Is Branding Part of the Value Proposition?

I’ve recently finished reading a book called “How Brands Grow” by Prof. Byron Sharp. Although it is not specifically technology venture focused, I would highly recommend it for any marketer, especially those marketing web-based B2C services such as we do at iWantMyName. The author questions much of the accepted wisdom on marketing and turns a lot of traditional textbook strategies about marketing on their head.

In a dynamic market, you can compete on price, but this is akin to an arms race and damages everybody. You can also compete by innovating and making your product more feature rich, but this is expensive and takes time. A third approach is to have a brand strategy in place from the outset that puts you in a stronger position when competition arrives. But product developers sometimes overlook branding as part of the overall value proposition.

In his book, Prof. Sharp argues that the quickest way to build a market is to make your brand physically and mentally available to consumers as well as targeting the large pool of dissatisfied customers that change brands each year. He scoffs at differentiation, citing cases like Coke and Pepsi who have attempted to differentiate within the cold drinks category, but whose respective market shares hardly change year after year.

Coke and Pepsi are constantly fighting off cheaper brands and do so quite successfully because customers are prepared to pay a premium for a brand they feel connected to. That connection has been built up through generations of consistent positioning. Everybody recognises the Coke symbol, right? It’s irrelevant whether or not the product itself is substantially better than the cheaper ones. What matters is that customers mentally associate positive attributes with a brand such as trust, some kind of meaningful narrative plus “sticky” graphical images. Customers ascribe value to intangible features and this should not be overlooked.

This post is an extension of a discussion on a value based strategy to competing in new markets started by Libby Russell on the New Zealand Software Alliance LinkedIn page.

Why Customer Acquisition Is Trumps

Companies traditionally put a huge amount of resources into carving out and dominating niches within a particular product category. Airline loyalty programmes are one example of the lengths marketers will go to in order to retain customers. But in more dynamic markets such as web-based services, the old rules no longer apply. Customer acquisition trumps retention every time. Do the math.

For argument’s sake, let’s say that there are a total of 100 customers in your target category and that 20% change their loyalty each year. So, ignoring any organic growth, there is a total pool of 20 customers up for grabs in any given year. A start-up entering the field does well and secures 5 of these floating customers in the first year. But they will lose one of these customers at the end of the first year on average. In the second year there are still 20 customers looking to change provider. If the start-up succeeds with customer acquisition at the same rate it will still more than double it’s user base.

Being a small brand in a market with high defection rates is risky. Growing customer numbers as quickly as possible is insurance against future defections. A larger brand can weather the storm. For many product categories in fact, 20% loyalty churn would be extraordinarily high. So a new entrant has its work cut out for it on both fronts because in some industries the number of shifters is fewer.

I’ve over-simplified the figures, but you see my point. Acquiring customers from the pool of dissatisfied users is the primary goal of a start-up. In the case of web-based services, create a better user experience and you immediately tap into that pool. Customer retention will also take care of itself. Because the domain registrar industry is in dire need of innovation and there is a large number of disaffected users, this is the approach we have taken at iWantMyName.

Air Affair Needs Pre-Flight Check

You have to give credit where it’s due. Air New Zealand’s spin doctors have had a delicious time making their engagement with Virgin Blue sound like a huge bonus for customers. Unfortunately the reality of the situation is somewhat different. Our national airline’s lusty desire for consummating a union with Virgin may sound like a match made in heaven but it should not be allowed to get airborne without a proper pre-flight inspection.

The two airlines plan to merge and rationalise all their trans-Tasman operations in order to compete more effectively. With Qantas and its low cost offspring Jetstar making rapid inroads into market share and a host of other carriers dumping excess capacity in the region the blue team are taking a beating. It makes perfect economic sense for the airlines to work together, but there is no upside for passengers – especially those from Wellington, where ANZ and PBN already face little opposition. 

