Category Archives: Marketing

Advertising, Marketing, Strategy

The Danger and Opportunity of the Intermediate Metric

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Are social media companies overvalued? The question is not just a matter of revenue multiples (low or high), but rather whether that revenue is actually generating new sales for advertisers. Google convinced the world to believe in the click, Facebook has done the same with the Like, Twitter with the follower, and Pinterest is planning on unveiling the same with the Pin. Creating these “intermediate” metrics between impression and ultimate purchase is a great move to boost revenue, but must stand up to scrutiny as software eats the marketing funnel. For startups seeking to build a valuable advertising business, creating an intermediate metric is crucial, but so is ensuring that that metric holds up to scrutiny.

Let’s rewind a bit, though. Without commerce, without transactions, there would be no advertising. The point of an advertisement is to generate sales. Full stop. Brand building, goodwill, mindshare, buzz, and a lot of other niceties might come about, but even those are meant to eventually lift sales. Without a transaction at the end of the line, advertising has no raison d’être.

The challenge, though, is that it’s often difficult to draw a straight line between “person sees an advertisement” and “person buys a product.” Impression and transaction are the two endpoints of the advertising-commerce lifecycle.

And, the chronological delta between impression and purchase can be wide. A 15-year-old might be bombarded with BMW advertisements for 10 years before she finally pulls the trigger on a fancy, brand-driven car purchase. Deciding to buy Advil vs. Tylenol might take years of external inputs and supermarket trips.

Enter the intermediate metric, which is anything that falls on the continuum from impression to purchase: clicks (the Internet’s first intermediate metric), likes, bookmarks, views, shares, app downloads, recall, followers, retweets, mentions, pins, etc. Intermediate metrics help publishers (e.g., Google, Facebook, Twitter, Yelp, Pinterest, etc.) attempt to show their impact when sales are not readily measurable — either because of chronological disconnect or because the transaction data is not readily accessible. Or, cynically, and in some instances, because there are no downstream sales — making the intermediate metric the best way to obfuscate while purportedly showing performance.

intermediate metric

Intermediate metrics help advertisers show internal and external stakeholders that they’re doing a great job. It’s hard for Clorox’s marketing team to be given an instruction of “sell 20 percent more bleach this quarter and you get a big quarterly bonus!” A national “must wear white to participate” tomato fight might increase sales of Bleach without Clorox lifting a finger. So many advertisers will compensate and reward their teams for the achievement of intermediate metrics.

  • “Your goal for the quarter is to get 10 million Facebook Likes, and to get a 15 percent increase engagement on Twitter.” (This must increase sales, right?)
  • “Twenty percent of your bonus this quarter will be based on getting 100,000 mobile app downloads.” (Mobile is hot and people are using mobile phones everywhere, so it must drive revenue!)

The greatest intermediate metrics allow for the broadest attribution tracking possible (accounting for marginal intent generation), while being somewhat unique to the medium. At scale, Quora might charge for a promoted corporate answer; Gmail might charge for a bolded email; Waze might charge for a “route added.” These would all be intermediate metrics, knowing that none of these actions yield an immediate purchase but hopefully contribute to one. Without an intermediate metric, there would be a publisher-advertiser marketplace failure, since immediate “transaction” tracking would undercount efficacy and cause metrics-driven advertisers to abandon the platform.

The greatest intermediate metrics allow for the broadest attribution tracking possible while being somewhat unique to the medium.

The smartest thing that Google did was charge for the click, not the sale, because it isn’t Google’s fault if your site converts poorly (or if a sale/action is not relevant, as it is for, say, auto research).

The smartest thing that Facebook did was define the like not just as an intermediate metric, but as a quantum of self-worth. Watching Samsung hit 20 million Likes must have made HTC mighty jealous and want to respond accordingly. When I asked a large restaurant chain where they spend most of their money online, the president said “Facebook. We get a lot of likes, and that must be better than not a lot of Likes.” A click — Google’s classic intermediate metric — isn’t too relevant for a restaurant that doesn’t deliver or allow online transactions. Facebook has a potentially broader audience, yet less transactional intent — so ultimately those likes will need to turn into revenue.

