Investing in Loyalty August 2, 2012Posted by peternieh in 2012, Consumer internet, startups.
Tags: consumer, funding news, loyalty
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“Customer loyalty is the single most important driver of growth and profitability. – Harvard Business Review
Today, we are excited to announce our investment in FiveStars. Founded by Victor Ho and Matt Doka, FiveStars makes it easy, and affordable, for retailers and merchants to reward their most valuable customers. It is the first loyalty offering that integrates directly with over 90% of existing point of sale (POS) systems and is already being used by hundreds of merchants.
So why loyalty and what makes this company and market interesting to us?
In the face of economic pressures, consumers are thinking more carefully about every purchase, and retailers now face more competition than ever. However, smart retailers are facing these challenges and actually growing their businesses, and bottom lines, by retaining their most loyal customers. A recent student by Harvard Business School found that a 5% increase in customer retention yields an increase in profits between 25 – 100%.
The key, however, is how to retain these customers without increasing complexity and costs. As a former loyalty consultant at McKinsey & Company, Victor Ho has a keen understanding of the challenge that retailers face and has delivered a product that not only meets those needs, but also does it in a way that works seamlessly within their existing business structure and is frictionless for consumers to adopt. It literally “slides in.”
FiveStars offers consumers a single card that they can use to earn rewards for everything from picking up coffee to getting a massage without the hassle of keeping track of multiple cards. A consumer registers once by just giving their phone number and then simply provides the card to merchants on checkout. And because the company integrates directly and easily with the POS, retailers can be up and running with FiveStars in literally minutes. No extra equipment is required, like iPads or smartphones which add to complexity and decrease adoption. Furthermore, Five Stars allows merchants to track spending habits and better personalize promotions and rewards.
The proof is in the pudding, and the company has already signed up several hundred merchants in its first several months of selling with very little marketing or advertising. They have developed a winning formula and with the new capital will be looking to accelerate their go-to-market activities.
It’s a great product, built by a great team and addressing a huge market. We couldn’t be happier to partner with them as they think big and move fast.
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2010 Consumer Internet Predictions December 11, 2009Posted by jeremyliew in 2010, Consumer internet, predictions.
Once again, Lightspeed is going to go on record and make some predictions for 2010, in the areas of Consumer Internet, Mobile, Cleantech and Enterprise. I am leading off with our 2010 Consumer Internet Predictions, with my partners posting the other predictions coming over the course of the next week or so at the Lightspeed Blog.
This is the fourth year that I’ve been making predictions for the consumer internet.
First, let’s take a look at how I did on my predictions for 2009:
1. Consumers seek cheap thrills
Grade: A. I predicted an increase in time spent on social networks and on games. In fact, social games have been the breakout story of 2009.
2. Trading real money for virtual goods
Grade: A. Virtual goods has been the business model powering the growth of social games.
3. Web 2.0 leaders pull further away from the pack
Grade: B. Facebook has reached cashflow positive on huge revenue growth, but other web 2.0 leaders like imeem and ilike have had a bumpier ride.
4. Online ad prices continue to fall, alternatives help make up some of the ground
Grade: B. CPMs have continued to fall and behavioral targeting, the best hope for arresting the slide, is under a cloud from the FTC.
5. Getting serious about monetizing non-U.S. traffic
Grade: C. Most attention is still focused on the US.
Overall a B+ average – that’s not too bad! Now on to new predictions:
1. Social games overflow out of Facebook.
I’ve said before that I think that social gaming is a tactic, not a category. 2009 was the year that social games overran Facebook (17 of the top 20 Facebook apps by DAU are games as of Nov. 23rd). I think that in 2010, they will overflow Facebook and spill into the open web.
We’ve seen the first indications of this with the launch of farmville.com recently. But Playfish was the first to take a game from Facebook to the open web when they launched petsociety.com in May. And companies like Bigpoint and Gameforge have been launching similar games on the open web for years.
