Very few businesses are actually consumer businesses.
A consumer business is one where there is a direct relationship between business and consumer that involves money changing hands. A high street retailer is a consumer business. A coffee shop is a consumer business. A plumber who comes to your house to fix a leaky pipe is a consumer business, but a plumber subcontracted by a builder for the new extension to your house is not.
A book publisher is not a consumer business. The sales process of a book publisher involves persuading a book buyer at a high street store, or a retailer, or at Amazon to stock their books. The role of the sales department is not to persuade 10,000 people each to buy one copy of a book. It is to persuade one gatekeeper to buy 10,000 copies of that book and then manage the distribution and selling of the product to individual customers.
A music business sells to record shops. A toy maker sells to a toy shop. A game publisher sells to game shops. A musician sells to a label, a game developer to a game publisher, an author to a book publisher (often via a literary agent). These are businesses making products or services for ordinary people that have no direct connection with their own consumers, but are only linked via a long chain. The marketing departments are consumer-facing, using indirect communications like television spots, magazine advertisements and advertising hoardings on busy streets to build demand that is then indirectly satisfied by the retail trade. They use imperfect information and marketing instincts to craft campaigns they believe will lead to increased sales. It’s hard to say if a campaign worked, or if the product would have sold just as well without it. It’s hard to be sure which bits of a campaign were effective and which bits were wasteful. It’s hard to understand what customers want when you can only talk to them in sample focus groups or understand their desires indirectly through conversations with retail gatekeepers or through high-level data – ‘Oh, so this author is more popular in Boston than in Atlanta. I wonder if it’s a North-South thing?’
All that is changing. The internet has ushered in a new era where any business that has a consumer-facing element needs to become properly consumer-facing. It is not enough to be a B2C marketing organization and a B2B sales organization. Anyone who markets to consumers needs to have the skills and disciplines necessary to sell to consumers as well. If they don’t, they run the risk of seeing their value erode in a changing competitive environment. This is the consumerization of business and it is happening all around us. You can embrace it, and you must deal with it, but you cannot stop it.
That is not to say that I believe in total disintermediation. That all producers will have direct connections with their customers, unmediated by middlemen, a digital utopia where commerce is frictionless, where discovery is easy and where building relationships is as simple as putting a sign up that says ‘I’m available’. The changing digital landscape replaces the old middlemen with new ones. The difference is that this time round there are alternatives to relying on a single retail channel. In order to make it work, not only do creators have to learn some of the roles that publishers used to fulfil, but publishers need to learn some of the roles that retailers used to fulfil.
Intermediaries are adapting. A book publisher has fewer intermediaries with which it has to negotiate when it publishes an ebook. Most platforms accept whatever a publisher loads up. Publishers supply the files, upload them, often set the price and then have to stimulate the demand. The requirements and skills for a publisher (or any former gatekeeper in a digital world) are changing.
Let’s start with some basics. The heart of the Curve is that you need to use the power of free to reach the widest possible audience of your product and then use the one-to-one interactivity of the web to let your biggest fans spend lots of money on things that they truly value. That is not to say that your audience needs to be massive or your product needs to be a lowest-common-denominator populist one. The Curve enables the niche to survive as well as the mass market. The items in trouble are those that used to be ‘good enough’ but not remarkable, that squeaked through the system because gatekeepers determined what got released and what was successful more than consumers.
It is not to say that you need to cut out the middleman entirely. There is still a role for specialist retailers and supermarkets and online partners in the world of The Curve. It’s not to say that the gatekeepers are going away either: in the new world of digital, businesses like Google and Facebook and Amazon and Steam and Apple are new gatekeepers.
These gatekeepers are often more open than the old ones. They embrace choice and filtering rather than curation. They have abandoned the tyranny of the physical and understand that more products can be produced by more businesses for more consumers than ever before. They are nevertheless important, challenging bottlenecks that sit between creators and consumers.
Successful creators, publishers and distributors will learn when to partner with these new gatekeepers and when to circumvent them. They will learn what the new gatekeepers do so that they can choose where and how to work with them from a position of strength. In the next chapter, we’ll look at a number of industries and see specific examples of how that industry can embrace the Curve. First, though, we need to return to the mix of skills that are needed in this new world.
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James Woollam is the managing director of F+W Media International, the UK arm of US business F+W Media. F+W calls itself a ‘community focused creator of content for hobbyists and enthusiasts’.1 It focuses its activities on vertical communities that are formed around hobbies or interests that are easy to understand: arts and crafts, lifestyle, health, outdoors, collectibles, writing, design, genealogy, sewing, screenwriting, fiction. It offers a range of products and services to those communities. It has 225 websites, some free, some paid-for. It has a backlist of 4,000 books and publishes 600 new ones every year. It operates forty-six magazines, twenty large-scale events and has published 3,800 ebooks. It is not just a publisher, though. It operates dozens of online stores focused on its niches. They include ShopDeer Hunting.com for the outdoors type, GardenersHub.com for gardeners, WritersStore.com for writers and filmmakers and so on.