As Twitter goes public, it probably needs a stronger intermediate metric that can resonate with the long tail of advertisers. It might not make sense for regular people to “follow” an advertiser like Oreo in the same way they might follow their favorite moviestar, thus making followers a poor metric; in fact, The Bronx Zoo’s Cobra (an actual snake) has more followers than Oreo. The famous Oreo Superbowl tweet was retweeted only 16,000 times. The most retweeted brand advertisement on Twitter (from Nokia) has yet to top 50,000 retweets. Yet perhaps Oreo was seen by millions of people on Twitter, yielding a spike in supermarket sales, and thus followers and retweets — the intermediate metrics with which pundits seem to be measuring Twitter, are the wrong intermediate metrics.

The danger of intermediate metrics is that they feel quantitative — these are numbers, people! — but they might actually be meaningless. Ironically, both parties, advertisers and publishers, often have a vested interest in separating them from sales — for the short term — lest the music stop. Separation allows for “quantifiable metrics” when sales are just too hard to perfectly measure, so advertisers can keep spending and publishers can keep charging.

If a company’s revenue is based on selling questionable intermediate metrics, be cautious — no matter how quickly that revenue is growing. Sometimes metrics are purely about internal vanity and do not last. As an example, “number of app downloads” feels like a key performance indicator, whereas for many companies (Supercuts has an app?!), “apps” make little sense as a paradigm. Depending on how this intermediate metric (app downloads) stands up against actual incremental sales, the whole app download market could suffer. The same goes for many other intermediate metrics. When advertisers start thinking of the intermediate metric as the final action (the R in ROI = achievement of intermediate metric), the market is inflated.

For any company — whether buying traffic or selling it — intermediate metrics are often a crucial strategy in building a broad revenue model and in having a metrics-driven approach to customer acquisition and retention. But it is unwise to divorce the intermediate metric from the final, and crucial, metric of the transaction — to ignore it, or to exaggerate it, is penny wise and pound foolish. Plenty of startups and established industries (television advertising!) will be obliterated when data finally lights the path from impression to transaction and, in some cases, reveals it to be seldom traveled.

Commerce, Marketing, Payments, Strategy

Payment Data Is More Valuable Than Payment Fees

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We are in the midst of a great revolution in the payments space: anyone with a phone can now accept credit cards; online-to-offline commerce is allowing online payment for offline purchase and significant friction is being removed from the consumer purchase experience thanks to mobile. All of this innovation (read: competition), combined with government intervention, means that payment fees are falling, threatening revenue streams for incumbents and startups alike in the payments space. But a broader opportunity exists: using the data of payments to build a more valuable, more defensible business model, one not dependent on fees. The result will revolutionize offline commerce and online advertising.

Today: It’s All About Fees, and They’re Heading Towards Zero

Payment companies make money by charging fees to “process” a payment from buyer to seller. Square charges 2.75% (or $275/month for volume up to $250K/year). PayPal Here charges 2.7%, as does Intuit GoPayment. Groupon and Amazon are both supposedly working on their own dongles, and prices will continue to fall, especially as these new devices create “one-sided” networks without significant defensibility outside of switching cost and inertia. “Pay with Square” is a potential game changer, as the millions of Square user accounts can ONLY be used with Square. But basic “acceptance of credit cards” is becoming a commodity where prices will keep going down.