No matter what spin the airlines put on the alliance proposal, there are only two possible outcomes for consumers if it proceeds – fewer flights and higher prices between New Zealand and Australia. That is the sole objective because it is the only way the airlines can get revenue per seat to a sustainable level. The net result is that eventually one brand will cease to exist. Given that Air New Zealand is entrenched, it is likely to be Pacific Blue that dies. This will also reduce competition on the domestic scene. That would be a shame because both companies are highly innovative and have excellent customer service standards.

In any event New Zealand’s domestic market has never been able to sustain more than two airline brands historically and somebody will blink eventually. Then the era of cheap airfares will be over, at least for a while. On the other hand Singapore’s Tiger Airways is waiting in the wings – so to speak, although with its appalling customer service record it is questionable whether Tiger’s arrival would be either beneficial or long-lived.

There are however two possible benefits of the proposed alliance to consider. Firstly, Air New Zealand gains access to Virgin’s domestic feeder traffic and marketing machine. That would be a plus for the New Zealand tourism industry and a long awaited return to the Australian market since Air New Zealand’s near death experience with its misjudged acquisition of Ansett back in 2000. Secondly, with more A320s on the way, Air New Zealand will have more capacity irrespective of its partnership status. There may be scope to launch some kind of new low cost option to address this section of the market and placate the regulators.

There is a certain inevitability about all of this, so it’s important that any deal gets properly examined. Australia handles such proposals through the Australian Competition and Consumer Commission, but in New Zealand it will likely be a Cabinet level decision. Considering that the New Zealand government is the majority shareholder in one of the applicant companies, that would seem to be a slight conflict of interest. Hopefully a compromise can be hammered out that both ensures the viability of airline services and protects competition in the market.

Kiwi iWantMyName Continues Product Evolution

ideegeo’s successful launch of iWantMyName as a global domain registrar site and the opening of sites for Germany and the Netherlands last year were exciting milestones in the evolution of iWantMyName into a highly scalable industry-wide platform solution and in the development of our company.

Although our focus was global from day one, we felt it was now time to turn our attention to home. We had many requests from our friends to establish in the New Zealand market, because of our unique service offering, friendly user interface and great customer support. Finally we just had to say yes and so we now have a dedicated Kiwi site offering fixed prices in New Zealand dollars.

The Kiwi iWantMyName has by far New Zealand’s widest range of domain extensions, many of which are unavailable from other local domain registrars. Examples of exclusive domains include the recently launched .TEL and .ME suffixes plus interesting country code top-level domains from all over the world such as .LI (Liechtenstein), .IO (British Indian Ocean Territory) and .FM (Federal States of Micronesia).

Customers from the existing site can use the same login details to access their accounts across the iWantMyName platform suite. We also offer the same free services on our Kiwi version so that you can hook up your own domain to customise a wide range of great web applications such as GMail, Blogger and Zoho. In the very near future we also plan to add some cool new Kiwi-made services that we really want to support.

We think it is appropriate that the launch of a new product should be celebrated with some special offers. So until the end of February we are offering new .COM, .NET, .ORG and .NAME domains for only $19.90 NZD plus .INFO for $9.90 NZD. We are also able to offer a FREE one year extension if you transfer your existing domains across to iWantMyName NZ. Transfers can be handled from your personal dashboard once you join up. Please note that all domain prices quoted on the Kiwi site are GST exclusive and that we provide full GST invoicing to all our valued customers.

Can Private Equity Rebalance?

Private equity firms in the U.S. alone are reportedly sitting on over $US 1 trillion in funds whilst at the same time economies are being hollowed out as cash strapped businesses go to the wall. But a surge in buyouts in the first quarter of 2009 suggests that equity investors are emerging to pick over the fallen carcasses of once great firms. In Asia, private equity firms successfully raised over $US 50 billion in 2008. Now with the faltering of several leading equity firms in Australia, there has been a resurgence of interest by Asian firms in that market especially.

It remains to be seen how the rebalance of power across Asia-Pacific will impact on New Zealand. But one thing remains certain, private equity deal-making is alive and well across the region and New Zealand will not go untouched. One example of this is the sale of accounting software provider MYOB. Although critics claimed at the time the price was too low, there was an ironic twist when founder Craig Winkler reinvested some of his winnings in a direct competitor. Small shareholders in such target firms would be well advised to remain alert to any further machinations that may impact on the value of their holdings.

