Why the Future of Business Isn’t $0.00
I’m writing in response to Chris Anderson’s interesting (but rather obvious) Wired article, “Free! Why $0.00 Is the Future of Business.” I disagree.
The premise is sound enough; the author cites the famous marketing strategy of Gillette of giving away razors to drive sales of the disposable blades. Similarly, computer printers have become very cheap to drive sales of the higher-margin ink cartridges. This strategy has been used in marketing time and time again, not the least of which was making cheap cameras so people would spend more money on film back in the ’80s.
It’s not free. It’s bundling. The combined price of the package is considerably more than $0.00. While it’s true that consumers don’t usually take into account the total price of the bundle when making a purchase decision (they may be influenced by the seemingly free initial cost), I don’t think this is indicative of the future of web marketing, which is sort of what Anderson implies in the rest of his piece.
Let’s talk about the web. Yes, we as consumers are used to consuming the web at no cost. The music industry is on a downward spiral from pirating that can be almost entirely attributed to the proliferation of absolutely free alternatives to paying for music available through P2P. A consumer’s willingness to pay is completely destroyed in the face of a free alternative. The “psychology of free” is indeed powerful — however I’m going to claim that it’s *terrible business.*
Anderson claims:
“From the consumer’s perspective, though, there is a huge difference between cheap and free. Give a product away and it can go viral. Charge a single cent for it and you’re in an entirely different business, one of clawing and scratching for every customer. The psychology of “free” is powerful indeed, as any marketer will tell you.”
Anderson misses the other side of the story. Price is not an absolute. “Free” is not the price consumers want to pay in many, many cases. I know that sounds counterintuitive, but let’s explore the following hypothetical situation:
Recall the last time you’ve been at a wine shop. You probably saw bottles of wine with price points such as $8.99, $15.99, $59.99, and $180.00, or points in between. What were your perceptions of the quality of each of these wines, without having tried any of them? Which would you have bought if you were on your way to a dinner party, your best friend’s engagement, your first time cooking dinner for a new significant other, or a frat party? Different answers for each, I would imagine. What about a free bottle of wine? Ehh…
The psychology of free carries with it a stigma. Say goodbye to any hopes of brand premium, and don’t even think about charging people for it once they’ve gotten used to it being free. Not only is the psychology of free suicide for a brand, the economics of free don’t work out either. “Give it away for free, get a lot of users, and then worry about value capture” is something that caused the collapse of web companies in 2000 — are we forgetting this? I can’t trust any business model that is solely based on eyeballs. It might work for the top 0.1% of traffic generating sites, but it certainly isn’t something I’d count on for a startup.
But why should people stigmatize free when they’re getting a high-quality, useful service for free? Because in many cases where it matters, they aren’t. Take the music industry: while it’s possible to get CD quality, full-length albums at no cost, I have *rarely* been able to get what I want without a) opening the downloaded archive to find that the uploader has chosen some exotic file format that I can’t play (.ogg, .mpc, etc.); b) the quality is far below CD quality; c) it’s not even the album I wanted. This is why iTunes has sold over a billion songs, and I *gladly* pay a premium to be able to get the song I want, when I want.
Consumers are willing to pay! This is not going to change, regardless of the dwindling marginal cost to the supplier of a product or service. It’s dangerous to look at marketing from a marginal cost perspective in any case — look at the economic value to the consumer and price accordingly. I see smart companies doing this in the future, and companies that can’t find an economic value to their consumers that is larger than free are going to find themselves struggling to find a business model.
Relevance is Expensive
Being compelling and relevant to consumers is the goal of any good advertising campaign. But at what cost?
I’m posing this question to marketers and media buyers that are faced with the economic reality of cheaper buys when things aren’t as optimized as they can be. Yes, an online airport parking company is best fit on a travel site. But for how much a premium buy on a single site costs, is it worth it?
More and more, the answer is no. It makes more sense to bid up keywords on AdWords, spray some ads across the web through a network with low CPM and see where they stick, and generally stay away from ever paying a premium CPM direct to a publisher.
Good news for advertisers, bad news for publishers, and horrible news for consumers. Ad networks can do some wonderful things for ROI, but they’re a “good enough” solution when it comes to ad relevance and influencing purchase intention. Why spend $1 sending a pitch that really speaks to you, the consumer, when I can spend $0.01 and send one that sorta speaks to you?
Again, a lot of excitement these days surrounding relevance in ads. But any technological breakthroughs that enable this to happen are going to have to develop through ad networks for them to actually be scalable. I see the death of premium CPM approaching…
Consumer Sentiment on Social Networking: Declining?
I’m seeing a trend. Granted, I live in somewhat of a microcosm that isn’t necessarily indicative of what’s going around in the rest of the (Western) world. I think in this case it is.
Let’s talk about Facebook. Rousing success. Tens of millions of users, stole people away from MySpace. Converted old people who didn’t even know what social networking was. My stepmother is on this site.
How’d they do it? Obviously differentiation: seeing MySpace’s shortcomings (phishing, invasion of privacy, scandal, trolling, pedophilia, SPAM) they made Facebook, in my colleague Itai’s words, look like the login to a bank:
The site was clean, somewhat exclusive (until opening up to non-edu addresses in 2006), and virtually impermeable to trollers (you could only see profiles of people who confirmed a friend request). They also offered many grandma-proof features; photo uploading and tagging is a good example. Good times.
But, they weren’t really making any significant money — the downside to every social network; that nasty “value capture” problem. But, plodding on, they reasoned that improving user experience, building a larger user base, and getting people more and more addicted to this thing would continue building value, and the capture problem would get worked out in due time. Perhaps this is still true — their $15B valuation seems to suggest that it is: we often criticize companies like Microsoft for agreeing to such a ridiculous sounding valuation, but believe me, they’re not stupid. Assuming companies are just out of their minds usually isn’t a safe bet.