Woollam explains, ‘We’ve done a tremendous amount in recent years to tie together our publishing and consumer businesses. The changes we’ve made as publishers are extensive and far-reaching.’2 Woollam identifies three key areas which have seen substantial changes.
For F+W, audience development, and specifically email name capture, is now a company-wide goal. It is no longer enough to create a product, to release it and to hope it sells. F+W has understood that to harness the Curve, to move customers from being ‘people who have had exposure to what you do’ to ‘fans who will spend lots of money on things that they truly value’, you need to be able to talk to them, again and again, on your own terms without needing to get permission from a gatekeeper such as a retailer or Amazon. Each new proposal, new potential partner or new project, is viewed with audience development in mind.
Audience development, or the ability to talk to customers again and understand their behaviour and preferences, in terms of both product design and purchasing patterns, is critically important, but you have to get an audience first. Woollam says F+W has invested in company-wide training on search engine optimization, or SEO. ‘At least half our staff can more than competently complete keyword analysis and have an understanding of its importance. Sure, we review sales data and Nielsen [book data], but we use web analytics and keyword analysis in the content decision making process.’
SEO is the dark art of making sure that your content ranks highly in search results on the web, particularly on Google but also on Amazon and in the App Store. For much of the 1990s it was seen as having a ‘secret sauce’, where specialist companies could charge companies lots of money to ensure that their products appeared on the first page of Google, often by using dubious tricks such as paying for other sites to link to their clients’ sites or more nefarious practices. SEO is an endless battle between Google, which wants to have the highest quality results for its users and advertisers, and SEO experts who try to game the algorithms.
My advice is not to play the game. If you create good quality content on the web, Google (and Bing and other search engines) will help others to find it. It makes sense to put yourself in the shoes of someone who might actually be searching for what you are offering when thinking about how to describe it. Putting keywords that people might actually search for in your copy is good practice. But in the end, SEO is more about making good stuff that people actually want to look at than gaming Google’s algorithms.
Two quick examples can show why producing good content that people will search for is a good strategy. Many searches in Google throw up a lot of results from sites such as ehow.com and about.com which farm out cheap content creation aimed directly at optimizing for Google’s algorithm. The content is often weak, and is unlikely to engage passionate fans who can be moved along the demand curve to where they will choose to spend lots of money on things they really value. Instead, this is a volume game, arbitraging getting cheap traffic from gaming Google’s algorithm to gain sufficient eyeballs to build a display advertising business. It is the antithesis of the Curve.
Equally flawed is the diatribe written by John MacArthur, the publisher of American magazine Harper’s. MacArthur is concerned that Google is making it impossible for readers to find the high-quality content that lies within Harper’s. ‘Try finding Harper’s Magazine when you Google “magazines that publish essays” or “magazines that publish short stories” – it isn’t easy,’ he says.3
It’s hard to realize that some people genuinely don’t understand how a search engine works, particularly someone whose business should be about making their high-quality content easy to find for someone who is looking for it. MacArthur, presumably, believes that a user looking for a Harper’s magazine article would search for ‘magazines that publish essays’ or ‘magazines that publish short stories’. I could imagine typing those words into a search engine because I am a writer, amongst other things, and could imagine wanting to find a paid home for my writing. If instead I wanted to read about the countdown to economic collapse in Afghanistan, or the challenges of immigration in rural Nebraska, both topics that are covered in long-form essays in a recent edition of Harper’s, I would search for terms relevant to those words. Articles from Harper’s (a subscription website) would come up, as would those from The New York Times, Fox News and The Nation. It also ignores the fact that if a site is behind a paywall, Google’s spiders often can’t see the words to index them; Google can’t tell people about a website if it does not know what is in there.
I visited harpers.org, the home page of the business that MacArthur runs on the web. I am no SEO expert or web developer, but I used the capability that comes with all browsers to view the underlying source code, the raw text written in HTML and CSS that is rendered by my browser to make a web page that I can read. I searched for the words ‘essays’ or ‘short stories’. They didn’t appear once on the home page. If MacArthur really thinks that people search for ‘magazines that publish essays’, he should at the very least put the words on his site.
(SEO is both more complex and more simple than this. It is more simple because Google wants to help people find relevant search results. It is winning the search engine war by providing us with the answers that we want to the questions that we search for. It is more complex because you need to do more than simply hide the keywords that people are searching for in your copy. For example, Google pays attention to the words that people use when hyperlinking to a website to tell them what other people think the site is about. Google also personalizes our search results based on what we have searched for before and what sites we have visited in the past. If you run two identical searches on different computers, they are likely to show different results.)
SEO is also becoming less important as more of us are finding content through other, more social means such as links or recommendations from Twitter, Facebook, Pinterest, Tumblr and so on. What it does mean is making sure that publishers are thinking as merchandisers. ‘How will someone find my product?’ ‘What will they be looking for?’ ‘If they typed a query into a search engine, what keywords would I expect them to type for which [insert your product here] is the perfect solution?’ That’s not the dark art of SEO, that is simply putting yourself in the shoes of your customers and thinking a bit more like a consumer when building your marketing strategy, just as Marcus Sheridan did for his swimming-pool business.
