Tag Archives: Management

How Do You Make Your Customers Feel?

50 Facts About Customer Experience is an article by James Digby. As the title suggests, it lists fifty findings Digby collected from reports by many different sources such as consulting firms (McKinsey, Bain), research firms (Gartner, Forrester) and even the White House Office of Consumer Affairs.  We find that even though the article was written nearly three years ago, the facts that it lays out lead to insights that are arguably universal and still valid today.

After reading all fifty facts, it is almost impossible to miss the common trends that emerge.  None of these trends should come as a surprise to anyone, but nonetheless it is powerful to see facts from different sources point to the same outcome.Customer

The most powerful message of the facts is the importance of customer retention.  Companies are always chasing after new customers, but often times neglect existing customers while doing so.  It is critical to establish the correct balance between “hunting” new customers and “farming” existing ones. Here are some facts that underline the importance of “farming”:

  • It costs 6 – 7 times more to acquire a new customer than retain an existing one. (Bain & Company)
  • The probability of selling to an existing customer is 60 – 70%. The probability of selling to a new prospect is 5-20%. (Marketing Metrics)
  • A 2% increase in customer retention has the same effect as decreasing costs by 10%. (Leading on the Edge of Chaos, Emmett Murphy & Mark Murphy)
  • Research shows that a 10% increase in customer retention levels result in a 30% increase in the value of the company. (Bain & Company)
  • Customer profitability tends to increase over the life of a retained customer. (Leading on the Edge of Chaos, Emmett Murphy & Mark Murphy)

It is clear that customer retention is important for profitability, both from a cost and a revenue perspective.  If we can see that by simply looking at a few facts, then surely the managers of companies who deal with customers every day also realize its importance:

  • 85% of business leaders agree that traditional differentiators alone are no longer a sustainable business strategy. (Shaw & Ivens)
  • 73% of marketing managers of various large companies credit “repeat purchase behavior” as integral to the definition of successful customer engagement. (Forbes Magazine)
  • 71% of business leaders believe that customer experience is the next corporate battleground. (Shaw & Ivens)

It seems that most managers hold customer experience and retention in very high regard.  They are talking the talk, but are they walking the walk?

  • A survey asking which is the most important marketing objectives, shows that 29.9% think that it should be customer acquisition, and 26.6% think that it is customer retention. However 62.2% admit that they concentrate on customer acquisition, with only 20.6% focusing on customer acquisition. (eMarketer)
  • 55% of current marketing spend is on new customer acquisition, 33% on brand awareness and only 12% on customer retention. (McKinsey)
  • 92% of all customer interactions happen via the phone. (Gartner)
  • 85% of consumers are dissatisfied with their phone experience. (Gartner)
  • 68% of customers leave because they were upset with the treatment they received whilst speaking to customer services. (US Chamber of Commerce)

It appears that customer retention is not getting the attention it deserves, because not only does marketing consider existing customers to be less important than new ones, but the customers are also getting bad customer service, especially from call centers!

We will not go into the details of why that is the case here.  It is no secret that in most organizations the sales function is considered to be the “superstar”, while customer service function is more like the “ugly child to be kept in the back room.”  Why that is the case and at what point companies decided that selling is more important than serving is not important.  What is important here is that most customers are simply not happy, and most companies do not find out about it until it is too late:

  • 72% of all customers believe it takes too long to reach a live agent. (Harris)
  • 50% of the people survey said that agents failed to answer their questions. (Harris)
  • 44% said the information they received was not accurate. (Harris)
  • For every customer complaint, there are 26 other unhappy customers who have remained silent. (Lee Resource)
  • 96% of unhappy customers don’t complain, however 91% of those will simply leave and never come back. (1st Financial Training Services)

Customer Strategy

To summarize, Digby’s facts give us the following:

  1. Customer retention is extremely important for profitability.
  2. Executives are aware of this fact, but most are not doing what is necessary.
  3. To increase retention, both marketing spend towards existing customers and service quality need to be improved.
  4. A customer retention strategy targeting the right cost/benefit ratio for the company must be adopted by all parts of the organization.

Let us conclude with a quote from poet Maya Angelou, and remember: Customers are people, too!

People will forget what you said.

People will forget what you did.

But people will never forget how you made them feel.

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How Important Is Social Connectivity?

Sixteen years ago, around this time of the year, I was one semester away from finishing up my Master’s Degree in Systems Engineering at the University of Pennsylvania.  As with most students getting ready to finish school, it was job hunting season.  Perfecting resumes, writing customized cover letters, researching potential employers, attending information sessions and all other job hunt related tasks added up to an almost full time job by themselves.

Part of that job was getting ready for interviews.  My friends and I spent many hours conducting mock interviews with each other, preparing ourselves for those stressful meetings with recruiters.  Each type of job had its own interview format, and as a candidate for management consulting positions, I spent a lot of time practicing for Fermi Problems.

CalculationNamed after physicist Enrico Fermi, Fermi problems are typically about estimating quantities that seem impossible to compute given limited available information. These are questions like “How many airplanes are in the air around the world right now?” or “How many color printers are there in Istanbul?” The most famous Fermi problem, asked by Fermi to his students, is “How many piano tuners are there in Chicago?”

In a consulting interview setting, the interviewers are less interested in the actual number answer to the question than the methodology used by the candidate to get to the answer.  In the absence of relevant data, the candidate is expected to make use of  commonly available knowledge, break the problem into smaller problems while making assumptions and approximate calculations. Fermi problems help interviewers evaluate the candidate for reasoning, structured thinking, practical knowledge, mathematical skills, ability to deal with uncertainty and making estimations – all very useful skills in management consulting.