Games optimized for Facebook will need to be modified to work well on the open web. Some of the elements of serendipitous discovery, such as the feed, will be lost, but the ability to use email and IM without any “platform rules” restricting communication channels may offer new channels for growth.
2. Brand advertising starts to move online, boosting premium display, video and social media
The cyclical downturn in advertising made 2009 a tough year for publishers. But, there were some real bright spots amid the darkness. The most promising trend is that brand advertisers are shifting their advertising dollars from offline to online. This is finally following the audience that started shifting several years ago.
The first wave of online advertising was dominated by direct response advertisers. The Internet promised measurability, and direct response was the easiest thing to measure. Brand advertising lift was not so easily measured by click through rate. However, measurement tools from companies like Vizu are improving and allowing brand advertisers to see the lift that an online campaign can deliver in key metrics like brand favorability and intent to buy. Big brand advertiers who will not see transactions consumated online, from Consumer Packaged Goods to Quick Service Restaurants to Big Box Retailers, are spending 10s and even 100s of millions on digital media. This money is starting to flow to publishers and networks with premium display inventory that truly understand the needs of brand advertisers. These needs are quite different from the needs of direct response advertisers, and include safe content, brand metric measurement, real reach and frequency measurement, and guaranteed delivery across a campaign. Ad networks like brand.net, Collective, Specific and Undertone have been riding this wave.
Video content also lends itself to brand advertising because it allows the repurposing of 30- second TV commercials. Video ad networks like BBE, Tremor, YuMe and Brightroll have all benefited from TV ad dollars moving online, following users who are increasing watching their video online.
Social media sites are taking a different path towards capturing these brand dollars. They use integrations and take advantage of the native behavior on social media. Users affiliate themselves with the brands that they like, and implicitly recommend them to their peers. Facebook and MySpace continue to dominate in this category, but companies like Rockyou (a Lightspeed portfolio company) are also winning meaningful campaigns from brand advertisers.
3. Direct Response Advertising becomes ever more efficient
Whereas only 5% of brand advertising is now spent online, around 30% of direct response is spent online. With this volume comes experience and improvement. Direct marketing online is now very sophisticated. Additionally, the ever increasing volume of available advertising online inventory, driven by social media, means that there is always an oversupply. But various flavors of targeting, including demographic, behavioral and contextual targeting, are helping direct marketers to more efficiently reach their target customers. While the FTC may limit behavioral targeting in the future, the trend still favors direct marketers, who are able to acquire customers relatively inexpensively.
I expect this trend to continue through at least the end of 2010, with no near term pressure on advertising pricing. This will continue to favor direct response advertisers who will enjoy relatively low customer acquisition costs. Companies who realize a long lifetime of value from their customers (e.g. gaming companies like Playdom – a Lightspeed portfolio company, subscription businesses like Zoosk and ecommerce companies with a profile for repeat purchase like Gilt) will continue to be able to acquire fully valued customers at a discount in 2010, just as they did in 2009. Other direct response advertisers who realize one-time value (e.g. lead gen, big ticket ecommerce) can also do well, depending on the rate of rebound in demand for their products.
4. Finding Money and Saving Money online
Although the recession is officially over, unemployment is expected to continue to climb and consumer confidence about the current situation is still at historical lows.
Many consumer are looking online to save money, or to find money.
Discount ecommerce, whether in the form of discount shopping clubs like Gilt, Ruelala and Hautelook, single SKU sales like woot, or pay to bid auctions like bigdeal, swoopo or gobid, are all likely to see growth this year. Coupon and discount code sites, like retailmenot and savings.com, will also continue to do well. Local savings like Groupon and Living Social Deals are also showing real growth.
Finding money is harder than saving money. But there are a number of businesses that have helped consumer find sources of cash that they didn’t realize they had. Cash4Gold is the highest profile of these given its Superbowl ad earlier this year, and traffic has continued to grow for that site:
Online payday lending companies like payday one, peer to peer lending companies like prosper and lending club and reverse mortgage companies like golden gateway are all helping consumers to get access to more money. I expect further innovation in helping people find additional sources of cash.
