When is Amazon “Corporate” and Whole Foods Not?

People that know me know that I am very particular about food, not just about restaurants (it’s service quality that matters more to me in a restaurant, assuming the food quality is on par for the price) but also food ingredients. I will go to considerable lengths to get the best meats, produce, cheeses, breads… and honey.

I am highlighting honey because I had an interesting customer service experience yesterday that has stuck with me. Not all honey is created equal, the type of flower that the honey bees feed on produces uniquely flavored honey. I happen to prefer honey made from wild blackberry blossoms… can’t explain it beyond saying this is the flavor that is most appealing to me. I found a great supplier that is semi-local, Katz & Co., and when I ran out I went online to purchase some more.

Like many small businesses Katz & Co. does not have enough volume to command low shipping rates for online purchases but I was really surprised to see that one jar of $11 honey was going to cost me $8.90 to ship. Surprised because a jar of honey is physically small and weighs less than about one pound, so the curious cat inside me came out and went to fedex.com to see how much it would cost for me to ship a package of that approximate size from their zipcode to mine… and it was $6.85, so throw in a box and supplies along with a handling charge and you are at $9, but keep in mind that is retail shipping cost, like you or me going to the fedex office, and not what a business should rely on for shipping online orders.

I ordered 2 jars of honey because the shipping jumped up to $11 so my cost per jar was less… but crikey 2 jar of honey is going to last me over a year because even though I like honey I don’t have it everyday. In the comment box on the order I wrote that I thought the shipping charges were pretty outrageous and maybe they should look at Amazon for doing their fulfillment. I clicked “confirm order” and forgot all about it. Please don’t comment that “well he got you to double your order” because 1) that’s pretty lame, and 2) he didn’t increase my consumption, ordering 2 jars just pulled forward future demand… he really didn’t sell more honey.

Later that day I get a call from a 707 area code number I don’t recognize, it was Mr. Katz. He was concerned about my comment and said two interesting things right out of the gate, first that they would never go with Amazon because they were “corporate” and that’s not what their customers expect, and that if I wanted to avoid the shipping charge I could go to Whole Foods… seriously, how the heck is Whole Foods not “corporate”? If anything Whole Foods is the bad corporate citizen because they don’t make any effort to bring consumers the lowest possible prices and best quality service. Mr. Katz also mentioned I could also get his products at Draeger’s for reasonable prices but I have never heard “Draeger’s” and “reasonable prices” used in the same sentence before so I doubt that solves my/their problem.

My conversation with Mr. Katz was frustrating because I kept telling him that I loved his products but he should be not be lining the pockets of Fedex with my money in the process. He couldn’t hear me because he was talking through me, saying that he didn’t see the problem because every year he sells out of the honey… good for him but he should not confuse that with customer satisfaction because csat in the merchant-customer relationship goes far beyond product utility.

Mr. Katz also kept hitting on the nature of the product, being somewhat boutique, and high prices are what I should expect. Really? It seems to me that I’m not really paying a high price for the product, I’m paying a high price to SHIP the product. In this case he would be better to raise the price of the product from $11 to $16 and reduce the shipping charge to $4, in which case he comes out neutral and I don’t feel like I’m paying through the nose for something that isn’t at all related to the product itself, shipping. Heck, I’d probably enjoy the honey even more knowing that it was $16 a jar!

The reason the conversation stuck with me is that I still don’t understand how Mr. Katz could not understand that I love his products (despite my saying that 3x) and my point that serving your customers goes beyond providing a great product still stands. The irony is that while I appreciated him calling me I actually thought less of his business after the fact because he demonstrated a lack of concern for how much of my money was going to Fedex because he couldn’t be bothered to tap into a less costly logistics solution. Every interaction with a company adds to or detracts from your brand value… I keep saying…

I still love his product and will probably continue to buy from him but I won’t be a brand enthusiast or loyalist at this point.

SEC Defines Venture Capital

The SEC fulfilled their obligation under the Frank-Dodd financial reform bill and defined what venture capital is.

Represents itself to investors as being a venture capital fund.

Only invests in equity securities of private operating companies to provide primarily operating or business expansion capital (not to buy out other investors), U.S. Treasury securities with a remaining maturity of 60 days or less, or cash.

Is not leveraged and its portfolio companies may not borrow in connection with the fund’s investment.

Offers to provide a significant degree of managerial assistance, or controls its portfolio companies.

Does not offer redemption rights to its investors.

Welcome to the Department for Avoidance of New Business Creation, how may we help you?

Here’s what would, according to this definition, be illegal for a venture capital fund to undertake:

– Private investment in public entity (PIPE) financing. This is where a VC fund invests in a publicly traded company and the proceeds of that investment go not to other investors but to the company in exchange for preferential shareholder rights. This has been a lucrative area for VC funds to invest in and has also been critically important for companies to tap when other finance options (e.g. debt) prove to be onerous.