While practicing for Fermi type consulting interview questions, I sometimes fantasized about the following scenario: A candidate walks into a consulting interview. The interviewers ask the candidate to estimate something like how many personal computers there are in Mexico. The candidate asks them to wait a moment, makes a call on his cell phone, and repeats the question. He waits for a few seconds, says thank you, hangs up and says “As of this past Monday, there are 18,453,901 personal computers in Mexico. Would you like to know anything else?” The interviewers are very impressed and hire the candidate on the spot.

Whenever I talked about this fantasy with my friends, they would all object to the ending and say that would be considered cheating and would defeat the purpose of the interview and as far as they were concerned, the candidate should be kicked out. I did see their point, but disagreed because I thought surely, someone that well connected and can reach seemingly impossible data with a simple phone call would be worth a lot to any organization.

That was sixteen years ago and we live in a very different world now.  Last month, I read Andrew Razeghi’s Fast Company article, Do You Hire For IQ Or Klout Score, which reminded me of my fantasy.  Razeghi considers both intelligence and social connectivity as important traits in business, especially from an innovation perspective.

“The line is quickly blurring between the value of what we know and who we know. This then begs the question: which is more important? Is it more valuable to have the answer? Or is it more valuable to know who has the answer?

In an academic environment we call the latter cheating. But in the corporate world, does it really matter if you know the answer to the problem, or is it more important that you can find out who does?”

In Understanding, Defining And Achieving Innovation, we talked about the seven brain attributes (thinking and behavioral tendencies) of people.  What Razeghi’s questions really lead to is when strong analytical and structured thinking skills are more essential than social thinking, expressiveness and assertiveness, and vice versa.

My answer to Razeghi’s question is “it depends.” While intelligence and ability are important across the board, certain business functions especially benefit from the size of an individual’s social network, and how influential the individual is within that network.  It is essential, for example, for product management and marketing, where a manager has to interact with many external service providers (agencies) of varying functions, managing them to get work done on time with a reasonable budget. For recruiting, knowing how to reach people with various sets of skills and the ability to convince them to take a particular job is priceless.  (Receive any connection requests on LinkedIn from headhunters recently?) For sales, this is even more so, for each contact within the salesperson’s network becomes either a potential customer or a lead to a potential customer.

Even within an organization, who you know and how influential you are with them matters.  Once you “learn the ropes” of an organization, things run more smoothly. Being on friendly terms with Bob the CEO’s Assistant may get you a brief meeting with his boss during an otherwise impossibly busy day. Your friendship with Mary from IT can determine whether your laptop gets repaired by lunch or by the end of next week.

kloutSocial connectivity has always been important in business, but never more so than in today’s world.  Businesses are increasingly looking at measures of social connectivity such as Klout Scores when screening candidates. Klout is an online service that measures people’s online influence and scores it on a scale from 1 to 100. In order to do so, Klout analyzes people’s social media data from all kinds of sources such as Facebook, Twitter, Google+, LinkedIn and Foursquare. The Klout Score is calculated by applying Klout’s proprietary scoring model to more than four hundred signals such as number of friends, followers, comments, likes, retweets, all gathered from seven different networks on a daily basis. The claim is that the better someone’s Klout Score, the better connected and influential that person is.  Klout spokeswoman Lynn Fox is quoted in a recent Forbes article:

“We look at this as similar to an SAT.  It is one of many factors that is considered when a person applies to a university. Likewise, the Klout Score can be used as one of many indicators of someone’s skill set.”

Although somewhat controversial, Klout is beginning to get recognized as a legitimate measure of influence by businesses. In his Wired article titled What Your Klout Score Really Means, Seth Stevenson tells the story of an experienced marketing consultant who gets asked what his Klout Score is during an interview with a marketing agency.  The candidate gets turned down for the position due to his low Klout Score.  He then spends the next six months working hard to increase his Klout Score, and realizes that as his score rises, so do the number of interviews and job offers he gets. The consultant’s take: “Fifteen years of accomplishments weren’t as important as that score.”

The Tipping PointThe point is that social connectivity, however it gets measured, is important, sometimes even essential. One person who wrote about this way back in 2000, before there were social networks, user generated content and Klout Scores in our lives, is Malcolm Gladwell.  Gladwell saw the importance of social connectivity and talked about it in his bestselling book, The Tipping Point: How Little Things Can Make a Big Difference.  In his book, Gladwell examines what he calls social epidemics, which are “ideas and products and messages and behaviors [that] spread like viruses do.” According to Gladwell, there are three laws in the tipping points of social epidemics:

  1. The Stickiness Factor, which is about the actual informational content and packaging of a message. Messages must have a certain quality which not only causes them to “stick” to the recipients’ minds, but also is considered to be worth passing on.
  2. The Law of Context, which is about the rule of the environment in which the message is being passed.  Gladwell states that “epidemics are sensitive to the conditions and circumstances of the times and places in which they occur.”
  3. The Law of the Few, which states that “the success of any kind of social epidemic is heavily dependent on the involvement of people with a particular and rare set of social gifts.” Gladwell calls these people Mavens, Salespeople and Connectors.

Mavens are the information specialists of the social network. They accumulate knowledge, evaluate it and if they deem it worthy, pass their evaluations and the original message to others in a skilled fashion.  Mavens control what messages flow through the social network.

Salespeople are charismatic people with strong persuasion and negotiation skills.  They can propagate messages through the social network, even to people they do not personally know.  Salespeople control how strongly the messages flow through the social network.

