or sale that arises.

Very quickly there could be millions of little Ebay marketplaces sat in front of people who are interested in the items in that marketplace. Only then would Ebay be able to increase its share of overall sales.

Ebay at the crossroads (part 2)

October 23rd, 2007

In many ways, what ebay has achieved in the business model that it has pioneered is astounding. It has built an iconic brand that has changed our purchasing behaviour, and it has done this on a foundation of many people that it has never met. In other words, it has built trust on the back of millions of people who have bought and sold through it – a minority of whom are not trustworthy. It has done all of this as an intermediary and has relied on general honesty, to which it added a feedback system. This is an awesome achievement.

Ebay is also in a very rare position in the business world – it continues to dominate the market that it largely created, and has no significant competitors. The result of this is that it is very passive in the way that it drives sales. It relies on people coming to the site to search for items to buy. This is backed up to an extent by marketing – it used to spend a lot more on paid search and its television adverts have been visible but have not been successful (according to Marketing Week). In this way, it is missing the greatest potential of having an online trading platform – especially two things: recommendation algorithms and viral exposure.

This post will look at recommendation algorithms, the next will look at viral exposure. These algorithms drive a greater volume of sales per customer. In The Long Tail, Chris Anderson argues that there is a long tail of demand in many things. In other words, if you chart the sales volume of available variants of a product in descending order of popularity, there will always be a few products at the head that account for most of the sales, and less demand for the more niche products further down the tail. The aggregate demand for all of these niche products is significant (and frequently with less competition and better margins), but a traditional retail model cannot meet this demand easily due to the cost of shelf-space and inventory, so choice becomes limited. For online retail, the dynamic is very different – fewer physical constraints mean that it is easier to meet very niche demand. Anderson demonstrates that seemingly infinite choice results in increased overall demand. The challenge becomes how to connect this mass of pockets of supply and demand.

Everyone has seen Amazon’s solution to this problem – the recommendation algorithms. These appear in a number of different circumstances and use the combination of excellent product data, what you are looking at (and have looked at / bought), what products other people who viewed that product also viewed / bought, and amateur reviews and recommendations of those products. This creates the ability to treat people as niches of one and give them highly relevant products (people like you have also bought…).

Ebay could do something very similar. Sellers already categorize their items in order to get a much better sale (something, by the way, that they could do a lot better if they had the free-text and suggestions technology that Facebook and others have), so it wouldn’t take a lot to categorize items far more effectively. Imagine that – people would be prompted to buy far more things if the recommendations worked much, much better. Now I know that people might not be very happy with Ebay suggesting rival auctions at the bottom of the items that they are trying to sell, but it could go at the end of the bidding screen (assuming that the auction is not about to end in the next 30 minutes), or even better, after bidding has closed it could be displayed to the losing bidders. The point is that this would cost very little for them to develop, and even less to run.

Imagine the power of the Long Tail of Stuff (as Chris Anderson called Ebay) proactively recommending relevant stuff to you – it is enough to make you wonder why they have not already done this.

Ebay at the crossroads

October 20th, 2007

Ebay has had a lot of coverage recently, prompted by the $1.4bn impairment write-down that it has had to take against its purchase of Skype. This has also brought questions about what its strategy is at the moment. I believe that ebay is at a crossroads. It has been a great company, and what it does now can move it forwards and make it a great company again. It could also act in a way that just makes it lose focus and move sideways. The worst of the outcomes is if it sits back and admires itself, in which case the decline that it appears to be facing is certain to continue.

Why do I believe this? Ebay has grown phenomenally and has been one of the cornerstones of the growth of the internet. It has also entered into popular culture in a huge way – it is one of the few companies whose name is also a verb (I’ll just ebay it). At the same time, it really doesn’t seem to have changed very much – its front page has been the same for as long as I can remember. It is certainly not the pioneer that it once was, and it has been struggling to maintain its meteoric early growth. Buying Skype has now been officially admitted to have been a lesser act than it was claimed to be. In short, it has all of the characteristics of a company that is drifting a little.

Doing nothing will only take ebay backwards, and losing focus will take it sideways. So I intend, over a few posts, to focus on what I believe will move it forward. This will principally be three things:

  1. Using the latest of the web to proactively drive more people to buy and sell through:
    1. Recommendation algorithms
    2. Viral exposure
  2. Finding new markets to which it can bring its core strengths
  3. Potential targets, or partnerships, for it to growth inorganically

The next posts will consider each of these points.

Welcome

September 25th, 2007

Hi, welcome to my new strategy blog. This is going to cover my thoughts about corporate strategy, both theory and company-specific. It is just opinion, so please do comment and debate.

I work in-house as a strategy consultant for a major UK financial services company, but my interest in this blog is in strategy generally – not just financial services.

Anyway, I hope that you enjoy reading it.

Peter