Ronald's Blog

I’ve been watching the developments at Twitter over the past 2 months with some real interest. Other than the excellent engineering feats they accomplish, like Gizzard, elephant-bird and their work with Unicorn, they’ve made some interesting business decisions.

I’m specifically talking about their stance announced in February that they will start competing in the application space. On Friday, they attacked the app space by acquiring Tweetie and launching their own blackberry app. So in a day, they’ve launched a salvo at two of the most popular app markets in business. My only surprise was that they didn’t launch a desktop or AIR app the same day. I’d guess their only reason not to is because they prefer to use their site as the main “app” instead.

Loic Le Meur, the founder of Seesmic, has an interesting take on it. Admittedly he takes it very well, for hole read niche:

As long as we keep moving and innovating and both partners treat each other in a fair way, I think we will all be safe, the hole is big enough and there are many other holes.

Where Seesmic has gone right is that it’s not only working on Twitter, they work with Facebook, and other socnets too. But lets face it, as long as you’re no the owner of the platform you’re always going to be at the mercy of the owners, now you’re just at the mercy of more of them.

I remember an argument years ago about how the Internet was turning into the sharecropping system of the time. That was then in reference to GeoCities, but it seems just as applicable these days.

And as I’ve experience in the past, the most fickle of mistresses is Google. In one case they put a penalty in place that killed 80% of traffic overnight. Loic, in the same post above, points out that this happened to a friend “because they did not like what he was doing”.

Google have moved into real-estate, shopping, Airline times and stock quotes. The real scary thing is of course that they’re not making any significant amount of money from any of these efforts, they’re all just AdSense fodder. Twitter isn’t making money on its apps either, at least not as far as I know. As a business operating in a space, how can you compete with someone willing to occupy that space without having to face your business realities?

Simple answer is you can’t. It’s not enough anymore to be the best client to a platform, maybe it never was, you have to solve a problem. If you’re just a better UI on top of Twitter, you haven’t solved a problem, you’ve made their solution prettier or more usable, which is great if you’re an UX guy for them, weak if you’re building a business on it.

If you’ve built up a directory site that only serves to aggregate information already on the web, you’re not solving a problem. Even if you add value through adding additional editorial content or control you’re not really solving a problem you’re putting a layer on top of an existing solution if they’re using Google to find you, and those layers can be taken away by the owners of the existing solution at their discretion, regardless of what you’ve done.

Of course, the platforms and solutions only became popular because they’re useful. And they became useful through being open to an extent. Twitter would not have become as popular as it is now if it only had its web and SMS client. It certainly would’ve had major competition on platforms like the iPhone if it didn’t open itself to developers. Google wouldn’t have become popular if it didn’t educate and empower webmasters and content aggregators. The entire SEO industry is based on trying to pretend you know what Google wants, and for an SEO’s mojo to work they’ll encourage even tighter adherence to whatever the current Google magic bullet is.

Both are competing with their original enthusiasts, biting the hand that fed them growing up.

In 2006 all of the company results on Google maps were from yell.com, a couple of years later, they’ve built the local business centre, and completely replaced the yell content with in-house results. A local business site in that period received a 90% drop in yell.com referrals but had an overall increase of traffic from Google. They will defend themselves, correctly, that they are serving both the search user and the business customer better by doing what they’ve done. That doesn’t change that yell is now defunct, that it sucks as a site and a business may also play a role of course.

When a retail wholesaler sells direct to the public, bypassing the retail channels, it has to tread carefully, it incentivises retailers to still stock the product through giving them a fair margin, promotional offers, training, etc. The online platforms have to be careful that they don’t alienate the businesses out there that make them tick. 

I hope that the fall out from all this is that developers wake up, and don’t just chase the dream on the new platform, but ensure that they protect themselves by working with, or demanding, platforms that respects them as developers and continues to give them that respect and support to let them build stable businesses.

I also hope that business realise you have to have something worth using, something worth paying for, otherwise you are just a means to an end. Which can be more easily replaced that how you did it in the first place. 

I fear though that the excitement of the next big thing causes people to leap in before making sure they’re not going to get screwed over. I must say though, the only people that stand to lose from a move like this are the people that have gained through the platform already. To the rest of us it just means more choice.

I came across a post by Anthony Tjan (a VC) on the Harvard Business Review which talks about how at their VC firm, they’re constantly on the lookout for business with the following monetisation model:

recurring revenue + fixed cost leverage = superior cash flow

I think he convolutes the message a little bit, and using a words like recurring and leverage just confuse the matter.

What it comes down to is very simply, build a business where your costs stay fixed or close to fixed, and your revenue keeps climbing and you’ve built a successful business.

The opposite of this model, if you’re interested, is to receive linear revenue per cost, something which is typical of the service and retail industries.
There are only a few industries where this model really is viable, Technology, Biotech, Finance and Securities trading. What Taleb refers to as Extremistan. (Almost done with his book, so will post on it soon)

Tjang further goes on to expand and clarify the idea,

…a business model where you get the vast majority of your customers coming back every year, where the cost to deliver an additional customer approaches zero at scale, and where you get a lot of the cash upfront…

This is a great business model, but the three basic premises are very important to get right:

1. High retention rate,
2. 0 cost of customer acquisition, and
3. cash up front

If you look at those individually, there are very very few business that do match this, and more importantly match it in the long run.