– Investor/founder buyouts. It’s not uncommon for a VC to invest in a company and have a portion of the invested capital go to buying out founders and other investors. It’s a way for founders to get some liquidity and for companies to dispose of investors who have external pressures related to liquidity.

– Bridge financing. According to this definition a venture capital firm may only invest in equity securities, which would suggest that a VC firm would be prohibited from offering debt financing… at least under a strict reading.

This is yet another example of legislative overreach, venture capital is a very small percentage of private equity overall and in no way contributed to the last financial crisis so why is this regulatory definition necessary? It’s not and it won’t be helpful for investors who have a demonstrable track record of business and job creation.

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Freemium 101: Customer Conversion

At Get Satisfaction we have had a freemium model from day 1, when it was just free, no premium offerings existed so we’ve lived through a couple of key transition points and now are optimizing a model we know works.

We have 2 primary channels to market, an enterprise business that mimics what every other enterprise business sells, which is a contract sale with a named customer built around high value product offerings and bound by legal agreement which stipulates a heavy support model and SLA for non-performance. The other half of the business is web-direct, we call them Standard Plans, that are marketed and purchased directly through the site and have a month-to-month model where customers can discontinue at any time without financial penalty. The latter part of the business is what I am responsible for.

The basic challenge with a freemium business is twofold, first providing enough incentive for free customers to convert to paying and for paying customers to not downgrade to free, and secondly to deliver effective product marketing on the site and through an inside sales capability to keep the sales funnel flowing.

The product marketing is a real challenge because if you assume your product is reliable and is without major deficiency, and that you provide good customer support for all stages of the customer lifecycle (in other words, your customers aren’t leaving you because you are pissing them off whenever they interact with you), then the only other reason you will lose customers is because you are misrepresenting the utility and value of the product which when discovered causes mass customer defection.

Churn (aka turnover) will kill you in this business and it’s not as simple how many customers you lose in one period compared to the previous but rather the relationship between attrition and customer acquisition over time. This is why it is so important to target the “right” kind of customer in your marketing because in order to recover the cost of customer acquisition you need to keep them long enough to go positive on revenue relative to customer acquisition and ongoing operation.

If you do a cohort analysis which maps out the survivability of customer groups according to what month they were acquired you will see the effect of churn on your customer base and get a foundation for determining what the lifetime value is of a single customer at any plan level, assuming you have multiple pricing plans. This is critical because it gives you a basis for determining the efficiency of your sales and marketing expenditures for achieving revenue and more important, profitability.

I have written about pricing issues before and while I do want to cover that again in more detail I will defer to a later post because pricing is a topic which deserves a much deeper dive than is possible here.

The last thing I want to cover is trial processes and customer conversion. There is no process more critical to your success than optimizing the free-to-paid conversion and the web-to-trial process. We have done a lot of work to address improvements in how we move web visitors into a trial process and then convert them to paying customers.

About 22% of the communities that are created on the Get Satisfaction network are accomplished through a trial-to-pay process and this is a phenomenal result that any business would be proud to disclose… which is exactly why I am disclosing this. We understand how to do this well but it’s only half of the equation because once you get them to opt-in to a trial process you have to do everything possible to make them successful with the trial and move through to regular monthly billing.

Accomplishing successful trial conversions is a process that incorporates a strong dose of online trial enablement combined with effective inside sales capabilities. At $19 a month I can’t afford to have high touch inside sales people working the trial customers but at $289 a month I cannot afford to not have them working on those prospects.

Our trial process is 15 days and that is not arbitrary. Basically it comes down to a simple dynamic which is that if a trial customer does not start using the product in the first hour after creating the trial account we know the probability of converting them goes down exponentially with each passing day, therefore a 30 day trial process is not going to contribute to a higher conversion percentage.

A 7 day trial process is far too short for us because we have a product that requires several discrete steps to be taken in order for the value to be realized. We have recently instituted a series of emails backed up with landing pages that go out to a trial customer when they sign up, this is commonly called “onboarding”. Over a 15 day period we can, depending on when the trial was initiated, have 5 weekend days in that time period so getting 5 emails out when the trial customer is most likely to respond to them requires more than 7 days but they can’t be sent out too closely together and risk over-communicating to a trial customer which causes them to opt-out and you have lost your ability to communicate at all with them.

I hope this is useful information, it’s actually quite a fascinating departure for a guy like me to be involved with when compared to the world of traditional enterprise software that I grew up in. I would like to make this a series of posts that cover conversion, retention, free community migration, and operational metrics but I will resist creating the impression that I will knock these posts out in the next week. Stay tuned.

