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Etailers will need to grow to counteract the slowing economy October 31, 2008

Posted by jeremyliew in Ecommerce, recession.
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Earlier this month I wondered which companies might prosper in an advertising recession.

But some companies might do more than survive – they might prosper. Companies that buy advertising (rather than selling it) will find that they can now buy advertising more cheaply than previously.

Ecommerce companies, subscription businesses, lead gen businesses and online game companies are all buyers of online advertising. In the last advertising slowdown, companies like Expedia, Zappos, Quin Street, Lending Tree, Lower My Bills, Netflix, Classmates.com and Ancestry.com were all able to grow to over $100M in revenue by taking advantage of cheap media.

Will history repeat itself in this recession? It is hard to know. Certainly lower CPMs can lead to lower customer acquisition costs if all else is equal. But the difference between this recession and the last one is consumer confidence, which is markedly lower today than in the 2000-2003 time period. As a result, there may simply be less buyers out there to acquire.

So far it is looking like history may not repeat itself. As I noted earlier this week, consumer confidence is at an all time low, half the level of the trough in the last recession.

I recently did an informal survey of etailers to see what impact the economic turmoil has been having on them. The results were generally pretty negative. Most etailers that had been in business more than 24 months were seeing results down from their projections since the middle of September. Consumers, watching the decline of their net worth both in the stock market and in their homes, have been deferring many of their purchases. Some of the more dire responses:

“Our August Sales were X. Our September Sales, 2X/3 . The first ten days totaled X/3 but then right after that, sales dropped precipitously for the whole rest of September. My October Run Rate is X/2. My last year October sales were 4X/3. Big difference. Right after all of the banks went bankrupt and the media frenzy kicked in scaring everyone from buying, sales completely tanked to such a low level I could have never imagined it. This is not a recession for me…more of like a depression!”

“We got our asses handed to us starting about [middle of Septemer]. Before that was Ok. And we checked with our vendors who sell through [discount department store] and [big box retailer] and they confirmed — [discount department store] down 45% week over week starting about last monday, [big box retailer] down 35%.

So for us . . .
4 weeks ago: fine
3 weeks ago: fine
2 weeks ago: conversion rates dropped 40%, along with revenue/transactions
past week: the drop has stuck around.”

The exceptions to this trend in the survey are businesses that are actively adding SKUs to their product offering. Growth is the antidote to the slowing economy. This growth could come from adding new stores or product lines, new distribution channels or marketing channels, but it won’t come from the overall rise in online spending that has bouyed the category for the last few years.

Consumer confidence is at an all time low – factor this into your 2009 planning. October 29, 2008

Posted by jeremyliew in business models, Consumer internet, economics, start-up, startup, startups.

The Consumer Confidence Index (CCI) measures how optimistic consumers are about the state of the economy. Specifically, it measures how consumers are feeling about:

1. Current business conditions.
2. Business conditions for the next six months.
3. Current employment conditions.
4. Employment conditions for the next six months.
5. Total family income for the next six months.

Notes Investopedia:

In the most simplistic terms, when [CCI] is trending up, consumers spend money, indicating a healthy economy. When confidence is trending down, consumers are saving more than they are spending, indicating the economy is in trouble. The idea is that the more confident people feel about the stability of their incomes, the more likely they are to make purchases.

The Conference Board, which measures the CCI, announced yesterday that:

The Conference Board Consumer Confidence Index™, which had improved moderately in September, fell to an all-time low in October. The Index now stands at 38.0 (1985=100), down from 61.4 in September…

Says Lynn Franco, Director of The Conference Board Consumer Research Center: “The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers’ confidence. The decline in the Index (-23.4 points) is the third largest in the history of the series, and the lowest reading on record. In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the fourth quarter is off to a weaker start than the third quarter. Looking ahead, consumers are extremely pessimistic, and a significantly larger proportion than last month foresees business and labor market conditions worsening. Their earnings outlook, as well as inflation outlook, is also more pessimistic, and this news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season.”

As a point of comparison, the CCIs most recent peak was at 112 in July 2007. It is down by two thirds since then. The last CCI trough was at 61 in March of 2003, down from a peak of 144 in May 2000. This time around consumer are far more concerned than they were in even the depths of the last economic slowdown. Historical CCI stats are available here.

All consumer facing companies, whether ad based or commerce based, should bear these numbers in mind when planning for Q4 2008 and for 2009.