The third area of change that Woollam identifies is the concept of marketing as a separate discipline.
Marketing is a company-wide responsibility and not a department. Our marketers do great work and run specific campaigns, but an important part of their role is to conduct the wider orchestra. Our editorial and content teams, marketing and audience development work together daily. Our editors write blogs and post online, they encourage and support authors to do the same and they manage social media content.
Most of what Woollam has been focused on is
building an audience to sell stuff we have already created, whether it’s books or other products. Now, we’re generating enough data and insight to actually define new products. In part we can ask our customers what they want, but more valuable is that we can see how they behave. We can review the performance of online content, search results, conversion rates and behaviour and use this to identify gaps and opportunities. We can take that data and make, or find, new products that we know we have an audience for.
It’s hugely exciting and has tremendous potential, but the best bit is that we’ve really only scratched the surface.
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In an ideal world, we would all have a large captive audience, hanging on our every word, in a place where we could control and manage the dialogue, where only our products were for sale and where the community loved everything that we did. Sadly, we don’t live in an ideal world.
At GAMESbrief, I have a blog with 20,000 monthly visitors where I can control the dialogue and the user journey. I can steer them through a sales funnel to sign up for emails (our primary goal), to buy our products (our secondary goal) and to participate in the conversation. Many of those users are fly-by users, landing on the site because they followed a link that someone tweeted, because GAMESbrief appeared high in a list of search results for a particular query or because another website quoted something we’ve done. My job, as a publisher, is to do everything in my power to get more users, to keep them for longer and to give them opportunities to spend lots of money on things that they really value.
Getting new users means lots of things. I need to be active on Twitter and, to a lesser extent, Facebook. (Which of the social networks is important to you depends on your audience. My audience of ‘people who make games’ is more active on Twitter than Facebook, LinkedIn, Tumblr or Pinterest. We are experimenting with how important YouTube is as a discovery tool for us.) I need to write guest posts on prominent blogs and websites. I need to do interviews in written, video and podcast form. I need to be visible on the web so that people who are interested in what I have to say can find me.
That is why I have, together with my colleague Rob Fahey, written an ebook for the Kindle called Design Rules for Free-to-Play Games. In many ways, I don’t want to be on Amazon. On Amazon, I know nothing about my customers. I don’t know their names or email addresses. I don’t know if they have bought one of my books or all my books. I can’t analyse my average revenue per user to see whether I am selling lots of books to a small number of people or if most people only buy one book from me.
Science-fiction author Cory Doctorow points out that many organizations who have to work with Amazon seem to be fighting the wrong battles. In February 2013 his young-adult novel Homeland was published in the US. It was a New York Times bestseller. Doctorow went on a whistlestop book tour of the US, covering twenty-three cities in twenty-five days. Along the way, he was asked by his internet-savvy friends, ‘How many copies have you sold?’ The answer he gave was that no one knows.4
You can get detailed answers from Bookscan if you subscribe. That gives you data from the tills of participating booksellers. But for the ebook numbers you have to wait. As Doctorow’s friends said, ‘You mean Amazon, Apple and Google know exactly who comes to their stores, how they find their way to your books, where they’re coming in from, how many devices they use and when, and they don’t tell the publishers?’
I’ve had the same experience self-publishing via Kindle. The data that Amazon shares with me about what is selling where is almost incomprehensible. Amazon varies the price, the royalty and a range of other factors and tells me what I have sold in a spreadsheet with dozens of entries for just a single book. I do at least know how many copies I have sold, via which of Amazon’s six major stores, which I suppose is something.
The battle we should all be fighting with Amazon is not about co-operative marketing or pricing. It should be about getting access to the data about our products. We should be able to test different marketing copy on sales pages so we can see what works. We should be able to follow users on a journey so we can discover if making a video makes a difference, how price sensitive customers are and whether a different colour book cover changes the conversion rate. Amazon has all this data, but it isn’t sharing. It controls the customer relationship, it controls the customer information, it controls the opportunities for upselling and cross-promoting. Why on earth should I be putting any effort into improving Amazon’s ecosystem when I could be putting all the effort into my own tiny little ecosystem at www.gamesbrief.com?
The simple answer is because Amazon is where the customers are. If I want people to be able to find what I sell, it makes sense to be in the largest shop on earth. I need to go where my customers are, no matter the disadvantages. That doesn’t mean I have to be stupid about it, though. In my head, I think of Amazon as a customer acquisition channel, not a revenue channel. It just so happens that it also generates revenue, which is a marvellous (and important) bonus. I am not in a position where I would be happy to make no money from selling products via Amazon, but I can conceive of the day when that could happen. It would work something like this:
Amazon is a recommendation engine that is highly sophisticated. It gives me the potential to reach an audience that dwarfs the audience I can find myself on my own dedicated website. I will therefore launch a number of books, both physical and digital, on Amazon and use the algorithmic recommendations, keywords and other tools available to me to help make my books appear to the kind of readers who are likely to be interested in the things that I do. I will share links on social media that drive my audience to Amazon too, because they will then share the links in turn to people who are outside my direct reach. Assuming that I have products that people want to buy at cheap enough prices, I will make some sales.