Running out of retention:

If you’ve got product that no-one reuses, you’re not going to last long unless you fix it, lack of retention when its your fault is fixable. The big problem comes in when you are highly reliant on others for your customer retention.

As an example: The humble roadside attraction.It used ot be a great familly business, you have an initial outlay to build some weird and wonderful thing, and customers just walk in off the road. your cost is fixed, you get a high number of people coming back, normally with their kids in tow, and they have to pay before they can go in and see your world of wonders (and then you sell them a t-shirt on the way out).

Then someone builds an interstate, and your customers are simply not there anymore. Nothing the roadside attractions did in the 50s saved them from the interstate.

The biggest fear of most internet “content” sites, is someone switching of the tap of traffic. If that happens, their revenue tanks, their costs stay the same, and they’re screwed.

If I look at some online businesses, they relied on Google for either traffic, revenue or both. Without exception, all of them started doing really well, well enough to get the Execs on the board to sit up and start adjusting budgets, and then tanked.

The key is retention. These sites were reporting traffic numbers in the millions per month, and the numbers were going up, so they thought retention was in the bag.

They didn’t pay attention to the stats that tell them how many users are coming from external sources, or how many of them are new vs. returning. When those external sites found somewhere else to send the traffic, or launched a competing product, the fountain of plenty dried up. For the interested, these numbers were usually around <1% direct traffic, and 10% returning.

Simply retaining numbers isn’t good enough, you have to retain individuals, or more clearly, people have to choose to use your product over others.

Customer Acquisition doesn’t stay 0

Another business is subscription based, with very high numbers of retention, they built a complicated technology offering but once it was up and running they didn’t have to spend much to keep it running, so their acquisition tended to 0. They are and have been successful for a very long time.

Their big issue that they target a very specific role in an industry. As it pans out, they’ve run out of customers to sell to.

By itself, running out of customers isn’t really a problem, what it means is that your cost of acquisition all of a sudden tends towards infinite, if there aren’t any new customers, it doesn’t matter how much I spend, I’ll not get any new customers.

So you can stop spending on acquiring customers, but you still have to spend something to keep your retention high, otherwise someone will steal your lunch, but you can bake that increase of cost back into your charge to customers. This kind of business needs to batten down, start figuring out how to save money by being efficient and shore up their market.

What it doesn’t need to do, is to try and build a whole new product, which they hope will work for their existing customers and attract an entire new market.

Know your limits in a market, and be comfortable with them, if you’ve cornered the market, that’s a good place to be, make sure you stay there rather than find a new market.

Cash up front

Gift vouchers are the bane of the Service industry. Cashflow is normally quite tight, so by the time the customer comes round, the initial money has already been spent and then you’ve got to tie up one of your employees in an activity that makes no money, but costs you lots.

You’d expect your customer acquisition costs to balloon right? Except for the cashflow issue however, there is no additional cost to getting that customer, after all you did get the money already. Even better, you’ve now got an opportunity to sell additional services or products and to market your business directly.

A beauty salon till recently was putting an expiry date on their gift vouchers, primarily to try and avoid the cashflow issue. Needless to say, customers that had received a gift voucher and ended up not being able to use them got rather upset about the whole affair.

They ended up not only losing out on the opportunity to sell more to a customer, they also created bad marketing for themselves by letting people down.

When you take cash up front, don’t forget what people have paid for, they must feel that they are better off by having paid in advance, there’s nothing in it for them otherwise.

I had lunch with an old boss and another exec recently. Among various topics we discussed, the following question came up:

What is more valuable, a dollar of revenue or a dollar of cost saving?

Around the table, both the execs and I knew which one we preferred and also knew that our preference is against the corporate line, for those of you playing along at home, the corporate line is cost saving. Not really a surprise.

Looking around on the web, you find that most personal financial advice toe this line pretty well. sticking with Benjamin Franklin’s well known phrase, “A Penny saved is a penny earned.” With some going to the hyperbole of a dollar saved is two dollars earned.

The corporate line follows the common approach, but ads an additional veneer to make it even more palatable for shareholders I guess. Cutting costs is seen as a predictable contribution to your bottom line. Every dollar you cut, you know is going to stay cut, whereas revenue is a fickle friend, here one year, gone the next.

Hopefully the cynics out of there are as appalled by this utter bullshit as I am. 

The first problem is with applying the folk knowledge to business, there is a fundamental difference between saving money and cutting cost. When you save, you hold something back with the aim of using it on the proverbial rainy day, you save to spend. When you cut costs, you reduce your existing expenditure. I’m going to ignore the corrolary, you spend to save, since most companies ignore the direct costs of cost savings anyway.

The second problem is the corporate veneer, the seemingly solid fact that once it’s cut it stays cut completely misses the point that you still can’t predict your income. In fact I’ll even go further than that, when you focus your efforts on growing revenue and you’re successful you know you’re doing something right, and you can repeat that process to keep growing your revenue. When you focus on cuts, you’re not focusing on growing your top line, so instead of moving your business forward, you stay still… but the rest of the world doesn’t. 

For every dollar you save, you’ve already lost the opportunity to make a dollar, and furthermore you’ve prevented yourself from establishing practices to let you earn even more dollars.