Connectors are people who have made large number of friends and acquaintances, and are in the habit of facilitating the formation of new social connections between them. They invest time and effort into maintaining their social connections, which are many more times the number than the average person. Gladwell calls them “[people who] link us up with the world … people with a special gift for bringing the world together.” He also attributes the social success of Connectors to the fact that “their ability to span many different worlds is a function of something intrinsic to their personality, some combination of curiosity, self-confidence, sociability, and energy.” Connectors control how wide and how quickly the messages flow through the social network.

viralTying all of this back to the seven brain attributes, it would be safe to say that we would expect the three types of people stated in The Law of the Few to be strong in different brain attributes.  I would expect a Maven to be strong in analytical and conceptual thinking, whereas a Salesperson would most likely excel in expressiveness and assertiveness.  A Connector would undoubtedly possess great social thinking skills and good flexibility.

If one sees the world of business through Gladwell’s eyes, it is clear that the goal of any business organization is to start social epidemics, for every business exists to create “ideas and products and messages and behaviors” and make sure that they “spread like viruses do.” Assuming that the other two of the three laws are fulfilled, meaning the product/service/message possesses high quality content and packaging in a favorable environment, The Law of the Few can very well determine the success of a business.

So I repeat my answer to Razeghi’s question. It depends.  It depends on the line of business, it depends on market conditions, it depends on the strengths and weaknesses of the organization. But social connectivity does make a big difference. Deciding on how to use it, where to apply it and whom to hire to get it – well, that is the art of management.

Let us take a moment here, and recite a paraphrased version of the Serenity Prayer for executives:

God, grant my business the analytical resources to develop a high caliber product/service/message and a well functioning organization,

The social connectivity to start social epidemics that can make my product/service/message reach and stick with my customers,

And the business wisdom to help me decide how, when and where in my organization to utilize the two.

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Understanding, Defining And Achieving Innovation

You may have heard the story of famous Wall Street banker J.P. Morgan and the shoeshine kid.  According to the story, Morgan was getting his shoes shined, and the shoeshine kid asked Morgan about the latest stock tip he heard. This made Morgan realize that something was very wrong, that if even the shoeshine kid was in the stock market, then everybody else was too and the market was seriously overbought.  He promptly sold all his holdings and was able to avoid the stock market crash a few weeks later.

I always liked this story and often share it with my consulting clients to make a point about either a market being overcrowded or a concept being overused.  In this instant, what made me think of it was a job posting for a junior position looking for people who are “experienced in innovation” and would “add new innovations to the organization.”  (I especially loved the new innovations idea.  Who wants old innovations anyway?)

It is really getting annoying to see the word “innovation” misused in places where it does not belong. Unfortunately,  innovationmania is all around us.  There are innovation workshops that almost guarantee that all participants will be great innovators at the end of the program.  Self styled “innovation consultants” are everywhere, and can apparently make entire companies innovative overnight.  The first ever Innovation Turkey Expo was held in Istanbul earlier this month, which was really an expo of inventions, but innovation sounds much cooler than mere invention.  Corporate executives talk to business TVs and magazines to announce that their firm is in the innovation business.  Even politicians are making an extra effort to attend events that have innovation in the title somewhere, such as the National Innovation Initiative, because, it is hip, it is cool and it makes one look like they are keeping up with the times.

But seriously, what is innovation?  In “Innovation Is… Hmm…“, we briefly talked about how most companies and their employees are clueless as to what it is and what it really means for their organization and that it is the leadership’s responsibility to define what innovation should mean to the organization in general and each employee in particular.

A useful first step to understand innovation is to look at its etymology:

innovation (n.) mid-15c., “restoration, renewal,” from L. innovationem (nom. innovatio), noun of action from pp. stem of innovare

innovate (v.) 1540s, “introduce as new,” from L. innovatus, pp. of innovare “to renew, restore; to change,” from in- “into” + novus “new” . Meaning “make changes in something established” is from 1590s.

So, etymologically speaking, innovation is taking something that already exists and turning it into something new by making changes. This definition is further elaborated in the 2005 edition of the Oslo Manual, a joint publication by OECD and Eurostat.  The Oslo Manual, taking a broad approach, defines innovation as follows:

“An innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.”

The manual distinguishes innovations in four different areas: product, process, marketing and organization.  Definitions of innovation in these areas are fairly MECE (mutually exclusive, completely exhaustive.)

“A product innovation is the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics.

A process innovation is the implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software.

A marketing innovation is the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing.

An organizational innovation is the implementation of a new organizational method in the firm’s business practices, workplace organization or external relations.”

The Oslo Manual also lists a number of changes that are NOT innovations.  I cannot help but be amused when I think about the many corporations and executives who call themselves innovative and brag about it all over the media, simply because they did one of these things below:

  • It is not an innovation to stop doing something, even if it improves a firm’s performance. Innovation is something new, not abandoning the old.  Example: an electronics manufacturer discontinuing a line of product.
  • The purchase of identical models of installed equipment, or minor extensions and updates to existing equipment, are not process innovations. This is not something new, it is simply more of the same.  Example: a steel mill expanding capacity by adding another furnace.
  • A change in the price of a product or in the productivity of a process as a simple result of changes in the price of factors of production is not an innovation. Example: a computer manufacturer can now produce the same model of laptop cheaper, because RAM prices have dropped.
  • Creation of a unique product in order to satisfy a specific demand by a specific customer is not a product innovation. It is another story of course, if the customized item displays attributes significantly different than previous products made by the firm.  Example: an automobile company builds a custom car for a wealthy customer.
  • Seasonal and other cyclical changes in design that are routine for the industry in general are neither product nor marketing innovations. Example: an apparel manufacturer switches from the summer line of products to the new fall line.
  • Trading of new or improved products is not a product innovation for a wholesaler, retailer or logistics firm, unless it is a new line of goods, not previously sold. Example: an electronics retailer starts selling the next generation LED TVs.