What is clear at present is that there is generally a dearth of quality assets on the market. Profitable medium sized firms are hard to come by, but this situation will change. In particular family owned firms that survive the recession may attract more attention as their baby boomer owners head into retirement and look to offload. At the other end of the scale relatively new companies, that have a unique value proposition, may begin to look more interesting. But current indications are that such businesses are few and far between and even some local venture capital firms are struggling to place cash.

So what does this mean for New Zealand technology companies? Asia-Pacific looks like becoming the “buyout destination of choice”, according to the Asia Venture Capital Journal. Deal flow was up in the first quarter of 2009 and (surprisingly) the more developed economies benefitted most, as opposed to the emerging economies of China and India. The implications of that fact are that eventually a bunch of cashed up former business owners from around the region, like Craig Winkler, are going to be looking for new projects.

The Apprentice

Almost one year into my “apprenticeship” as a technology start-up CEO I found it was time to take stock of achievements, critically reassess my position and then plan for the next phase of growth. Balancing the capital requirements of the business has proven to be the biggest challenge.

I read somewhere recently a suggestion that there is “an inverse relationship between the amount of capital available and the level of creativity in a start-up.” To some extent this is true. With too much capital in the bank there is a lot less urgency to get your product built and consequently innovation happens at a much slower pace. But when a company needs to find the cash to pay for rent and employees each month, building a brand and growing revenue certainly come into much sharper focus.  However, bringing in an investor should not be a priority at an early stage because it may result in divesting too much control at a very low price. If possible, put your assumptions to the test first.

On the other hand, running a capital starved business is like flying an aircraft without enough fuel in the tanks. You won’t make it to your destination and you may well end up wrecked in some farmer’s turnip field. Hence, we train pilots to load sufficient fuel for the planned flight plus an additional fixed margin for safety. Most experienced pilots add a little extra on top of this, especially if the weather is inclement. When the economic climate is adverse, it is not the time to be short on financial fuel.

We’ve made huge progress since we launched iWantMyName last December and I’m very proud of what the guys have already achieved. The good news for ideegeo is that the site has growing revenues and is only the first of several spin-off projects as we build and test our internal capability. The bad news is that we have entered a mature market in a highly competitive industry with this first project. That means we have no choice but to offer the best user experience and market our product powerfully.

Something else I read recently. “Overnight success” can take years, especially in the technology sector. That is why I realised that it was time to sit down, readjust my self-imposed frame of reference and plan for more growth (and more hard work). If consumers see value in the product, cash will continue to flow into the business; if not then it will soon become an expensive hobby. The key will be to add smart services that differentiate iWantMyName from other offerings in the market.

Boardroom Boo-boos Beggar Belief

Questions being raised over the standards of corporate governance in Australia are a timely warning to boards and CEOs on this side of the Tasman.

The shock departure of ex-All Black and Kiwi Rhodes Scholar David Kirk from Fairfax demonstrated how far the rumblings of discontent in Australia about executive and boardroom performance have spread. With commodity prices on the wane and a global recession lapping at Australia’s shores, corporate decision-making has come under more intense scrutiny. Until now shareholders have enjoyed booming profits and were happy to go along with board decisions on strategy and governance. Only now are they being awakened from their stupor.

David Kirk may simply be a scapegoat for an industry struggling to come to terms with the proliferation of web based media services that have nibbled away at a previously dominant market position. But there are probably more fireworks to come. Outspoken Telstra CEO Sol Trujillo might have a blowtorch turned on him after his antics in Canberra estranged the new government and resulted in Telstra being excluded recently from bidding in Australia’s broadband network lolly scramble. Colourful Qantas board member and recently retired CEO Geoff Dixon might also be in the gun having presided over an alleged collusion scam with other airlines, the costs of which have yet to appear on the books.