That is when it becomes up to me to do more with my books than simply let Amazon sell them. I need to use those books as a stepping stone to a direct relationship between me and the reader. Maybe I will link from the book (and particularly the ebook) to more resources on the website. Maybe I can find a way for every purchase to entitle the reader to login to an exclusive area of the website where they can chat and compare notes with other readers. Maybe I will provide them with an incentive to visit the website and give me their email address: another free ebook, access to an exclusive webinar or video series. My objective at this stage is to move the buyer of my book from being an Amazon customer to being a GAMESbrief reader to being someone I can communicate with directly. That is the necessary first step to building a relationship that will enable me to convert them into a GAMESbrief customer, then a GAMESbrief repeat customer, then a GAMESbrief superfan. I need Amazon, but that doesn’t mean I have to be stupid about how I work with them.
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On 27 September 2012 The Casual Vacancy was published worldwide by Little, Brown. The book, the first for adults from the author of the Harry Potter series, J. K. Rowling, was highly anticipated. In the UK it went straight to the top of the fiction charts, selling 124,603 copies in the first three days of its release, ten times as many as the next bestselling book, Bernard Cornwell’s 1356, which sold 12,231.5 In the first three weeks, it sold 600,000 copies in North America.6 By any standards, it was a phenomenal launch.
And yet there were challenges. The recommended UK retail price for the hardback edition of The Casual Vacancy was £20 ($30). Given the huge following that Rowling had built up through her Harry Potter novels, it seems that there was likely to be enormous pent-up demand for the book. Rowling’s biggest fans might have been prepared to spend a lot more than £20 on the book. Yet, in the UK at least, £20 was not the price that many people paid. Supermarkets like Sainsbury and Tesco offered it for £10 or less. At WHSmith, you could get it for as little as £6.99, albeit in conjunction with another offer.7 In February 2013, Amazon was selling the hardback for £8.50.
I’m sure that the book has been a success for the publishers, even with the eye-watering advances that are likely to have been paid. The US rights alone were believed to have been sold for an advance of $7 million, according to Forbes.8 There was still an opportunity to make money, to make a stronger connection with fans, to weaken the stranglehold of specialist retail, supermarkets and Amazon, who don’t care about Rowling’s book except as a means of getting people through the door so that they can sell them other things.
To my mind, that model of selling is on the way out. Little, Brown should consider sales made at Sainsbury and WHSmith and Amazon as the start of their relationship with Rowling’s fans, not the end of it. Not everyone will want to become a fan or a superfan, and that’s OK. The model behind the Curve is not to treat everyone the same. It is to use the power of the web to segment people, to allow the freeloaders to experience the product for free while the superfans are given opportunities to spend money on things they truly value. Would 100,000 people have been prepared to pay £30 to get the book a week before the general release date? Possibly. Would 10,000 people have been prepared to pay £50 to get a signed, limited edition? Possibly. Would 1,000 people have been prepared to pay £300 to attend one of ten launch parties during the first month, where they could eat a fine meal in the company of one of the best-known authors in the world? Possibly. Could Little, Brown be building a database of J. K. Rowling fans so that they can talk to them again, for her next novel? Are they thinking about how to cross-promote between authors based on genre, target market, purchasing patterns and so on? Possibly.
I don’t know what might have worked out differently for the launch. I am pretty sure that Rowling’s first novel since Harry Potter was always going to do well. (It’s the second one that will be a bit more scary for the publishers.) I do know that we are all trying to learn in a rapidly changing environment and that the winners will be the ones who have the best relationships with the fans. That might be the creators. It might be the retailers. It might be the new digital gatekeepers. It might be businesses who would traditionally have been called publishers. It is all up in the air. Those who learn the new skills and grasp the new opportunities will be the ones still standing in fifty years’ time.
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William Goldman is a legend in Hollywood. He is the screenwriter of The Princess Bride, Marathon Man, Butch Cassidy and the Sundance Kid, for which he won his first Oscar, and All the President’s Men, for which he won his second. In 1983 he published Adventures in the Screen Trade, an insider’s look into the workings of Hollywood. His primary axiom: nobody knows anything. To illustrate the point, Goldman related a conversation he had with the head of one of the biggest Hollywood studios in the late sixties. Life magazine had just published an edition with a picture on its cover of, it claimed, the biggest star in the world. Goldman asked the studio boss if he’d care to guess who was on the cover. As Goldman tells it:
‘Newman,’ he said.
No.
‘McQueen.’ Not McQueen.
A pause now. ‘It can’t be Poitier.’