5. Real time web usage outpaces business models
2009 was the year that Twitter really entered the public consciousness. But it isn’t just Twitter that is behind the rise of the real time web. Companies like Aardvark, Four Square, Gowalla and of course Facebook are driving real time content, including location info, and companies like bit.ly, oneriot and collecta are all trying to organize and make sense of the this data.
I expect this trend to continue in 2010. Real time information puts a new spin on categories like user generated content, news, vertical search, local information and Q&A. Unfortunately, these categories have been some of the hardest to monetize.
UGC and news are relatively low CPM categories, and real time is unlikely to change that. Vertical search has shown some success in transactional categories (e.g. travel, shopping) where there is an opportunity to buy traffic and arbitrage, but has not been nearly as successful in content categories (e.g. video search, picture search). Many of the early real time search engines are more focused on content than transactions. Local information has historically been a difficult business. It is an area where there is high demand for content, but cost of sales have been very high. The most successful companies in local have innovated on their sales model rather than on their content generation model. Real-time location info sounds more like a content innovation than a sales model innovation.
Q&A is one area where there may be some real opportunity. In general search, around 30% of queries are transactional, and hence monetizatable. Some real time and mobile Q&A sites are reporting that for them, an even higher proportion of their queries are monetizable (e.g. “Whats the camera for low light?”, “Where can I get a good pizza late night in Noe Valley?”). If this remains true, and if mobile is a key driver of real-time search, then there could be real promise in this use case.
This time next year, we’ll get to look back and see how accurate my 2010 predictions were. I’m hoping for another B+ or better.
Stay tuned for the rest of our predictions over the course of the next week or so at the Lightspeed Blog.
How to measure how well an online media company is scaling. December 8, 2009Posted by jeremyliew in Consumer internet, Digital Media, Internet, media, start-up, startup, startups.
Two years ago I posted about the three ways to grow an online media business to $50 million in revenue. In this article I focused on RPM (Revenue per thousand pageviews, = CPM x sell through rate x # of ad units per page) and drew the distinction between three strategies, and the traffic needed for each strategy to get to scale:
1. Broad Reach, low RPM, traffic in the 10s of billions of pageviews/mth
2. Demographic Targeting, moderate RPM, traffic around 1 billion pageviews/mth
3. Endemic Targeting, high RPM, traffic in the 100s of millions of pageviews/mth
I think using CPM/RPM in this is a useful framework to think about strategy, but it isn’t necessarily the most useful way to think about howe well an online media business is scaling. In practice, most online media companies do not sell out their inventory through direct sales. Because direct sales generates RPMs so much higher than remnant inventory running through ad networks, the amount of direct sales is key.
Direct sales shows real economies of scale. While it is harder and more expensive to sell, support and serve a $1M insertion order than a $10k insertion order, it doesn’t cost 100 times more. Unfortunately, many media startups find that their campaigns are primarily in the 10s of thousands. This creates inefficiency and makes it difficult to scale. It is hard to get to $50M in revenue $10k at a time.
Right now, the key measure that I use to judge how well an online media company is scaling is by looking at quarterly revenue by advertiser. The more advertisers are spending over $100K per quarter the better. I like to see 10 or more advertisers spending over six figures per quarter. This shows that the site has grown beyond “experimental buys” and has become a core part of the advertising mix for a core set of advertisers. These sites are over the hump on scalability of their business as it is much easier to get repeat business from clients who are committed to the site, and to use these reference accounts to drive further sales growth.
What do readers think about this measure of how well an online media company is scaling?
When your brand becomes a verb July 19, 2009Posted by jeremyliew in branding, Consumer internet.
Sunday’s New York Times Week in Review writes about the power of the brand as a verb:
Perhaps nothing better illustrates how far behind Microsoft is in the search engine wars than a recent comment by the company’s chief executive, Steve Ballmer, about why he liked the name Bing for Microsoft’s new competitor to Google.