Episodes like these raise serious questions about accountability and shoot dead the concept of sacred cows when it comes to board appointed management. In New Zealand we only need to look as far as our largest exporter. Fonterra chair Henry van der Heyden in a recent radio interview calmly discusses shareholder value offsets and the non-impact of San Lu on the company’s overall global strategy. No mention of the enormous human cost due to poor management practices inherent within China’s milk supply chain. For $4 million per annum in salary, you’d think their CEO would have taken a more active interest in how quality control and risk would be handled in their China venture.

Opening Fonterra’s share register to the public would be one step towards greater accountability and it would allow the wider public to participate directly in one of our few truly global entities. Fonterra’s farmer shareholders seem unlikely to sanction for change however, even though their conflict of interest as both suppliers and beneficiaries smells rather like a fresh cowpat. In that kind of perverse culture, it is unsurprising that the company has been all but silent on the fallout in China.

Prime Time for iPredict

I was so pleased to see iPredict’s Matt Burgess fronting up on the TV3 Leaders Debate this week with a demo of a political market trend forecast using their software product. Getting their website address in front of a few hundred thousand eyeballs won’t have done them any harm at all.

I’m pleased for two reasons. Firstly, Matt is a good guy, with an intriguing product and is doing a great job as CEO of iPredict in getting the company market recognition through media, events and the web. Secondly, it validates our decision to select him as one of the presenters at the Unlimited Potential Wellington to the World event on Friday. iPredict fitted our definition perfectly in that they had a novel and scalable global opportunity but still with a relatively low profile. Moreover, iPredict is a great example of academic research that has crossed over into the mainstream business arena.

In fact the first half of our show on Friday is devoted to linking academia with entrepreneurs and investors downtown. It’s an area that we have traditionally struggled with in New Zealand. Academics normally deliver to other academics and are focussed on building a body of research during their careers. Commercialisation of research is generally a secondary consideration. That’s a shame, because more than ever we need to be moving away from selling milk fat and instead moving towards selling knowledge to pay our way in the world.

It’s a cultural issue. In southern California smart post-graduate technology students are queuing up to attend seminars on how to structure their start-up businesses and court investors. Sure, the days when even a half decent business plan would get some crazy 20 year old funding for his pet project are gone. But that’s a good thing. Money migrates to value in the end and that’s where New Zealand creativity has an advantage. But we first need to overcome the barrier of distance to major capital and consumer markets; which is why we’ve partnered with KEA to take the event global.

It’s perfect that iPredict is a successful Victoria University spinoff company. There are other interesting projects emerging from Vic that could go the same way if we can help attract entrepreneurs and capital in that direction. That is why we are taking some first steps with W2W to strengthen bridges between academia and business here in Wellington.

For an entertaining forecast of the election outcome from our friends at iPredict and a look at some other cool ICT projects around town, make your way to the Wellington to the World event from 3.45pm on Friday 7th November at the Town Hall in Wellington. Registration essential.

Almost Free Software – Have Your Cake and Eat It Too

The debate over whether or not software should be made freely available has been around for a long time. Can we afford such idealism? Perhaps there is a middle ground.

There are two different threads when we talk about “free software”. The first involves releasing actual code for public use; the second discussion is about providing free access to an application but without giving away the code. The latter is obviously a lot more manageable these days because of the SaaS model. But why would you bother? If you have to pay for employees, premises and some hosting, you better make sure there is some revenue coming in.

On the other hand, the fact that I can even publish this article here today is a direct result of the “crowd sourcing” approach that has spilled over from the open source community into the development of social media. Also, I’m sure we can all think of plenty of businesses which gave away their software and then built a lucrative consulting revenue stream around it. So there are clearly some tangible benefits to encouraging the open source philosophical movement to flourish and grow.

There was a great discussion thread about the (non)monetisation of Web 2.0 over on Diversity recently. Giving your product away, before you can figure out how to make money out of it, is the quickest way to destroy value in any business argues Ben. I agree. Using venture capital to prop up an ultimately unsustainable business model with over-inflated valuations is an abomination only one step removed from pyramid selling. But, maybe it’s how you go about giving away your software that matters.