I agreed. It wasn’t.
Now a long pause. Then, in a burst: ‘Oh shit, what’s the matter with me, I’m not thinking – John Wayne.’
The Duke was not on the cover.
The situation was now getting the least bit uncomfortable. ‘If it’s a woman, it’s either Streisand or Andrews.’
I said it was a man. And then, before things got too sticky, I gave the answer. (It was Eastwood.)
And he replied after some thought, ‘They claim Eastwood? Eastwood’s the biggest star?’ Finally, after another pause, he nodded. ‘They’re right.’
The point being that if a studio giant couldn’t guess the biggest star in his business, the territory is murkier than most of us would imagine.
‘Nobody knows anything’ is a powerful and potentially liberating axiom. In the hit-driven world of Hollywood, it is terrifying. Executives don’t know if their next movie will be a massive success like The Avengers or an excruciating failure like John Carter. In a world constrained by the tyranny of the physical, executives pile on the financial risk in order to reduce the operational risk that a movie will flop. Goldman argues that with all the market research, gut instinct and experience in the world, no one in Hollywood knows which movies are going to fly and which ones will flop.
Next to my copy of Adventures in the Screen Trade on the bookshelf by my writing desk at home, I keep another book. In many ways, it feels like the natural companion for Goldman, even though at first glance the two seem miles apart. That book is The Lean Startup by Eric Ries.
Ries is a quiet, thoughtful man, an introverted character who has nevertheless become the figurehead of a movement to bring discipline and rigour into the scrappy, ill-disciplined world of startups. He was the chief technology officer of a business called IMVU, which is now a thriving community whose 10 million monthly members chat, play and hang out in an online digital world. Back in 2004, when Ries was co-founding this business, the team had a very different vision. They didn’t want to build their own closed, proprietary virtual world. They wanted to combine the mass appeal of instant messaging (IM) networks with the impact and high revenue per user of a 3D virtual world. The founders believed that the best way to build scale was to build a 3D avatar system that sat on top of existing IM networks such as AOL Instant Messenger or Yahoo Instant Messenger, so they set themselves a tough deadline of six months – just 180 days – to build the system and ensure that it was compatible with half a dozen existing instant messaging systems. After an enormous number of late nights and intense pressure, they launched the product.
It flopped. Absolutely flopped. They put up a web page and asked people to register for their ‘Instant Messenger add-on’ product. No one understood it. No one wanted it. The depressing thing for Ries was not that he had wasted six months of his life building a product no one wanted. It was that he could have found out that no one wanted it without building the product, just by putting up the web page that asked people to sign up. When no one signed, he would have had his market research for a fraction of the money, time and effort that he spent on building the dud product.
IMVU successfully pivoted away from being an add-on to other IM networks and became its own successful virtual world. Ries took the lessons he learned from IMVU and other startups and, building on the work of Stanford professor Steve Blank, started to create a template that other startups could follow to reach success faster and more cheaply than ever before.
Before you start thinking that you don’t work for a startup, think again. Here is Ries’s definition of a startup:
A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.
If you work in a media business, I would say that you are operating under conditions of extreme uncertainty. If you work in manufacturing, you may soon be operating under those conditions thanks to 3D printing. All of us are seeing unprecedented change in how we communicate and do business as the web continues to shape our daily lives and business interactions. It seems to me as if almost everything in the early twenty-first century is a startup by Ries’s definition.
Here’s why it matters. One of the insights that Ries and Blank developed is that a corporation and a startup are very different beasts. A corporation knows what its business model is. It is the same business it was last year, and the year before that. The job of people in a corporation is not to make radical changes. It is to do what was done last year, but a bit better. It is a world of tweaks and adjustments. It is a world where a three-year plan makes sense because there is a reasonable chance that broad assumptions made about the evolution of the market and customer needs will come true. A corporation is all about execution.
A startup, on the other hand, is an organization in search of a business model. Blank defines it in more detail:
A startup is a temporary organization formed to search for a repeatable and scalable business model.9
A startup is operating in a world of assumptions and uncertainty. It does not know what its customers want yet. It has to go through a process of customer discovery (finding the right customers) and customer development (learning what those customers want and what they are willing to pay for). It is a place filled with uncertainty.
The most depressing thing a Lean Startup proponent can watch is a flawed plan, perfectly executed. Yet this is often what results when people trained and schooled in corporation thinking turn their attention to developing market segments. They form assumptions. They pay for expensive research and top-flight consultants to tell them what to do. They produce spreadsheets and presentations that make detailed predictions about the future. They get board-level signoff to deliver on the plan. They go off and execute against the plan, and they do it well, because that is what corporates are good at doing.
Sometimes it works, because the initial assumptions were right. More often, the initial assumptions were wrong but there was no mechanism for adapting to new data on the fly. The corporation continues to execute, pointing in the wrong direction, with no feedback loop from live customers that would have allowed it to recalibrate its objectives if only it had a process in place to listen and adapt.