Another confusion I come across frequently is mistaking invention with innovation, such as the Innovation Expo mentioned earlier. The two are related, as  innovation refers to the successful implementation of something new, whereas invention refers directly to the creation of it. Not all inventions turn into innovations; if an invention is not economically feasible or practical, it will not be implemented, however novel or beneficial it may be.

Based on all of the above, here is my definition of innovation:

Innovation refers to an idea, method, system or product that;

  1. is new,
  2. has been successfully implemented,
  3. results in a net benefit.

Now that we have a better understanding and definition of innovation, next comes the question: how can a business achieve innovation and become an innovative company?

In Strategy Is… Hmm…(Part 2), we saw that businesses have three strategic resources: people, processes/information, and finances.  In the innovation context, the most important of the three is people.  With the right people, it is possible to upgrade the other two resources, and similar to strategic planning, the company can start thinking of innovation as part of the business – ongoing, habit and consistent – not as a “project” that has a start and a stop.

So, finding the right people is key.  Job postings looking for people “experienced in innovation” and would “add new innovations to the organization” is probably not the best way to go about it.  How a firm can find the “right” people is something that many have different opinions on.

Tony Golsby-Smith, founder and CEO of Second Road, a business design and transformation firm based in Sydney, Australia, thinks that the best way is to hire people with humanities backgrounds.  He criticizes the education system because it focuses on teaching science and business students to “control, predict, verify, guarantee, and test data”, instead of teaching students how to deal with ambiguity and the unknown.

According to Golsby-Smith, people with humanities backgrounds who studied topics like Shakespeare’s poetry, Da Vinci’s paintings, history of the Roman Empire or political philosophy, have learned to grasp and manage big concepts, as well as how to apply new ways of thinking to difficult and unconventional problems.

Complexity and ambiguity. Too many companies lack the scope of understanding to stop problems before they start, because their people are too focused on immediate tasks, or buried under so much data that they can’t see warning signs. Any great work of art — whether literary, philosophical, psychological or visual — challenges a humanist to be curious, to ask open-ended questions, see the big picture. This kind of thinking is just what you need if you are facing a murky future or dealing with tricky, incipient problems.

Innovation. If you want out-of-the-box thinking, you need to free up people’s inherent creativity. Humanists are trained to be creative and are uniquely adapted to leading creative teams.

Communication and presentation. Liberal arts graduates are well-trained in writing and presenting, making them natural fits for marketing, training, and research. A focus on writing helps people develop persuasive arguments, and a background in performance gives people great presentation skills. And an understanding of history is indispensable if you want to understand the broader competitive arena and global markets.

Customer and employee satisfaction. To “get under the skin” of customers and employees to discover their real needs and concerns demands… you need keen powers of observation and psychology — the stuff of poets and novelists.”

Geil Browning,  founder of Emergenetics International, and the co-creator of  Emergenetics Profile, a psychometric thinking and behavioral workplace assessment tool, approaches the issue from a different angle.  In her article titled “You’re Wired To Be A Leader“, Browning talks about research that tells us that there are seven brain attributes—thinking and behavioral tendencies—people take advantage of to a greater or lesser extent, when faced with issues:

1. Analytical thinking is essential to making more objective, less biased decisions. This is the function that helps you look at existing research and data, examine options, and question what will or will not work.

2. Structural thinking ensures that you come up with a plan that is doable. It is the methodical, sequential process that helps maximize results, and minimize pitfalls.

3. Social thinking allows us to listen, build successful teams, relate to people, and develop and inspire others.

4. Conceptual thinking is right-brain, visionary thinking that jumpstarts innovation. Ideas that connect the dots and come out of left field can invigorate your organization.

5. Expressiveness is a behavior style you use to communicate your ideas. It affects how you relate to people and sets the course for the way you speak with others.

6. Assertiveness is a behavior style you use to put your ideas to work. An effective leader is assertive enough to make things happen, but not so assertive that others are stymied.

7. Flexibility is a behavior style you bring to the way you get things done. It determines not only your openness to other points of view, but also your ability to thrive in undefined (or very defined) situations.

More often than not, a company will not have a mix of employees in such a way that all of these brain types are adequately represented.  Most businesses tend to hire similar types of people, with similar thinking styles.  For innovation, an organization will need people with advanced “conceptual” type of thinking abilities, as Browning explains above.  These conceptual people will have different way of looking at things where they generate ideas, notice trends and data points others would miss, and tie them all together to come up with solutions that fit the big picture nicely.  They enjoy challenges and focus solutions at an idea level, but not at a process level.  They are not detail oriented, but if their ideas can be picked up by other people in the organization who ARE detail and process oriented, innovation will most likely occur.

Browning lists a number of useful interview questions to ask to identify strong innovators, but also cautions:

“If you want innovative ideas to surface in your company, it is your job to cultivate an atmosphere in which all types of creativity are valued. Before you hire your perfect candidate, make sure your organization is truly ready to hear new ideas.

One note of caution: look for competence, not just blue-sky thinking, because ultimately you need ideas that will benefit your bottom line. Experience with real world solutions is a bonus in any job candidate.”

Douglas Merrill, CEO and founder of ZestFinance, a Los Angeles-based financial services technology company, echoes Browning’s recommendations but articulates it in a very different way.  In his article “Why Hiring People Who Annoy You Helps You Innovate“, Merrill lists his three rules to follow when innovating an existing brand or starting something new:

Hire People Who Annoy You.  Research shows that diverse teams tend to come up with a wider variety of answers, and, thus, are more likely to find the surprising winning idea. The converse is also true: If you build a team that looks alike, thinks alike, and wears the same shoes (pardon the pun), you will get groupthink and generate only one answer, and hope it’s the right one.