We have a couple of products in the pipeline at ideegeo but with two completely different marketing and monetisation strategies planned. The first is a mobile application targetted at a niche audience which we will sell for quite a low margin through an online store. I will be overjoyed if we break even on the time spent developing it. However, it will raise our profile and demonstrate capability. The second product will be given away completely for free through our own website. The hook is that we get paid a small amount every time someone actually uses it (which is often). The clients will happily pay because the application demonstrably drives more business their way. If the application needs improvement, we will also get very rapid feedback.

My point is that the Internet has completely revolutionalised both software development and marketing. If you develop “almost free” software and then make it available to a very large number of users at only a very modest cost, everybody wins.

Next month Unlimited Potential are proudly hosting Richard Stallman as special guest speaker in the lead up to the Geeks, Games and Gadgets ’08 event.

Stallman founded the GNU Project an open source software development project that contributed substantively to the genesis of the Linux operating system. At times controversial, the title of “open source guru” seems quite aptly applied in the context of Stallman’s thought leadership. Social media and especially Wikipedia had not even been conceived of at the time of this 1996 interview, but it illustrates his visionary abilities.

Whatever your position on open source or the debate around competing public licensing systems, this seminar is likely to be a thought provoking one. Registration is highly recommended for what will no doubt be a popular session.

Can Business Get Its Head Around Social Media?

Developer meeting held in SmallworldsFrom virtual worlds to dating sites to online gaming, there’s no denying that people are spending more time than ever before engaged in digital social media of some form or other. It comes as no surprise then to learn that, in the first half of 2008 alone, venture capital firms invested US $345 million in virtual worlds or related enterprises. As more sophisticated business models emerge around virtual economies, it has become clear that there is now real money to be made online.

In a world where travel costs are spiralling ever upwards, more and more people are opting to stay at home for entertainment. Does it mean that shopping malls, movie theatres and public bars are sunset industries, to be replaced by bits and bytes residing on a remote server? Perhaps not just yet, but rarely a day goes by that we don’t hear about the launch of a new web community, social mash-up or cool online game of some sort. 

Unfortunately research suggests that about 75% of these communities will never even achieve 1000 users. We set up ION almost six years ago and only recently celebrated our millenial sign-up. In any event there must be a limit to the proliferation of online social networks because once users become uber connected there is far less incentive to keep signing up to new networks. As network density increases, the advantage gained by the user decreases.

So when even Bill Gates gives up on his Facebook account, it really makes you question how much value large corporates see in social networks and virtual worlds. Some people continue to question whether or not virtual spaces will ever become meaningful in an enterprise setting. Although businesses have been using applications such as Sharepoint and Lotus Notes as knowledge management tools for years, corporates are still struggling to make the quantum leap into virtual communities and interactive game type environments as forms of collaborative business tools.

On the other hand corporate dinosaurs are belatedly waking up to the power of social media as a marketing tool. This videocast from the Harvard Business School offers advice to large companies about managing the change processes around implementing social media strategies. Now – I’m pretty sure I don’t need to belong to a web community for kitty litter or some other weird or random social network. I would however join a business network or film club that had an online community component for example. Whatever spins your wheels, I suppose.

New Zealand has a couple of promising virtual world ventures of its own. Smallworlds launched recently with a high quality browser based world for young adults that leverages advances in Flash based functionality and graphics. Socialise was an early entrant with a dating and friendship focus. Socialise is a regional community that has secured advertising sponsorship as a revenue stream, whilst Smallworlds is pitched at a global audience and intends to establish a virtual economy within the site.

Smallworlds users create and populate their own individual home spaces, which raises the question of identity portability. If players participate in several communities, plus own a Facebook or MySpace page, how can they manage their global identity? For dedicated social networkers with multiple sites to share and manage, aggregating all those links at one web address would seem to make sense. That’s a problem that we hope to address in a creative way very soon at ideegeo.