Applying game design to building apps (and games!) October 28, 2008

Posted by jeremyliew in game design, game mechanics, product management, usability.

Dan Cook has posted the slides of his recent talk, “The Rescuing Princess Application“:

My talk was on building an application that rescued princesses. The goal was to give interaction designers some insight into how game design might be applied to the domain of more utilitarian applications.

The notes fields are heavily annotated with more details about each visual. For those of you who attended, this deck also includes a third section on game design patterns that I didn’t have time to cover in the time allotted.

This is a terrific presentation for product managers and designers, as well as for people building web games. Read it – it will take you about 10 minutes

Also, check out Dan’s list of recommended reading:

Dan’s blog
Chemistry of Game Design
What activities can be turned into games?
A Theory of Fun, Raph Koster
Shufflebrain: Putting the Fun in Functional

Dan particularly recommends the Shufflebrain presentation. The Shufflebrain team recently launched Photograb*, their first game of their own, that applies many of their principles of game design. Check it out on Facebook.

* Lightspeed provided the seed round of financing for Shufflebrain.

Some tips on cost reduction October 26, 2008

Posted by jeremyliew in cost reduction, startups.
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PE Hub has an interview with one of the cofounders of Sherwood partners, a company that has helped close or restructure almost 200 startups. It includes some specific advice for startups looking to extend their runway.

On cutting once, or cutting multiple times:

Once you know who is getting axed, what’s the best way to do it?

If you do cut, you only try to cut one time. You cut deep and sharp because you have to build morale up and everyone left has to be comfortable that they have a job.

Meaning you have to make all of your cuts at once? Can’t it be an iterative process?

I’ve been doing this for 30 years and if you do it strong and deep one time, everyone complains for a period of time, then gets over it. Also, I’ll be honest with you, I’ve terminated people and two weeks later, I’ve brought them back and apologized for cutting too deep. Usually, they come back. It’s acceptable to be human as long as you’re not a jerk.

On non-labor cost reduction:

Are there other, less painful, ways that can startups can reduce costs right now?

You can cut the food that you’re giving employees. You can ask people to take a small reduction in their salary — or a large cut if necessary. You can stop giving away free services. The beta customers that are costing you 12 percent of your employee base — it’s time to ship up or shape out and you cut ‘em.

Look at your electric bill. Are you running your utilities at night? Stop. You can negotiate with your phone service provider. We do it all the time, negotiate debt on unsecured creditors. It’s either: get nothing, or get something. People don’t want to litigate and sue. I go to companies and sometimes we get savings of 50, 60 cents on the dollar for a going concern.

What about real estate? Should people be looking for cheaper rents?

Look, there’s plenty of real estate right now. Even Palo Alto is starting to have vacancies. It’s not about where you look. If you’re honest with your landlord, they might go ahead and give you a discount for a year and tag [on the savings] to the end of your lease. Or they might say, “Okay, look, I’ll give you a longer lease for less money per month and we’ll blend the rate.”

Now, can you do this when a market is hot? Absolutely not. But right now, do you think everyone isn’t a deer in the headlights? No one anticipated this tsunami. Anyone who says they saw this coming is a liar.

There is lots more at peHub.

Three tips on Search Marketing October 22, 2008

Posted by jeremyliew in marketing, Search.

Marketing Sherpa recently surveyed around 2000 search marketers for their 2008 Search Marketing Benchmark Guide. Some interesting tidbits from their summary:

Focus on long tail keywords:

Search is orienteering, not teleportation:

Well, if you actually look at the distribution of how many searches are out there based on how many words long they are, and you also look at the distribution of where marketers are putting their money, what you’re seeing is that almost 50% of searches are one or two words, and that same trend tends to follow in dollars spent.

But, the interesting thing is that, if you actually pay attention to the way people convert and use the search engines, what they’re likely to do is: start out with a simple search, such as “MP3 player”. So, they get the search engine results page, see that there are multiple brands of MP3 players, and then from that, refine their search. And, maybe when they first made the search, they didn’t realize just how many MP3 brands were out there. But then, once they do the search, they realize that they’re really just interested in, let’s say, Apple iPods, at which point they refine their search, do three- or four-word search, such as, “Apple iPod in Chicago for sale”.

So, once they do that, they’ve massively narrowed the field and get much more relevant search results. And those relevant search results result in much higher likelihood to click and much higher likelihood to convert after the click.