For a long time, the alternative to having a plan was to have no plan at all, which was even worse. Refugees from the corporate world would refuse to plan or budget or strategize, blaming the failures to innovate that they had seen in large corporates on the flawed process for delivering projects under conditions of extreme uncertainty. This didn’t work either. As President Eisenhower once said, ‘Plans are useless, but planning is indispensable.’
The solution put forward by the Lean Startup movement is to focus on a new metric of success. It’s not about revenues, or profits. That is what happens once you have discovered who your customers are and what they want to pay for. The metric of success in the early stages of a startup is validated learning. To put it another way, successful businesses operating under conditions of extreme uncertainty are those which work out how to learn faster than their competitors, and to keep learning.
There are many different ways to go about this. Have a hypothesis. Test it. If it is disproved, change your hypothesis. If not, keep going. Make a plan. Put a note in the diary for a meeting to take place six months from now to determine if the plan is working or if the organization should make a radical change (the famous – and overused – ‘pivot’). If you know that you are going to have a discussion in six months’ time about whether you should pivot, what data would you like to have available at the meeting to help you make an informed decision? Are you gathering that data by your activities today? If not, how can you adapt what you are doing today to answer the strategic question you expect to face in six months’ time?
The Lean Startup movement provides an invaluable template for organizations whose business or operating environment is undergoing rapid change. Much like William Goldman, it involves admitting that we don’t know anything, but unlike Goldman’s Hollywood, where the only option is to continue to throw money at risky, hit-driven projects and hope the bets pay off, the Lean Startup approach offers an alternative. It’s about learning how to learn. It’s about learning how to adapt. It’s about learning how to accept failure as a necessary part of doing business but at the same time using the failure as a process of learning.
Economist Tim Harford takes up the theme in his book Adapt. Harford has three basic rules of being adaptable: You must experiment. You must survive the failure of the experiments. You, and your organization, must learn from the experiments.
Far too many organizations fail at hurdle two, let alone hurdle three. A business initiative is launched. It struggles, probably because it is a well-executed plan built on flawed assumptions. The experiment is shut down, which is fine. The executive in charge is sidelined. The team who worked on it is re-assigned. The message is received loud and clear throughout the organization: experiments are fine, provided they are successful. Innovation dies.
It is important not only that the organization survives the failure of the experiment, but that the team members and executives behind it survive too. That means making sure the experiment is structured to deliver validated learning rather than revenues and profits as its initial success criterion. Using revenues and profits as criteria only makes sense if the business model is known and well understood. In many cases, new projects happen to fit known and well-understood business models. In that case, measuring success by financial metrics is sensible. Other projects are operating in an environment of extreme uncertainty where the business model is not yet known. Their success is dependent on an organization’s speed of learning and efficiency at adapting. These are very different disciplines.
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Supercell is a Finnish games company that is an amazing success story. It is estimated that its revenues in 2013 will top half a billion dollars from just two games, Clash of Clans and Hay Day. Yet Supercell’s first game, Gunshine, was not a success, and the company has a strategy of embracing failure.
Ilkka Paananen is the youthful founder of Supercell. In his mid-thirties, although looking a decade younger, Paananen is a second-time entrepreneur. His first games business was called Sumea and he sold it to mobile publisher Digital Chocolate in 2004. Based on the track record of Paananen and his team of co-founders, Supercell was able to raise $12 million from Accel Partners and London Venture Partners before they had even shipped a game.
Paananen is opposed to micro-managing. ‘When you set up a company, the only thing – the only thing – you should care about is getting the best people,’ he said. ‘From that, good things will happen.’10 He then gives those good people the flexibility to work in small teams, typically of five people or so, which he calls cells. The entire company, consisting of a number of these small teams, is the Supercell. Supercell is relaxed about projects that fail provided they fail quickly. ‘This year [2012], we’ve killed more products than we’ve launched.’ It is also focused on keeping the small, cell-like structure that enabled it to find the hits:
You’ll often see a gaming studio get a hit, then they’ll start to grow at an astronomical rate. Then the next product they do has to be bigger in terms of the team, the headcount and the budget because they think they’re better. But this model has been proven wrong multiple times. This leads to companies being risk averse and copying what has already worked. Our guiding motto is, ‘Think Small, But Get Big’. We prize extreme independence and have a flat organization with little bureaucracy.
It seems to be working for Supercell. Its two games, Hay Day and Clash of Clans, are bringing in $2.5 million in revenue every day, and in February investors bought into the company for $130 million at a valuation of $770 million.11
The small team size ethos is reflected by many other successful technology companies. Jeff Bezos, founder of Amazon, said, ‘If you can’t feed a team of people with two pizzas, it’s too large.’12 (Given the size of American pizzas, that typically means a team of five to seven people, depending on their appetites.) Valve, the creators of the Steam platform that has revolutionized gaming on the PC, has a similarly flat structure. There are no team leaders and everyone is involved in the issues of business, marketing and sales. Desks are on wheels to make it easy for project teams to form. If you think something should be done, you just need to convince enough of the people with the skills you need to come and help you make it happen. It is not an environment for everyone, but it is an environment that enabled a maker of shooter games to create a platform for selling PC games and become the dominant distribution force in that market. Steve Jobs had a rule: ‘I can’t remember more than a hundred first names, so I only want to be around people that I know personally. So if it gets bigger than a hundred people, it will force us to go to a different organization structure where I can’t work that way. The way I like to work is where I touch everything.’13 In an organization which now employs over 70,000 people, Jobs liked to keep the people working on a single project (in this case the Mac) at fewer than a hundred.