Social psychology has taught us that we tend to like people who are similar to us, and the higher the similarity, the more likable the person. This suggests a hiring strategy–hire people who annoy you. As long as you’re ensuring they are smart, the people who annoy you represent the diversity you and your company require.

Don’t Copy, Remake. There is an entire cottage industry devoted to teaching you how to be innovative… They tell you what was done, not why it was done… Don’t copy the surface behavior–understand the goals, and do them in your context.

Don’t Create, Listen.  The purpose of innovation is not simply to build something new, but to win new customers, new markets, or new products. While you think you may know what they want, in reality, you don’t. Rather, you knew what customers wanted back when the company started, but now the only people who really know what customers want are the customers.

So how do you find out what the customers want? My advice would be to nix the focus groups. While they’re generally not representative of your actual customers, it’s also true that humans can’t describe what they don’t know… In many cases, you can see what customers want by watching their behavior.”

There is no reason to be confused or misdirected by all the hype about innovation.  Innovation is real and it happens every day, all around us. If we understand what innovation really is, and what it means for our business, then all it takes to achieve it is to have the determination to reshape our organization and hire the right people to lead the way.

To borrow from and paraphrase Shakespeare, be not afraid of innovation: some businesses are born innovative, some achieve innovation and others have innovation thrust upon them.  Does innovation lead to greatness?  I do not believe that it is sufficient, but it is very much necessary.

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Facebook: Show Me The Money

Amazing how a website and a company that did not exist a mere ten years ago is so popular. There are some who cannot even start their day without logging in to Facebook and updating their status. Others criticize the site and boycott it due to privacy concerns. A lot of shareholders who bought Facebook shares at the IPO price are furious, while other investors and industry analysts are hopeful about the future and what the company may become. There is already a movie about Facebook out there, with rumors of a sequel. Not only are there hundreds of books about Facebook in bookstores, there are actual businesses out there that help you make your Facebook profile and photos into an actual, real-life book. There are songs about Facebook, even a mini Facebook musical! Facebook is all over the place and in our lives, whether we like it or not.

The latest Facebook news that had everyone excited was the 1 billion active users number.  At the beginning of this month, on October 4th, Facebook announced that it reached another milestone with 1 billion monthly active users, according to an Amazon Web Services (AWS) factsheet.  The previous milestone was on July 2010, with 500 million active users.

The active user term, which is different than registered users, is defined by Facebook as “the number of users who have logged in during the previous month.”  While merely logging in doth not a truly active user make, the term is still a lot more interesting to me than a registered user, especially considering the many fake accounts created on Facebook for purposes such as increasing the number of “likes” for a specific piece of content.  Facebook announced last month a significant increase in efforts to delete fake accounts and false likes.

Other than the 1 billion active users, the AWS factsheet lists a number of other interesting facts, some of which piqued my interest:

Age Demographics.  Median age of users has been declining since 2007.  On the milestone date of July 2010, the average median age of users joining that week was 23.  As of September 2012, it went down to 22.  This steady decline in median age is a good indicator of increased total user activity volume in the future.

Global Reach. The top five countries where people connected from at the time the latest milestone was reached were, the United States, India, Brazil, Indonesia and Mexico, in that order.  (Turkey was Nr. 7) same top five in July 2010. With the exception of the United States, the top countries are all emerging economies, which is good for future growth expectations.

Location Based Content.  There were 17 billion location-tagged posts, including check-ins, since the launch of the check-in capability in August 2010.  That there were a simple average of 17 location tags per active user is good news for the future of location based services.

Mobile.  Facebook now has 600 million mobile users.  A 2011 year end report by ITU (International Telecommunications Union) that surveys the global mobile and online landscape puts the worldwide number of mobile phone subscriptions at 5.9 billion, which has probably reached 6 billion by now.  That means roughly one out of every ten mobile users in the world is on Facebook via their mobile phone.  That is also good news. Or is it?

Mobile has been a risk factor for Facebook for a while now.  In February of this year, Facebook’s original SEC filing for its IPO listed mobile as a core part of the company’s strategy:

“We are devoting substantial resources to developing engaging mobile products and experiences for a wide range of platforms, including smartphones and feature phones. In addition, we are working across the mobile industry with operators, hardware manufacturers, operating system providers, and developers to improve the Facebook experience on mobile devices and make Facebook available to more people around the world. We believe that mobile usage is critical to maintaining user growth and engagement over the long term.”

At the same time, the same SEC filing pointed out to risks to the company’s bottom line due to mobile usage:

Our advertising revenue could be adversely affected by a number of other factors, including … increased user access to and engagement with Facebook through our mobile products, where we do not currently directly generate meaningful revenue, particularly to the extent that mobile engagement is substituted for engagement with Facebook on personal computers where we monetize usage by displaying ads and other commercial content.”

Even before the IPO, Facebook had its eye on the mobile world.  The company acquired Instagram in April of this year, for a cool USD 1 billion, although Instagram will remain independent of Facebook and will not be integrated into the company, at least not in the near future.  Facebook CEO Mark Zuckerberg commented:

“Now, we’ll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests. … We think the fact that Instagram is connected to other services beyond Facebook is an important part of the experience.”

Zuckerberg explains how they have been addressing the mobile issue at the TechCrunch Disrupt conference in San Francisco last month.

“Q: Is mobile a strength or weakness for Facebook?

A: There are more users, they spend more time on Facebook, and we’re going to make more money on mobile ads. … We’ve had right-hand-column ads and it’s been great, a multi-billion-dollar business. But on mobile, we can’t do that. It’s clearly going to have to be different. We’re seeing some great mobile ad products being developed. There’s a huge opportunity. The question is getting there.