Competition between payment companies is only one leg of inevitable downward pricing pressure. Government intervention is the other. Not too long ago, the Australian government decided that payment fees were too high, so now most Australian merchants pay less than .5% for credit card swipes, a fraction of the cost here in the US. The European Union is likely to enact similar legislation. The Durbin Amendment of Dodd-Frank and the $6B+ (pending) Brooklyn Settlement are US-based government and civil attacks on the business of payment fees. Many of these fee-cutting regulations help intermediaries like PayPal and Square short term, by reducing their cost (owed to the Visa/MasterCard infrastructure), but eventually it limits what they can charge, too.

Wherever fees end up, most merchants will still dislike paying them. They are a “cost of doing business” that every merchant has an incentive to bring down. Payment companies generally aren’t delivering new customers; they’re taxing the flow of existing ones. Google effectively charges 20-30% to deliver a customer (if you back out the cost-per-click to percentage of realized sale) to an ecommerce merchant, yet merchants are competing to hand Google more money because each dollar “in” produces more than a dollar “out.” Payment companies charge a fraction of Google, but are often despised (witness the lawsuits and legislation) or treated with promiscuous disrespect.

It comes down to something rather simple: Connecting the bank accounts of buyers and sellers will never be as valuable nor defensible as connecting buyers and sellers. Google delivers customers at the top of the funnel, and payment companies serve the prosaic, but necessary, task of shuffling funds at the end.

Tomorrow: Payment Data Will Revolutionize Commerce & Advertising

As society goes increasingly cashless, payment companies will have a larger business, and a more valuable one, in closing the loop for offline transactions and helping deliver customers. The data they possess is without equal; did somebody buy something? How much did he spend? What did she buy? Paper money cannot be tracked in this manner. In order for Online-to-Offline commerce to take flight, every merchant needs an ability to track online/mobile action to offline purchase, and PayPal Here, Square, GoPayment and others could provide just this for a whole new class of small merchants.

Imagine that Wendy’s, or even a local handyman, wants to advertise on the Internet. What’s the point? What does a click, or an impression, really mean? It’s clear what it means online, since every click can be measured to “action” (e.g., purchase) for an ecommerce company. Who can tell Wendy’s, or the local handyman, if that online advertisement worked?

In an increasingly cashless society, the answer is pretty clear: the payment infrastructure. Tracking that purchase back to the originating source (Google? Yelp? Patch? etc) is known as “closing the loop” and will revolutionize offline commerce and advertising alike.

The million-plus merchants walking around with Square, PayPal Here, and GoPayment dongles want more customers, and these dongles provide a means to “close the loop” and let those merchants acquire more customers, remarket to those customers, understand those customers, and do everything that ecommerce companies have taken for granted for over a decade. Legacy POS systems were poorly integrated and insufficiently verticalized, often requiring a merchant to have separate relationships with every player in the payment chain (hardware vendor, merchant bank, CRM system, etc); moreover, they were priced out of reach of the sole proprietor.

Beyond closing the loop, payment companies can utilize data from existing transactions to generate more transactions. Companies who maintain a direct relationship with the consumer — such as American Express, PayPal, Square, Discover, etc — are in the perfect position to serve as an Amazon recommendation system for “everything.” You bought a tennis racket at Sports Authority? How about tennis lessons with Saul the tennis pro, at a discount thanks to your purchase of a tennis racket, only redeemable with the same payment instrument? You weren’t searching for Saul, and you wouldn’t want an unsolicited email from Saul, but seeing an advertisement for Saul shortly after buying a tennis racket (say, on your purchase receipt) would likely produce a response. It’s a way topreeempt search for a large class of “secondary” purchases (e.g., charcoal after buying a grill; tennis balls after buying a tennis racket, etc), in a “pull” based way.

None of this is to say that the fees charged today are wholly unreasonable and unconscionable; they’re just not long-term defensible as more parties offer the same conduits to existing credit card infrastructure. I have $40 cash and five credit cards in my wallet right now, so any merchant wanting to charge $100 for some widget can either get 97.25% of $100 (if using Square), or $0. That’s an easy decision and shows why things like Square and PayPal Here are hugely beneficial to merchants and consumers alike. But longer term, as those fees continue to compress to the benefit of merchants, the larger business will be in applying the data of payments to the benefit of merchants, consumers, and payment providers alike.