Mention your brand in your search marketing.

STEFAN TORNQUIST: … And this addresses one of the big questions that’s really been going back and forth between the search engines themselves and agencies, and, of course, the big brands, which is, does search have a brand effect? This is a chart that really requires some explanation. Tim?

TIM McATEE: Yeah. Well, if you’re familiar with a dynamic logic or insight express brand effectiveness study– I think a lot of people who have worked in online advertising have seen these over the years. But what they do is, they go through and they compare a simultaneously collected control and exposed group, so that exposure to the advertising is really the only variable in between these two groups. And, then they attribute any difference between the control and exposed to the advertising, since there’s actually no other difference between the two.

So, this chart in particular, this was a brand effectiveness study done looking just at search engine results pages. And, it was conducted by Enquiro for a major cell phone manufacturer. This particular question is actually looking at the likeability of the brand. So, they’ve actually asked, which of the following brands do you like best? Which do you like least? What we’re seeing is that the brand came in at 49% liked for control, but then increased, from 53% to 68% to 77% with multiple and all these different levels of exposure.

So someone who just saw a side-sponsored link with just kind of a short…(inaudible) stashed off on the side, right there, that bumped it up a little bit there from 49% to 53%. When the generic keyword or the branded keyword was in the top organic spot, we saw a massive jump there from 49% all the way up to 68% or 74% when it was in the top-sponsored as opposed to the side-sponsored. But the top-sponsored and the top organic, it jumped all the way up to 77% and 72%.

So, the point being that, just being there on the page is definitely going to have some effects on the way people perceive your brand. Being in the top natural spot is huge. I think it’s kind of omission if you’re not there. If someone is to search for, say, cars, and your car brand doesn’t come up, I guess that just says something about your brand, that you haven’t optimized your search. So it really has to be there.

These are just three of the nineteen slides in the presentation. The full presentation is here and the transcript for the presentation is here; worth checking out.

IMVU founder’s framework for digital goods: three key questions October 20, 2008

Posted by jeremyliew in digital goods, game design, game mechanics, games, games 2.0, mmorpg, virtual goods, virtual worlds.

Eric Reis, one of the co-founders of IMVU, posted last week on the three key decisions you have to make when thinking about virtual goods business models:

UGC or First Party content?

First Party – more control, but higher costs and harder to anticipate what users will want

UGC – Massive breadth of content, but have to put systems in place to deal with adult content and copyrighted content

Subscription or a la Carte payments?

Subscriptions – Greater game balance between rich and less rich players, lower fraud rates

A La Carte – Easier to monetize players without credit cards (e.g. teens)

Merchandising or Gameplay?

Gameplay – Virtual goods are functional, part of the core game mechanics, and confer benefit in the game. Demand is driven by game mechanics alone, and requires a delicate balance to ensure that players with money do not always beat players with time, skill and passion.

Merchandising – Virtual goods are not just functional, but also associated with self expression or attention in a noisy environment (see my previous post on the three use cases for virtual goods). This creates potential for greater demand for virtual goods, but requires the creation of a marketing and merchandising capability in the company.

Reis believes this framework can be used to describe any virtual goods business:

You can use these three questions to analyze existing businesses. For example, IMVU is a user-generated, a la carte, merchandising product. Habbo is first-party, a la carte, merchandising. Mob Wars is first-party, a la carte, gameplay. WoW is first-party, subscription, gameplay.

Read the whole thing.

WSJ says experimental ad budgets are getting cut October 15, 2008

Posted by jeremyliew in advertising, virtual goods.

Last week I posted on which online media companies will survive the ad recession and noted that experimental budgets are the first to get cut. Today’s WSJ finds evidence that this is already happening:

In recent years, marketers have set aside a portion of their ad budgets to experiment with digital technologies such as Web video, mobile phones, gaming and virtual worlds. But with broader economic turmoil reaching Madison Avenue, these “experimental” budgets are among the first to hit the cutting-room floor.

Chrysler LLC has already slashed its experimental ad buys. With each ad dollar facing additional scrutiny, especially in the hard-hit auto industry, these ad buys will now make up about 5% of the auto maker’s marketing budget, down from as much as 10% in previous years, says Deborah Meyer, Chrysler’s chief marketing officer.