Clearly we’ve had a bunch of missteps there. The biggest mistake we made as a company was betting too much on HTML5, because it’s just not there yet. … We just couldn’t translate it to mobile with the quality we wanted.  We had to start over and rewrite everything to be native. We burned two years. It may turn out it was one of the biggest if not the biggest strategic mistake we made.”

The company has also been testing its own mobile ad network according to BusinessInsider‘s Owen Thomas, who explains the tests:

“Facebook is doing a limited test of ads on mobile websites and mobile applications, displaying ads to people who are logged into Facebook.  So, if you are logged into Facebook on ESPN, and you head over to ESPN’s mobile site, you might see an ad for Domino’s Pizza.  That ad won’t say that your buddy Nicholas loves Domino’s, though: According to a Facebook rep, these ads won’t have the “social context” that ads on Facebook’s own website show.

An ad network could be a lucrative new source of revenue for Facebook.  But the ad-network space on the Web is incredibly crowded and competitive, with Google dominating the business.  The mobile-ad space is just getting started. And Facebook has a lot of data on users—not just demographic information, but the apps they use, and the apps their friends use.  One pool of customers for a Facebook mobile ad network: app developers who want to get more people to install their software.  Facebook is already selling ads on its own website and mobile apps that help encourage users to download new apps. Placing those ads on other Facebook-enabled apps and mobile websites could tap into big app-promotion budgets.”

Nicholas Carlson, also of BusinessInsider, talks about why the Facebook mobile ad network is such a big deal:

“Right now on the web, the most successful advertising business other than search is advertising targeted to specific users based on lots of anonymized data collected about them. [e.g. location, age, gender, web surfing history, purchase history].  Web publishers know who is looking at their ad inventory and they can sell their inventory to advertisers looking to reach certain types of people.  The problem that Facebook’s ad network will solve is that at the moment, mobile app publishers do not have the same amount of information about the people who are using their apps and looking at their ad inventory.

The reason that web publishers know who is looking at their ad inventory is that web users, in their surfing, download something called “cookies” to their browsers. When they load a new page, the publisher of that page can read past cookies downloaded, and build a data mosaic of the person looking at their ads.  On mobile, apps are separate pieces of software from browsers. They cannot look at the cookies downloaded in the browser. iPhone browsers don’t download cookies at all, anyway.

So mobile app makers are flying blind. Right now, they are selling ads using a very old-fashioned model. They are guessing what kinds of people might like the content that their app offers, and then asking advertisers if they would like to buy ads to reach those kinds of people. Advertisers don’t like to buy ads this way these days, and they don’t have to.”

Last Wednesday, Facebook announced the rollout of its mobile app installation ads program to all developers. That means that all developers on Facebook can build ads that link from Facebook’s Android and iOS apps to either Google Play or the App Store, resulting in ad revenue for Facebook.

Facebook’s stock price will certainly benefit from any additional revenue the company can get.  The company’s stock price closed last week at USD 19, exactly half of its IPO price of USD 38.  There are two main reasons for this poor stock performance.

One of them is the expected and scheduled unlocking of shares over the next seven months.  The current volume of 700 million shares is expected to increase to 2.5 billion shares.  A Bloomberg article published mid-August lays out the schedule:

“The shares freed up yesterday represent 14 percent of the 1.91 billion that will become available for sale in the coming nine months. The next expiration date comes between Oct. 15 and Nov. 13, when restraints are removed on about 243 million shares. Lock-up expires on about 1.2 billion shares on Nov. 14, and for 149.4 million shares a month later. A final round comes May 18, 2013, with 47.3 million shares becoming available.”

The other reason is the uncertainty around Facebook being able to generate new revenue streams.  Until now, Facebook had two main streams of revenue: Advertising and Payments.  Advertising, as we touched upon above, is moving away from PCs towards mobile and how Facebook’s mobile strategy will play out remains to be seen.  Payments, which until now really means Zynga, the social game developer, is not looking too great, mostly because Zynga is trying to move its gaming transactions away from Facebook to Zynga.com.

So Facebook really needs to figure out how to show its investors and the rest of the business world the money. The company is reported to be kicking a few ideas around, according to Erin Griffith who covers New York startups for PandoDaily:

“On its quarterly reports, “Payments” is the category of revenue that Zynga falls into. The hope is that Facebook will expand this category beyond small game-related transactions and into virtual wallet territory.  The company has also said it will take its real time bidding ad exchange off its own site to be implemented across the web. It’s another ad-related product but unlike the Sponsored Stories Facebook is hand-holding its advertisers through, this opportunity has advertisers salivating, because no other site on the Web has as much data about so many people, voluntarily supplied with a real name attached, as Facebook does. There’s also dating, e-commerce, and search. Perhaps one of its acquisitions from this quarter–Karma? Face.com?–could create new streams of revenue.”

Facebook’s recently announced online gift store, Facebook Gifts, is one of these ways.  Wired.com’s Ryan Tate explains:

“Citing its unique ability to recommend products, Facebook opened an online gift store. The move edges the social network onto the turf of e-commerce king Amazon, but at an opportune time: Amazon is busy making movies, computer hardware, cloud computing services, and entering other markets far afield from its core business of selling physical goods.

Not that Facebook is trying to usurp Amazon just yet. The launch of Facebook Gifts is modest: Facebook is emphasizing sub-$50 products like socks, cupcakes, teddy bears, and Starbucks gift cards. The idea is that Facebook will see words like “happy birthday” or “congratulations” on someone’s wall and prompt friends to buy the person something through the new store.

It’s an obvious and proven idea, one Facebook acquired when it bought year-old mobile gifting startup Karma in May. In the ensuing months, Facebook has rebranded the service and created a desktop version of the app, which is what is being launched today as Facebook Gifts. (From 2007 to 2010, Facebook operated a store by the same name, but it only sold virtual goods.)”