The name, he told The New York Times, “works globally” and has the potential “to verb up.” That is, some day, Mr. Ballmer hopes, people will “bing” a new restaurant to find its address or “bing” a new job applicant for telling events in his past.
Notes the Times:
The leader among Internet brands turned verbs, of course, is Google. Imagine the glee in Microsoft headquarters if Google lost its trademark protection to genericide. If “google” becomes synonymous with conducting an Internet search, then Microsoft could legally and confusingly advertise by saying: “Use Bing for all of your most complicated googling!”
On the other hand, when your brand becomes a verb, you know you’ve reached mass market consumer recognition, usually a pretty good indicator for value creation. So far the internet brands that I can think of that are commonly used as verbs are Google, Skype, Facebook, Yelp and Twitter (tweet). What am I forgetting?
UPDATE: Digg was a good suggestion
Consumer Internet Predictions for 2009 December 11, 2008Posted by jeremyliew in 2009, Consumer internet, games, games 2.0, gaming, Internet, predictions.
First let’s take a look at how I did on last years predictions:
1. Social Media advertising, Online Video advertising and In-Game advertising start to become scalable.
Grade: B-. We’re seeing much greater scale on social media and online video advertising, with a standard emerging for online video, and movement towards a standard for social networks. In-game saw some progress but not as much.
2. Structured web emerges.
Grade: C. Notwithstanding the Powerset acquisition, the structured/semantic web hasn’t been a real theme for 2008.
3. Games 2.0
Grade: A. This year was a breakout year for social networking games, web based games and free to play games. I see this growth driving several of next years predictions as well, as you’ll see below.
Now on to new predictions. Note that the remainder of this article is cross posted at the Wall Street Journal.
Last year, consumer Internet startups sprung up left and right, looking for U.S. traffic growth and relying on the robust growth of the advertising market to make money. We enter 2009 looking down the barrel of a recession. In this environment, I predict the following trends for consumer Internet companies:
1. Consumers seek cheap thrills
Even in a recession, people will still want to be entertained. The Great Depression saw resilience and even growth in movie ticket sales as one of the cheapest ways for people to entertain themselves. As this economy tightens through 2009, we’ll find growing numbers of “time rich-cash poor” consumers seeking today’s lowest cost methods to entertain themselves. In general, this will benefit two categories of consumer Internet companies.
First, social media and social networks. These are free and endlessly entertaining. As mainstream media companies cut costs, the relative value and quality of user generated content increases. MySpace, YouTube and Facebook all rank in the top 10 Web sites by aggregate time spent according to comScore. The most popular applications on Facebook and MySpace are all games, entertainment and lightweight communication, and these can provide endless hours of entertainment for users. It isn’t just Facebook and MySpace that will benefit though. Smaller social media sites that have built enough of a critical mass to have a self sustaining community will also see growing usage over the next year.
Second, games. Games are one of the most cost effective means of entertainment available. While a $10 movie ticket can provide 90 minutes of entertainment, a $60 computer game can easily provide 50-100 hours of entertainment. Free-to-play web based games make this math even more compelling, whether they be casual game portals like Pogo, virtual worlds like Gaia or massively multiplayer games like Runescape. The Web site with the highest amount of time spent per visitor in October was Pogo.com with 444 minutes/visitor. Number two was Yahoo, with just 291 minutes/visitor in the same period. Games in general, and free games in particular, can provide a lot of cheap thrills.
2. Trading real money for virtual goods
In Asia people have been paying real money for virtual goods for years. It is the primary business model for games and Internet companies in China and Korea, far more important that advertising. We’re starting to see similar behavior in the U.S., also led here by online games and social networks. On the back of the rise of social networks and games, 2009 will be the first real breakout year for this business model in the US.
To people who do not spend time on social networks, it seems crazy that people would pay real money to buy each other virtual gifts – pictures of things ranging from birthday cakes to hugging penguins – and then display them on their profile pages. But estimates peg Facebook’s digital gifts sales in the $35 million – 50 million range this year. As more human interaction moves online, these social tokens of appreciation move online in parallel.