But let’s forget about that for now. Whether Facebook stands to make significant profits and justify its forecasted cash flows that lead to an NPV of $15B (hint: >$2B/year in free cash flows [profit] over each of the next 30 years is one way) is a discussion for a finance class. But I’m illustrating this point because Facebook’s future success depends on their most base assumption, that their users will create this value for them.
And this is where I find it hard to believe that Facebook in particular, and social networking as we know it in general, is going to be creating so much value not even in the next 30 years, but in the next 30 months. Things may look great on paper; 40 or so million users, expanding and taking over new geographic markets, taking over people’s lives…but let’s talk about the first warning sign of failed marketing: declining consumer sentiment.
The problem, in my eyes, began with MySpace. It went from being the most novel waste-of-time to what’s been called the “trailer park of the internet“. What created this? Like I said: trolling, SPAM, lack of security (i.e. phishing and hijacking profiles), a cumbersome, ugly design, and a general feeling of “gee this is a *crappy* waste of time.” Most of these effects are byproducts of too much openness to too many people. This is what locked in Facebook’s success.
I’ll call the Facebook Platform, launched in May 2007, the beginning of the end for Facebook. At the time, Michael Arrington referred to this as a major differentiating feature, ironically, against MySpace. Ironically, because I see this as quite the opposite. Let’s compare: the major “downfall” of user experience for MySpace was external — too many people sending SPAM, too many bogus friend requests, too much phishing. The same is happening to Facebook. As of late, I’ve been receiving daily requests to my account (which includes receiving countless emails) for applications that I’ve never heard of, usually without any explanation of what they do. Any functionality or poking around requires installing the app, and all this gets broadcasted to everybody and propagates the virality of the app. Great stuff for the developer of the app, but what if the viral element being spread is downright annoying? This results in virality of annoyance, and that, coupled with the countless event requests, group requests, tagging notifications, friend detail requests, is starting to sound a lot like MySpace.
We’re missing the fact that high consumer awareness does not equal positive consumer sentiment. Bugging me every two seconds and giving me something to do has diminishing returns. These are opt-out, mind you; I could reduce the load but most consumers don’t opt-out of specific, abstract features hidden in some dashboard. They leave.
But this is fine for the app developers that don’t have much on the line. Trouble for Facebook in their Platform endeavor is that the interests of their “partners” developing applications are not aligned with Facebook’s. Facebook set out to provide people a secure, comfortable way to keep in touch and have fun with their group of friends (though they’ll tell you their vision is to become the “social operating system” of the internet). Now third-party appmakers are setting out to squeeze as much value out of these networks as possible, and they don’t have the same risk as Facebook in doing this (i.e. they can move to any other social network — Facebook only has its users, who are interested in keeping in touch and having fun with their group of friends, not using a…um…”social operating system”).
This is causing the “enough already!” reaction in not only a few of us. And I’m not sure what’s going to happen after that…I don’t see us all flocking to yet *another* social network. This is causing all the newcomers to the idea of social networking in the first place to dismiss it as another waste of time. The entire industry is for the most part already saturated; we all know about social networking now but I don’t think that means we’re going to continue to embrace it (page views have roughly leveled off):
I’m not sure what the solution will be, or where we’ll go to stalk our friends and share photos. Maybe “Inbox 2.0” will replace this, i.e. an unobtrusive social layer above your email account rather than a separate social network. I’m open to suggestions, but in the meantime, I’d advise marketers not to bank the future on the “power” of social networks as ad network.
Ads as Site Features (when they work…)
One of the most promising trends I’m seeing in web advertising today is the integration of ads that become site features. I’m talking about the widgets, forms, and other built-in site features sponsored by advertisers that allow the user to interact with the ad without having to click through blindly.
For example, The New York Times and an integrated Expedia widget:
Enter your trip in the widget, get a ticket. Easy enough. But Expedia is even smarter than this: they’ve integrated with the search/drop down, bringing you a customized hotel suggestion based on the destination you choose (in this case, you’re reading an article about Kyrgyzstan as a destination):
There are also a multitude of examples of this model working in the consumer electronics market — entire sites (e.g. www.dpreview.com) set up to review products with the sole purpose of becoming a channel to give you a chance to buy the very product you’re reading about. This isn’t keyword stuff; it isn’t guesswork; it’s letting the consumer tell the advertiser what he wants and the advertiser listening.
With commercials and ads becoming more and more a consumer choice rather than a force pushed upon them in linear media (think old school television; people used to have to watch *commercials* before they got TiVo! The HORROR…), it makes sense that advertisers put some of the control of the ad in the consumer’s hands. When I’m searching for hotels, this doesn’t feel like an ad to me…and I see it as far more successful for Expedia than a generic “Thousands of Travel Destinations on Expedia Today!” type brand ad that I’d surely ignore.
I suppose the only shortcoming of this model is its complexity. This works great for large advertisers and large publishers like the NYT — but the rest of the web isn’t this deeply wired yet. It takes a lot of negotiation, a lot of integration, and the fact of the matter is we’re still seeing dumb banners or keyword matching search-type marketing most of the time.
But when it works, it’s pretty sweet.
UPDATE: Anybody notice that that Kyrgyzstan’s hotel listings are…not in Kyrgyzstan? Similarly, choosing “Britain” as a destination produced an article about Cornwall, and no hotels in that area showed up. Also, clicking through doesn’t bring me anywhere…