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United Airlines: Conditioning Your Customers to Expect Less

Paul Greenberg wrote a lengthy piece about his complex relationship with United Airlines and their potential for service downgrading as a result of the merger with Continental.

But…I still fly United. I like to say that the reason I fly United is because I’m already so vested in the frequent flier program that I just don’t want to waste my investment. And, like many others, who immediately agree with me, that’s true. But, if I’m going to be honest with myself and, also, all of you, there is a reason for that too. I like the extra legroom of Economy Plus.

Several years ago I threw in the towel on United and refused to fly them anymore. At first it was an adjustment but then I realized a couple of things that revealed a psychology behind my relationship with United, which is that they use status in frequent flyer programs as the promise of benefits but those benefits only have utility when compared to the service they otherwise offer, not that of competing service providers.

I started flying Virgin America and it was like a fog lifting… all their seats have good leg room, the entertainment system is something United simply can’t match, first with wireless service, food is fairly priced and honestly quite good, and most importantly, the staff is friendly and enthusiastic.

Big airlines are not in the business of expanding the service they offer, everything they do is a reaction to cost cutting and drive for adding service fees. The status programs only serve to create a psychological lock-in for frequent customers who then react like a frog in a pot of water as it slowly boils.

No thanks, I’m done with United and there is nothing that would make me believe that they are capable of delivering a better service than competitors… they are like telcos in that “good” is only a measure of distance to the next worst option, in this case another major carrier.

Locked in Paradigms

Have you noticed that Google looks terribly stale when compared to Facebook? It’s not that Google’s products are weak by comparison but rather the simple fact that Facebook isn’t locked into paradigms imposed by having widely used products that reflect how earlier generations of users see them. More importantly Facebook has a distribution capability that equals Google.

I have to admit that I don’t fully grasp what Facebook is doing with their messaging platform but I very much get it that this is a lot bigger than email and that’s kind of the point. Facebook apparently isn’t interested in building an email system and because they don’t already have an email system that acts like Gmail or Yahoo Mail they can break free from that paradigm.

Gmail was pretty breakout when first launched (I received my first gmail message on 4/14/04… six and half years ago!) but it’s hardly what you would call leading edge today. Massively successful by any measure, Gmail is just email with a better interface and even the features that have gotten a lot of attention lately, like priority mail (a better filter, really), are incremental at best. Googles’s attempts at developing massively adopted messaging systems that displace Gmail and appeal to 3rd party developers is non-existent.

It’s easy to see why Facebook is keeping Google executive up at night… they are innovating at the edge and at the core simultaneously, have complete control over users social graphs while Google has to piece it together, and have a distribution capability that is only rivaled by Google. Most significantly, Facebook doesn’t seem restrained by the way that common applications, like messaging, have always worked and their ability to lever into 3rd party applications gives them an enormous advantage just at the moment.

One really has to wonder if Google’s power in the market is at an apex and when the history of today is written well into the future we will look back on Google and reminisce about what could have been if only they had more aggressively embraced change in core search, not fumbled so many product launches (Wave, Buzz, etc.) and been more willing to blow up hugely successful products in order to make them better.

Please be clear that I am certainly not writing Google’s obituary, merely pointing out that they have taken a trajectory a lot like Microsoft, just in a much shorter time period. Maybe what I am zeroing in on is that search alone is not the panacea that it was once thought to be, in other words it really isn’t a gateway to the web while Facebook is demonstrating that an ability to exist without Google and at the scale they are operating on.

Speaking of Microsoft, who now questions their investment in Facebook, which will not only prove itself to offer financial rewards but is also giving them an inside track as Facebook continues to build out platform and network capabilities that are so much a threat to Google?

Paul Krugman for Dummies

I’ll save you the trouble of reading Krugman’s latest missive, which is little more than a retread of the arguments that Democrats always fall back on when they lose:

1) Democrats aren’t fighters. Puhleeeeze… this is an administration that has for the last two years demonized the auto industry, pharma and healthcare companies, oil & gas, financial services, and individuals alike and resorted to referring to political opponents as “enemies”. The Democrats used every possible parliamentary tactics, threats and outright brides to get their wishlist of unpopular legislation pushed forward, that Krugman can say the failure of the administration was not fighting hard enough is laughable on its face.

2) Republicans are mean partisans. Listen, it’s called a 2 party system for  a reason… one party is in opposition to the other and a large group of voters, independents, swing between them based on the strengths of their arguments. The job of Republicans is not to fall in line with Democrats on legislation that is ideologically opposed by the members of the party, their job is to oppose it and then deliver on an alternate strategy.

3) It’s a messaging problem. Oh good Lord… this is a president that has done every possible communication venue except being a voice on a Simpson’s episode (and appearing on Fox News).  For a candidate who separated himself from the pack on his ability to communicate, it become farcical to suggest that the problem is now a failure to communicate. Krugman blames the messenger because he refuses to acknowledge that the problem is the message.