In good times, the maker of Chrysler, Dodge and Jeep brands tapped technologies like gaming and mobile to build awareness of its vehicles. “We won’t experiment in a lot of things that are fun to have. All of our dollars have to go to hitting in-market shoppers with the appropriate media,” Ms. Meyer says.

Areas like mobile, virtual worlds and widgets are expected to be hit particularly hard, as it remains unclear what kind of impact ads in these media have. These campaigns often reach a small number of people, and standard measurement systems have yet to be developed. “When we get into the need to drive results, you can’t spend money on the experiments and hope to keep your job and get your sales goals,” says Peter Kim, senior partner at Dachis, which advises marketers such as Philips Electronics NV’s Philips Healthcare and Johnson & Johnson on marketing strategies.

If you’re trying to sell advertising that isn’t standardized, you should read the whole article.

As an aside, the article suggest that in game advertising and virtual world advertising will be affected as a subset of this trend, making virtual goods even more central as the business model for games and virtual worlds:

Ad executives say creating an entirely new form of advertising to put in untested places like virtual worlds — or three-dimensional online computer games — may not be worth the effort in tough advertising times. “Virtual worlds are probably one of the things that haven’t been proven effective just yet. I can’t see us selling virtual worlds to anybody right now,” says Lars Bastholm, an executive creative director at independent digital marketing shop AKQA.

Which companies might prosper in an ad recession? October 13, 2008

Posted by jeremyliew in advertising, Ecommerce, freemium, gaming, Lead gen, recession, subscription, virtual goods.

I have previously posted on which online media companies will survive the ad recession. Clearly, all online media companies will feel the advertising recession, but some companies will hold up better than others.

But some companies might do more than survive – they might prosper. Companies that buy advertising (rather than selling it) will find that they can now buy advertising more cheaply than previously.

Ecommerce companies, subscription businesses, lead gen businesses and online game companies are all buyers of online advertising. In the last advertising slowdown, companies like Expedia, Zappos, Quin Street, Lending Tree, Lower My Bills, Netflix, Classmates.com and Ancestry.com were all able to grow to over $100M in revenue by taking advantage of cheap media.

Will history repeat itself in this recession? It is hard to know. Certainly lower CPMs can lead to lower customer acquisition costs if all else is equal. But the difference between this recession and the last one is consumer confidence, which is markedly lower today than in the 2000-2003 time period. As a result, there may simply be less buyers out there to acquire. Compete recently noted the marked drop in “in market auto buyers” over the last two years for example – down 37%:

Certainly, consumers are deferring “considered purchases” including homes, cars and other big ticket items. Etailers selling “necessities” that cannot be deferred, such as diapers or business cards, will do fine. The question is what will happen to the demand for small ticket consumer discretionary spending. Starbucks might be considered a proxy for this sort of spending. Unfortunately, the news for Starbucks isn’t good. Notes Seeking Alpha:

There was a time when getting a coffee at Starbucks Corp. (SBUX) – whether a basic “tall bold” or a souped-up venti concoction – was considered a relatively cheap treat, though those of us with a daily Starbucks habit might think otherwise.

However, a report from RBC Capital Markets analyst Larry Miller indicates that even that daily cup of store-bought java is one of the victims of the credit crunch. Mr. Miller lowered his 2009 earnings estimates – to $0.90 from $0.95, and said:

[The move] reflects our proprietary survey work, which suggests Starbucks sales continue to weaken as consumers are changing their habits and brewing more coffee at home.

This does not bode well for small ticket discretionary spending.

One potential brightspot may be gaming. The games industry has historically been considered counter cyclical. The argument has been that for $50s you can buy a game that will give you 50-100 hours of enjoyment, versus $10 for a 2 hour movie or $5 for a magazine that you’ll finish in an hour. Free to play games make this argument even more compelling. Free to play games may be able to take advantage of cheaper customer acquisition costs in an advertising recession.

For other forms of discretionary small ticket spending, the jury may still be out.

Usability testing slows down launch but speeds up success October 10, 2008

Posted by jeremyliew in A:B testing, product management, UI, usability.

I hate hearing the term “user error”. Good usability testing should eliminate most user error. I am a big proponent of A:B testing with live users. However, often a small usability test can quickly highlight any big problems before you go live so that you are working from a better starting point.