Another idea is Social Search.  Matthew Ingram of GigaOm explains:

“… The social network already handles about one billion search queries every day, and [they are] basically not even trying. For comparison purposes, that’s about 20 times as many as Microsoft’s Bing search engine gets — and about a third of the 3 billion queries that Google handles every day. But it’s not just about volume: the critical factor is that Facebook’s searches are all about finding socially relevant information, from people to brands and related topics.  To give just one example, the Facebook CEO said a question might be something like: “What sushi restaurants have my friends gone to in New York, and liked?” This is the kind of answer that Google simply isn’t very good at providing — or at least, not yet. It can show you sushi restaurants within a few miles of your location, and it can show you ratings from Yelp and other services to help you choose, including reviews from its recently purchased review providers Zagat and Frommer’s, which are starting to show up in the “one box” results for restaurants. But it can’t really show you which ones your friends like, unless they all happen to be on Google+.”

The idea I really like is the Integrated Social Utility concept. Why launch a gift store instead of providing Amazon with the social customer data? Why go into social search, instead of providing Google with the relevant social activity and user recommendations?  Why build an e-wallet instead of partnering with PayPal? Why create a matchmaking website and not leverage the experience of eHarmony?

Facebook is not an e-commerce site. Nor is it a search engine, a payment business or a dating site.  It is a social utility.  Just like other utilities, it is meant to work with other businesses, not compete with them.  That means it can be the provider of all kinds of social data to whoever is willing to pay for it.  Facebook has the ability to be the irreplaceable partner of every internet based business out there, integrated into their systems, providing them with data about their customers they otherwise would not be able to get. If the other businesses are willing to play ball, I believe that is the best long term strategy for Facebook.

But do not take my word for it.  Zuckerman said it way back in 2007, at his first interview with TIME:

“Q: Why do you describe Facebook as a “social utility” rather than a “social network?”

A: I think there’s confusion around what the point of social networks is. A lot of different companies characterized as social networks have different goals — some serve the function of business networking, some are media portals. What we’re trying to do is just make it really efficient for people to communicate, get information and share information. We always try to emphasize the utility component.”

Well, Facebook, you clearly talked the talk in 2007. Now, five years later, please start walking the walk.  Your investors and the rest of the billion people are waiting.

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Entrepreneurs: 10 Mistakes, 5 Lessons And 3 Methods To Learn Wisdom

A few months ago, I was talking to a friend of mine who is a high level executive of a global technology firm’s Middle East Region headquarters in Istanbul.  He complained to me that he had spent his entire weekend attending a startup marathon, trying to see if there were any promising teams with decent business plans.  He was upset that of the many teams that attended the event, only a handful had ideas that could be worth something.  Even those few would most likely not be successful or get any funding, because when the problems with their business plans were pointed out, they either became very defensive, reacting strongly to any recommendation or comment, or very passive aggressive, not arguing, but not really listening to suggestions, either.  For all his effort over the weekend, my friend came up empty handed, and was frustrated, mostly due to the attitude of the would-be-entrepreneurs.

Martin Zwilling’s article, 10 Top Reasons Why First-Time Entrepreneurs Fail, from the Entrepreneur Magazine, reminded me of my friend and his weekend. As the title suggests, Zwilling lists top ten mistakes made by entrepreneurs during their first couple of ventures.  Most of these mistakes are due to inexperience, are quite common, and would probably not be repeated after the first time.  Entrepreneurs, Zwilling suggests, should learn from other people’s mistakes rather live through them personally.  Sage advice, very similar to a favorite Confucius quote of mine:

“By three methods we may learn wisdom: first, by reflection, which is noblest; second, by imitation, which is easiest; and third, by experience, which is bitterest.”

The ten mistakes are very well explained in the article.  Here they are, plus my translations into investorese. Unfortunately,  they all lead to the same outcome:

  • No written plan
    =
    poor planning = execution risk = low profits = bad investment
  • Slim or no revenue model
    = no revenue = no profits = bad investment
  • Limited business opportunities
    = no revenue = no profits = bad investment
  • Can’t execute
    = execution risk = low profits = bad investment
  • Too much competition
    = not enough revenue = low profits = bad investment
  • No intellectual property
    = easily replicated = too much competition = not enough revenue = low profits = bad investment
  • An inexperienced team
    = cannot execute = execution risk = low profits = bad investment
  • Underestimating resource requirements
    = poor planning = execution risk = low profits = bad investment
  • Not enough marketing
    = no revenue = no profits = bad investment
  • Giving in too early
    =
    execution risk = low profits = bad investment

All that is a lot for an entrepreneur to watch out for. Luckily, Brin McCagg, co-Founder, President and COO of OneWire, in his VentureBeat article, boils it down to Five Lessons Experienced Entrepreneurs Have Learned, for the would-be-entrepreneurs like the ones my executive friend has encountered.  If they listen, learn, and internalize, they could avoid most of the ten mistakes:

  • Follow-through is essential.

“Prove your ability to execute in both the short and long term, conduct comprehensive market-research and don’t give up when economic outlook appears grim.”

  • Build an enthusiastic and passionate team.

“Build and inspire a core team that fiercely believes in your vision and has the commitment to persevere through market crises and the ups and downs of a startup.”

  • Balance is critical.

“Raise sufficient capital and allocate the appropriate resources to expand your business. Seek to achieve the right balance; don’t be afraid to adjust your business plan depending on market conditions.”

  • It pays to think like an investor.

“While you undoubtedly need a brilliant idea that addresses a market need to spark interest, investors also gauge their faith in the executive team.”