Jobs, Bezos, Gabe Newell of Valve and Paananen have very different management styles. Some are famously controlling. Others allow the groups of talented employees that they put together or allow to form to determine what happens next. Google’s approach is to allow its engineers one day a week to tinker with anything they fancy, an approach that spawned Gmail, Google News and AdSense, as well as failures like Google Wave and Google Answers. The element that combines them is their approach to keeping groups small, flexible and personal, not corporately planned and structured. It also helps if they respond to failure swiftly. Some embrace it. Jobs got angry when things failed. Eric Schmidt, former CEO of Google, said, ‘We try things. Remember, we celebrate our failures. This is a company where it’s absolutely okay to try something that’s very hard, have it not be successful, and take the learning from that.’14
For Paananen, embracing failure in the hit-driven world of games is critical. It’s even better if you can learn how to kill things rapidly. How to avoid the risks of executing perfectly on a flawed plan by adapting along the way. When Supercell decides to kill a project, and it killed at least three in 2012, the whole company gathers to do a post-mortem to determine what went wrong, and then the cell members involved with the failed game are each given a bottle of champagne.
‘When failure is completely accepted – in fact it’s celebrated – then it encourages people to take risks. When you take risks, there is more innovation. And with innovation there’s better games, and eventually there are going to be hit games.’15
We are entering a world where business certainties are becoming uncertainties. Where revenue for traditional business models is collapsing. We are seeing physical dollars become digital dimes. We will not be able to reverse that trend. The weight of economics, of technology and changes in the social contract between creators and consumers is against us. We will nevertheless be able to make money from making stuff – both physical and digital – in the future. Those who thrive will be those who learn to be flexible, to adapt, to experiment, to succeed and to fail in the fastest, most cost-effective way. One thing that we will all have to get better at to make that work is measuring.
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How do you measure success? By volume? By units sold? By product line? If so, you are trapped in old world thinking. What use is a million downloads if they were all free and hardly anyone ever looked at the thing they downloaded? Why are you thinking about products when you should be thinking about customers? Why does volume matter when it is no longer a good proxy for revenue, because we have abandoned the tyranny of the physical for the flexibility of the digital?
On Amazon’s US website in May 2013, the most expensive Kindle books in the top ten were Dan Brown’s Inferno ($14.99) and James Patterson’s 12th of Never ($11.99). There were two books at 99 cents: Don’t Say a Word by Barbara Freethy and Truly, Madly, Deeply by Carly Phillips. The most expensive book costs fifteen times as much as the cheapest.
In February 2013, Amazon UK was in the midst of a price war with Sony.* The ebook version of Life of Pi by Yann Martel was priced at 20p. At number 20 was Stalkers by Peter Finch, priced at £1.99. At number 8 was Bridget Jones: Edge of Reason by Helen Fielding at £4.66. Stalkers cost ten times as much as Life of Pi. Bridget Jones costs twenty-three times as much. The most expensive ebook in the top hundred in the UK was Peter Brett’s The Daylight War, which sold for £11.49. When pricing can vary by a factor of sixty-five times from lowest to highest, is volume really a useful measure of demand?
Anyone who works in the web world knows that ‘registered users’ is a useless metric. Eric Ries has a phrase for them: vanity metrics. A vanity metric can only go up. It gives the rosiest possible picture. It cannot show failure, because it only ever moves in one direction. The number of registered users is basically a measure of how old you are as a business, but says nothing about how successful you are.
The focus on registered users comes from the days when everyone paid to get access to something. When the price was fixed, volume could become a proxy for revenue. If you say, ‘I sold a million copies of my album,’ I could perhaps estimate that the gross revenue you generated at retail from that album was £10 million ($15 million). Lady Gaga’s 1 million plays on Spotify made an estimated $167. (Not that I am suggesting these are comparable. Far from it. In the next chapter, we’ll look at how Spotify fits into the Curve for an artist, but it surely isn’t as the replacement for disappearing album revenue.) In a world where the price can be infinitely variable, a focus on registered user numbers, or downloads, or some other metric that can only go up is extremely misleading. Unfortunately, most journalists are caught up in the old school of thinking that the number of registrations is a proxy for revenue, while companies like publicizing the biggest numbers they possibly can.