Check in Fatigue

Danny Sullivan wrote up a piece on Foursquare that perfectly encapsulates the issue I have with Foursquare (and their ilk) these days… summed up as “really, who gives a shit?”.

I have really made an effort to apply myself to FourSquare and have accumulated a handful of mayorships and a dozen badges in the process… not a power user by any means but probably more active than the average Foursquare user. Lately my usage has dwindled because Foursquare is missing something pretty important… namely what’s in it for me!

A key part of the Foursquare ideology is underpinned by incentives to create content on the network, however those incentives are predominately in the area of social signals. There is a lot of discussion about social signaling in the context of network applications and while many definitions exist let’s just say that in this context social signals are users broadcasting traits about themselves, in this case mobility and proficiency with LBS services, in order to achieve the benefit of reputation and influence.

When I check in to a location and share that, or achieve the mayorship of a location or a new badge what I am signaling is that I am influential as a function of my ability to achieve status in a game environment. It’s really quite simple and this has worked out really well for Foursquare (and other early adopter targeted applications… Rockmelt is playing this game quite well at the moment) however at some point the influence aspect diminishes as the service itself becomes more popular and the shiny object becomes tarnished and less exclusive.

At this point a company needs to make a subtle shift from providing reputation incentives to economic ones. For example, what is the point of being the mayor of anything, especially if I have to work for it, if I don’t get any benefit out of the title. The metaphor of mayor is actually quite appropriate, what does a real world mayor campaign for after all? The plush office, preferred parking, cutting in line, guaranteed good seats at events, and the prospect of higher office. What does the mayor of a Foursquare location get… with few exceptions pretty much nothing. Want to do something really valuable for me… validate my parking!

One of the things that struck me about Crowley’s interview is that he, like a great many people in this business, displays a degree of indifference to how people actually use services like this. It’s not that he doesn’t care, quite the opposite I believe, but through his comments I can’t help but believe that user intentions are secondary to what he believes Foursquare should do.

For example, friend finding is a popular promised benefit from location based services yet I have never found this to be compelling or interesting as a feature I would want to take advantage of… I’ll let Rocky explain why.

The point is, if I want to find you I don’t need Foursquare to act as the intermediary. There are of course exceptions to this but it’s an edge case for me so I really don’t understand why companies invest product time and energy in promoting this as a feature. There is nothing new about this either, Loopt started out doing friend finding but in the last year seems to have abandoned that as a primary benefit, instead focusing on merchant promotions.

Tips and discovery is an area that is currently underserved in Foursquare locations and while I get what Crowley is saying about discovery and location experience but even that falls flat for me. Much of what constitutes tips is really pretty boring stuff because let’s face it, not every day is a new adventure waiting to be discovered.

For example, a useful tip for the Caltrain station is Redwood City is that additional parking is available to the north of the train station and parking spot #561 is not in the system (free parking!). If Foursquare gives me more of that, count me in but if the bulk of the tips for any location are really nothing more than nonsensical musings then why bother?

There is a lot more I could write on this but let me close by saying Foursquare isn’t a location service at it’s core, to me it is a business directory that relies on location features throughout the user experience. What happens in the directory is not that much different from the directories that have preceded them, which is that people like me use them to discover, build awareness, and ultimately take advantage of promotion throughout my day to day life.

Roadmaps… How Much is Too Much?

One of my favorite services, Feedly, published on their blog the roadmap for their next major release. Obviously this is not a new practice and through various mechanism companies make available for comment their product development process.

In recent years the evolution of “ideation” applications has provided companies of all types a powerful capability for capturing customer suggestions and ideas as well as providing mechanisms for different types of voting schemes that promise to surface the most requested and/or highest priority items in the eyes of their current and prospective customers.

Here’s the question I continue to struggle with… how much disclosure is enough? Clearly there is value in promoting what you are contemplating building into your products, in effect pre-selling the features, and at the same time capturing valuable feedback that informs your product development process in ways you may not have anticipated. Yet these benefits are not without risk.

Much of what Feedly discloses are features that are best described as incremental, in other words improving on core capabilities that already exist. This is valuable and made even more so by the fact that Feedly publishes the roadmap in a form that easily translates into customer value rather than an engineering roadmap that really doesn’t map well to what customers care about.

How about major disruptive features that a company may be contemplating? This level of disclosure, effectively tipping competitors to what you are building that could disrupt the competitive landscape, would appear to be in all but extreme edge cases irresponsible. Closely related to this is core platform work that, in this case, a competitive engineering group could interpret future capabilities.

Clearly communicating a product roadmap to prospective and current customers should be a core competency for every product and service company however there remains the issue of how much to hold back until the point which you are actually delivering  it. Thoughts?