  • Listen and learn.

“Entrepreneurs often focus on communicating, convincing and selling. But investors can be more than financial-backers; they can also act as advisors who speak from their personal experience, failures and successes.”

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Tweak Or Overhaul?

In Listen Up, Biz Leaders: It’s Time to Rethink EverythingFortune editor and columnist Geoff Colvin reminds us about the recent fates of former industry giants such as Motorola, BlackBerry and Kodak.  Colvin comments on the angst felt by many high level executives about the viability of the strategy, organization and business models of their organizations.  He then recommends a self-diagnostic of three questions to see where thing stand:

  • What is our core? Are we certain that our core business will hold up?
  • How is today’s unprecedented environment changing our customers and their behavior? Does that mean more or less demand for what we provide?
  • Is our industry being deeply restructured, and if so, how will it affect us? Are we experiencing a hiccup or an earthquake?

Every now and then the leadership of a company must raise its head, look around and make decisions that lead to change.  The correct amount of change, however, depends on the situation.  Sometimes a small shift of the steering wheel is enough, other times one must stop the car, get out, and look for an airplane going in the opposite direction.  There is no prescribed formula.  Only through rational analysis can the best courses of action be decided.

“Not every company needs to change its strategy, even in these tumultuous times. But every company needs to determine if its strategy requires an overhaul or just thoughtful tweaks.”

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Cashless Society: Be There or Be Square?

Square caught my attention this summer, when I came across a VentureBeat article called Square credit card readers now being sold at Walgreens, FedEx Office, and Staples.  A credit card reader sold at office supply retailers?

Basically, Square is a payment system where a small, square-shaped reader plugs into your Android, iPhone or iPad’s earphone jack, and allows you to process credit cards, as if you had a POS machine.  The reader is free, after a rebate.  You can choose fixed or flexible pricing, either a flat rate of USD 275 per month, or a variable rate of 2,75% of the charged amount per swipe. Payments taken during business hours usually become available in your bank account the next business day.

Pretty neat, especially when compared to all the hoops a business must jump through to get a POS machine in Turkey.

Generally speaking, a business that wants to obtain a POS machine and the ability to accept credit cards in Turkey, must first fill out an application with a bank and open an account there.  Then come the negotiations, which are not really negotiations but terms dictated by the bank about all the payments the firm has to make to the bank.  Types and amounts of payments vary by bank, common ones are POS machine charge, POS machine setup fee, bank commission rate for the charged amounts (as high as 4%), service fee, loyalty program fee, account processing fee, to name a few.  There are also some penalty fees, if the monthly amount charged through the POS machine is below the quota assigned by the bank.

If there is an agreement, the applicant then must provide the bank with all kinds of documents such as list of authorized signatures, a certificate of good standing with the Chamber of Commerce, copies of the national ID cards of all the partners , a copy of the tax registration certificate,  a certified copy of the article of incorporation and myriad others.  After doing all this, if the applicant is deemed worthy, it is time to sign a bulky agreement with the bank.  My favorite part is where most banks tell you that they cannot give you a copy of the signed agreement, so you have no idea what you just agreed to, and in case you need to look it up in the future, well, tough luck.

Naturally, after comparing the Square to all that hassle just explained above, I thought that it was a pretty good, possibly a disruptive innovation, especially for small businesses and individuals.  It turns out, I was not the only one.  Over the summer, Square signed a deal with Starbucks where customers at participating U.S. Starbucks outlets would be able to pay for products using the Pay with Square app.  Then at the end of August, Square announced a new partnership with AT&T, making Square readers available at 1,000+ AT&T retail stores all over the U.S.

So, Square is doing well in the U.S., but I am more interested in how, if at all, it would work in Turkey.  What does this innovative payment system mean for developing countries like Turkey? Could it become mass market, or would it merely be just another cool gadget, only used by few? Ignacio Mas of CGAP, an independent policy and research center dedicated to advancing financial access for the world’s poor, housed at the World Bank, talks about it in Are Lower-End Shops Ripe for Electronic Payments?.

“In developing countries, … most people do not have a preference for electronic payments, and the installed base of cards and smart devices is still low. The former is by far the bigger obstacle. The majority of people in developing countries who have an electronic account do don’t have much value stored in them, and many more don’t even have an account. It’s hard to create a preference for paying in a currency you don’t have. In this situation, only merchants that tend to serve the richer banked elites will see a reason for accepting electronic payments (and, more significantly, the merchant discounts that come with that). Accordingly, we’ll observe the usual slow progression down-market.”

CGAP’s analysis rings true.  In developing countries like Turkey, cash will continue to be king for a long, long time. Visions of a cashless society come up more and more often in business circles these days.  The cashless society idea, where everyone uses a credit card, debit card, NFC or a gadget like Square instead of cash, sounds cool and may work in a country like Sweden, but around here it is nothing but a pipe dream, at least for the near future.

Sure, credit card usage has grown at an impressive rate in Turkey over the past few years. But a significant number of credit card owners are “revolvers“, people who use the credit card to buy things they otherwise would not be able to afford, as a substitute for a loan, if you will, instead of “transactors“, who simply use the credit card as a convenient payment tool. If you include transactors using the “installments” method of payments, a phenomenon unique to Turkey, number of revolvers becomes even more significant.  So, the large number of credit card users does not necessarily mean that people prefer credit cards and are willing to abandon cash.  It just means that they enjoy spending money they do not actually have, even if the cost of doing so is high.

With its huge underground economy, uneducated customer base, low level of trust in financial institutions and a widespread habit of tax evasion, I do not foresee electronic payments winning over cash in Turkey anytime soon.  Anybody who tells you different is trying to sell you something.

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