Customer Acquisition, Marketing, Strategy

Push v Pull

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What makes email, Facebook, and Google so valuable? Answer: Visiting them is largely unprompted, notwithstanding the synapses that fire in your brain that make you check your email, your Facebook feed, or decide to research something on Google. In other words, people pull content themselves, rather than having that content be pushed — or foisted — upon them.

The best way of looking at consumer web applications is as a complex stack of “pulls” and “pushes.” Lest these terms be confused with an earlier generation of push: a “pull” is an unsolicited action by a consumer, whereas a “push” is a solicitation by a seller/producer.  The consumer ultimately “pulls” from a mobile phone or computer. Everything else is “pushed” to the consumer, through ads, e-mails or other marketing efforts from companies eager to get business and traffic.

The greatest trick that Facebook ever “pulled” was transforming itself from a push platform (dependent on email to woo users back) into a de facto pull platform.  Facebook touts that 50%+ of its users log-in every day, and my guess is that the vast majority do so with no prompting. Push is still valuable but simply complements the massive pull that Facebook has developed.

Why is Pull so essential for a web company? The intersecting forces of human psychology and economics.

First, psychology: consider how most people hate being “sold” to. “Being sold to” is a form of push. Consumers get hundreds of unsolicited offers and emails pushed to them every week. They learn to tune these solicitations out, especially if they are not in a buying mindset. Relevance is a function of offer-consumer fit paramaterized by time.

Second, economics: A pull platform doesn’t need to spend any money to reach or acquire customers; a push platform does. Facebook’s marketing spend per user has to be the lowest of any company known to man. Granted, Facebook is intrinsically viral and laden with network effects, but the unprompted pull phenomenon has been crucial to Facebook’s dominance.

The value of pull is not just for consumer companies. Any Business-to-Business company knows the value of “demand generation”: catalyzing a “pull” by customers. The quickest and cheapest sales cycles start with a pull by the prospective customer.

For any web company, fostering Pull is essential to creating value and engagement.  There is no shortage of great applications and amazing technologies which stagnate due to a lack of pull.  But the greatest economic achievement of being a “pull” platform is in becoming the mechanism by which “push” companies must engage with audiences, paying handsomely to do so. This expectation is why a company like Twitter can be valued in the billions with minimal revenue.

Here are some ways of thinking about fostering pull:

Plan Around Events

Groupon Now is Groupon’s attempt to add Pull to its traditionally Push service. I want to eat, where do I go? Groupon. Every human desire has a natural pull tendency. Being the “first responder” to a human desire is incredibly valuable.

Find Offline Analogies

Most forms of pull fit a predefined social pattern, per the comment on “human desire” above. Before Google, people used phone books (unprompted) to find services. Before email, people would check their postal mailbox, generally at a given time (after the mail was delivered).

Answer Recurring Questions

There are certain types of content that consumers will invariably pull (or want pushed to them). These types of content generally answer recurring questions of a consumer. How much did I spend Receipts, bank websites)?  Where am I going (Google Maps)?  How do I get there (Kayak)? What’s wrong with me (webMD)?

Build Brand and Familiarity

Once one of the above is satisfied, brand and credential storage foster pull. A frictionless and “known” experience catalyze pull for transactional activities. While Amazon, as the largest spender on Google, does a fair amount of push, they also benefit from a tremendous amount of pull when consumers decide to shop. This is a combination of the brand but also their accumulation of user/payment credentials.

There is no substitute for pull in establishing success for a web company; the key is producing something sufficiently valuable in repeat interactions. Reid Hoffman has notedthat “social networks do best when they tap into one of the seven deadly sins.” It’s no coincidence that people have, unprompted, “pulled” those sins since the dawn of humanity.