In the same way, gamers are more than willing to buy virtual goods In 2007, Nexon made $30 million selling virtual goods to U.S. players of their games. These items either allow players extra powers in the game (e.g a bigger gun), or allow players to customize the way that their character looks (e.g. cool sunglasses). People want to win, and they want to look good doing it. Dozens of other games companies are now employing this model in the U.S.
Why would this recession be a time for virtual goods to take off in the U.S.? It actually has nothing to do with the economy, Rather, two new payment mechanisms are becoming available now that allow gamers, many young and without credit cards, to play these games to their full capacity. The first is that prepaid game cards are now being sold at retail, with Target leading the charge. The second is incentive marketing. If a player take an action (like signing up for a ring tone service, or completing a survey) the advertiser who benefits will fund the purchase of that players desired virtual goods. One virtual world company, Gaia, used to have three full time employees who did nothing but open envelopes of cash that their teen and ‘tween players sent them to buy virtual goods. Since rolling out their new payment mechanisms, their revenues have doubled and they no longer have to open envelopes full of pocket money.
Asia and Europe have led the US in the adoption of free to play games because they have had good alternative payment mechanisms in place for longer, including mobile payments and credits available for sale at internet cafes. Now the U.S. is ready to catch up.
3. Web 2.0 leaders pull further away from the pack
In a recession, when advertising budgets are cut, there is a flight to quality among advertisers. Size and “brand name” are good proxies for quality. Advertisers will want to buy advertising on big, well known websites. The big online media companies like Yahoo and AOL will benefit from this. However, they are already so big that they cannot escape the overall shrinkage of ad budgets.
On the other hand, many Web 2.0 companies, like Facebook and Digg, have build large user bases but have not yet built out their capacity to monetize their traffic. These companies will see the benefit of the advertiser flight to quality. However, as they are only now building out their sales forces, they will likely continue to see strong revenue growth in 2009.
4. Online ad prices continue to fall, alternatives help make up some of the ground
The Internet advertising market, like all markets, responds to changes in supply and demand. In the current recession, demand for advertising is likely to decrease. At the same time, supply of online inventory, page views, is continuing to increase. Social networks and other social media sites in particular are creating masses of new inventory. As a result, the price of online advertising will continue to fall in 2009.
Targeting may mitigate some of this fall. Better targeting is steadily improving the effectiveness of direct response advertising (the equivalent of TV infomercials). This targeting takes many forms, but all have demonstrated an ability to lift conversion rates over “run of network” advertising. As targeting technology improves, and as the data that publishers and networks collect about users increases in quantity and quality, we will see a better ability to match the right ad to the right person, and charge more for that ad.
5. Getting serious about monetizing non U.S. traffic
The U.S. led the way on the internet, and for a long time the U.S. dominated overall Internet usage. In the past couple of years this situation has changed. China passed the U.S. as the country with the most internet users this year. Top sites like Yahoo, MSN, Facebook and MySpace all have more users internationally than in the US. Serving an international user costs the same as serving a U.S. user, but making money from an international user is much harder. In 2009, I expect Internet companies to get serious about making money from their international traffic.
The US market represents about half of all online advertising, which is partly what makes monetizing international traffic so difficult. Building up direct ad sales teams (and networks) internationally will partially help to bridge the gap, but this will not be enough. As noted previously, in Asia direct monetization models (i.e. selling things directly to users) have proven to be a better business model than advertising. U.S. companies will need to understand and embrace the direct monetization models that have worked well overseas, principally mobile monetization, premium subscriptions models and digital goods models based on selling greater functionality, scarcity or status.
Silver linings to dark clouds
These trends will benefit some internet companies but disadvantage others. I hope that your company finds the right way to navigate these shifting shoals. Let me know if you agree or disagree with these predictions, or if there are other trends that you think I’ve missed.