We can see this with IMVU. The company has 50 million registered users. Of those, 10 million are active on a monthly basis.16 For a business that is about generating revenue from the sale of virtual goods to its active community, only the active users are valuable. Moshi Monsters, the successful virtual world aimed at kids, has 80 million registered users, but doesn’t break out how many of those are active on a monthly basis (although CEO Michael Acton Smith is at pains to point out that they don’t focus on vanity metrics internally).17 Bigpoint, the German browser-based games company, has 300 million registered users but no one outside the company knows how many of those are active.18
This can be a big problem. A company focused on registered users is a customer acquisition business. Its focus is to get customers through the door. It is a mentality derived from the shorthand equation that customers = revenue, a shorthand that is no longer true. I know companies with fewer than 200,000 monthly active users making high single-digit millions of dollars in revenue, while other companies with ten times those users struggle to make the same amount of revenue. Customers do not equal revenue, they are simply the prerequisites to revenue.
A company that focuses on active users (MAUs and DAUs) has two different levers it can pull to improve its metrics. It can get more customers through the door or it can make the existing customers sufficiently satisfied that they come back again. A customer acquisition company is trapped in twentieth-century thinking; a customer retention company has taken the first steps along the road towards making money from the Curve.
Thinking about the metrics of success in what you do, do you focus on revenue per product or average revenue per user? Are your colleagues incentivized by how well your book or album or game or tractor or overcoat or product sells, or are you incentivized by how often your customers come back and how much they spend with you? Have you got an ability to segment your users into different buckets depending on their spending habits and give them different offers, promotions, products and services depending on the type of customer they are? Do you rely on a retail partner, whether physical or digital, to do that for you, or can you do it yourself?
The Curve is not just about making money. When acting as a consultant to traditional games companies, I am often referred to as a monetization consultant, which I find strange since so much of my work revolves around helping companies shift from a product mentality to a service one. I help people move on from just worrying about how to get customers and learn how to keep them. I do think about monetization, but it is part of a strategy to engage customers, to keep them and to give them an emotional context in which spending significantly more than the average price of a physical product makes sense.
To pigeonhole the Curve as a monetization strategy is to miss the point. The Curve is a way of changing your mental picture of what you do to something different from ‘creating something to sell’. Today, you build a relationship with your fans and a context within which they can spend. Then you allow them to spend amounts of money ranging from the tiny to the enormous, with technology as a tool to help you understand what they want, and to move customers along the demand curve.
Milling grain might seem like an unlikely Curve business. The business of turning grain into flour and selling that flour in supermarkets seems like a business that can’t escape its physical roots. Yet King Arthur Flour, a 225-year-old milling business based in Vermont, has done just that. In 1990, the company was a small mail-order business with just five employees.19 By 2012, the company had grown to be a nationally recognized brand with 283 employees and revenues of $97 million.20 Along the way, it changed from being a family-owned business to being an employee-owned business. Since it became employee-owned, the company has seen remarkable growth in sales and, according to former owner Frank Sands, profitability. Its distinctive premium King Arthur Flour is now the number two brand in the US. As Sands says, ‘When people KNOW that they are owners, they think and work like owners!’
King Arthur Flour has worked very hard to build a community. Its website offers thousands of detailed recipes. The blog posts are chatty and personal yet informative and helpful. King Arthur Flour’s YouTube channel has 3,000 subscribers and many of its videos have tens of thousands of views. The company has an active email list and engages with its users. There is a helpline staffed with nine bakers ready to answer questions from baffled or beleaguered home bakers: ‘What should dough feel like when I’ve finished kneading?’ or ‘Help, I’ve used baking powder instead of baking soda, what can I do?’21
King Arthur Flour can be found in most supermarkets in the US. The company also runs a mail-order service supplying items ranging from ingredients to pans to storage solutions. The company has published four recipe books. For the serious fans of King Arthur, the company offers masterclasses in its Vermont headquarters. You can learn how to bake gluten free cakes or make macaroons or bake bread in a wood-fired brick oven for prices ranging from free to several hundred dollars.
King Arthur Flour is not at risk from the digitization of its core product. No one is yet threatening to turn flour into easily replicable bits and bytes. Flour is a staple product and not one that naturally leaps to mind when thinking of a business where it is possible to build an emotional relationship with customers and turn them into fans. Yet that is exactly what the people who run King Arthur Flour have done. In the same way that Marcus Sheridan did at River Pools, they have created an audience by giving away high-quality information for free. They have understood how to talk to their audience and what they want through smart use of technology. They have enabled those people who love what King Arthur Flour does to spend hundreds of dollars a year with a business that, at its heart, is a miller. That is smart application of the Curve.
The company has realized that a miller can no longer just be a business-to-business if it wants to thrive. The web has encouraged the ‘consumerization’ of business. Your business is becoming more consumer-facing, and no matter your role in the business, you are becoming more consumer-facing too. Everyone needs to understand that they are part of the marketing organization now: sales, finance, customer service, product design, administration, everyone. To change your business from selling products to selling services is a big shift. In the next chapter, we will look at how you can make this shift, whatever you do.