Many developers like to quickly prototype and push code out quickly, and I am a fan of this. However, if taken to an extreme, it can lead to products based on incorrect assumptions. Noah Kagan notes that at Mint:

We did surveys, user testing and psychological profiles. This was extremely useful in identifying the types of users we may have on the site and especially for seeing how people use the site. I never really did this before and was AMAZED how people use the site vs. what I expected

As Noah points out, usability testing can be easy and cheap. What it requires is simple:

1. Determine what you are trying to test. This is usually a list of the form, “How easy is it to complete task X?”

2. Recruit representative users. If you’re testing a new user experience, Craigslist is fine for this [Tip – if your core user is a middle america, . But make sure that your testers are truly representative. Your existing user base is another good place to find testers, but make sure that you’re not just listening to just your loudest users. The key is to pre-qualify the users to ensure that they are “average”.

3. Do the test. First ask them what their first impressions of the site are. What captures their attention? What would they do first? Ask the users to speak out loud during the session, explaining what they are thinking at all times. Then ask them to complete the tasks that you have listed. Watch and listen. Note what they find easy, what they find confusing, and what they don’t find at all.

This can be incredibly frustrating for you. You’ll think that some things are “obvious” that are not, or you’ll be shocked to see how unfamiliar users are with your site, or even with how browsers work. Remember that your role is to learn, not teach. Don’t touch the screen, the keyboard or the mouse; don’t point out how to do anything (even when they are “doing it wrong”, even if it is a “basic mistake”). You can provide encouragement and reassurance, or ask questions about why they did something, but that is it. You’ll be surprised at what you see.

The key is to internalize that there is no such thing as “user error” and there are no “stupid users”. If users are having problems achieving the tasks that you laid out for them, then the fault lies with your site. You’ll need to review your UI.

I prefer to do these usability tests over webex with users at their own computers. This makes the interaction as natural as possible for the testers. As an added bonus, you can then record both their screencast and the phonecall for later review.

Usability testing does not have to be a lot of work/ You only need to test five users to uncover most usability problems.

The most striking truth of the curve is that zero users give zero insights.

When you’ve completed your usability test, go back and makes some changes, but then come back and test again:

You want to run multiple tests because the real goal of usability engineering is to improve the design and not just to document its weaknesses. After the first study with 5 users has found 85% of the usability problems, you will want to fix these problems in a redesign.

After creating the new design, you need to test again. Even though I said that the redesign should “fix” the problems found in the first study, the truth is that you think that the new design overcomes the problems. But since nobody can design the perfect user interface, there is no guarantee that the new design does in fact fix the problems. A second test will discover whether the fixes worked or whether they didn’t. Also, in introducing a new design, there is always the risk of introducing a new usability problem, even if the old one did get fixed.

Also, the second test with 5 users will discover most of the remaining 15% of the original usability problems that were not found in the first test. (There will still be 2% of the original problems left – they will have to wait until the third test to be identified.)

Finally, the second test will be able to probe deeper into the usability of the fundamental structure of the site, assessing issues like information architecture, task flow, and match with user needs. These important issues are often obscured in initial studies where the users are stumped by stupid surface-level usability problems that prevent them from really digging into the site.

This can all feel like overhead when all you want to do is launch. Trust me, it isn’t overhead. Getting this stuff closer to right the first time will only help you reach your goals faster.

Ad recessions past and present October 8, 2008

Posted by jeremyliew in advertising.

I posted earlier this week on which online media companies will survive the ad recession. If you have any doubts about the coming dip, check out the following chart showing how advertising growth has dipped in every past recession from Lehman Brothers/Barclay. The light blue line shows advertising growth rates, and it dips every time there is a recession (the red blocks):

Click on the image to see a larger view.

[Via Silicon Alley Insider]

Of course, online advertising will benefit from the secular shift from offline to online, so it will likely continue to grow, albeit at a slower rate. The latest ThinkPanmure research report on online advertising notes:

The Internet Advertising Bureau released its 2Q08 revenue report showing a material slide in display revenue, which grew 5% Y/Y in Q2—down from 14% Y/Y in Q1. Search continued to take share, maintaining 24% Y/Y growth through 1H08. Total online advertising grew 13% Y/Y during 2Q, down from 18% growth in Q1 and declining sequentially for the first time since 2002. Our research suggests that the media recession is likely to last well into next year. As such, we are now forecasting that online advertising will grow 3% in 2009, with search up 13% and display down 5% Y/Y.

Profy is more optimistic and proffers some anecdotal evidence, but I’m going with the stats over the stories on this one. Be ready.