Monetizing Facebook's Beacon

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Beacon, the controversial advertising tool used by Facebook to deliver highly targeted ads to users, was removed from the site a couple of weeks ago due to increasing concerns from privacy advocates. Beacon was a great idea.  Basically, the tool would allow data from other sites to be automatically delivered to a user's Facebook profile.  For example, if you went to Fandango to purchase movie tickets, your transaction data would be transmitted to Facebook and included in your profile.  That way your friends would know where you buy movie tickets and what movie you're going to see. Minus the privacy concerns, I think it's pretty neat.

Here's how I think this probably affected each of the three stakeholders.

Facebook: For Facebook this was wonderful because, presumably, they could charge advertisers high fees (with sky-high margins) for these ads.

The Advertiser: For the advertiser it was great too because it effectively created "forced word of mouth"; i.e. "oh, Betty buys her movie tickets at Fandango, maybe I should too".   Of course this doesn't mean that Betty is necessarily happy with the Fandango service or that she would recommend it if the data were under her control -- which does make the referral a bit less impactful.  Nonetheless, there's still a lot of value here.

Facebook Users: For the users, this wasn't so good.  It was an obvious invasion of their privacy for nothing in return.

To me this was the perfect time for Facebook to use the "pay-the-consumer business model" I've referred to in other posts.

Think about it for a moment.  This is a win-win-lose model.  Facebook and the advertisers win and the user loses.  How could the user win?  Why not simply transfer some of the margin from Beacons' sales directly to the users.  That's right, invade the user's privacy but give them something in return.  Further, make everything opt-in.  Privacy advocates can't complain when everything is opt-in.  And there'd be no shortage of opt-ins because people like easy money.  You could setup variable pricing for the advertisers based on unique users that viewed the data -- you could even charge based on the profile's of the users that made the transaction (Facebook has a TON of demographic and behavioral data that they could share with advertisers.)

To execute this, they simply could've added an icon to every users homepage asking them if they wanted to make some easy money.  When the icon is clicked, the users could opt into Beacon's various features.  Each feature would clearly describe two things:

1.  Exactly what data they'd be forfeiting and who it would be seen by. 2.  Exactly how much money they'd receive in return for the opt-in.

Of course they wouldn't have to actually send cash to the user.  It could be gift cards, or actual merchandise from their favorite merchants.  It could even be raffle based -- "opt into Beacon for the chance to win an iPod).  Eventually it could buy users access to premium site features.

The bottom line her is that the only way innovative ad systems like Beacon will be sustainable is if the users have control of the data that is sent and if they feel like they're getting something in return.

The key here is trust.

And I don't know about you but I'm usually more likely to trust companies that pay me.

The Image of Marketers & Social Networking

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A few years ago I had to write a paper for business school on the image of marketers and how that image could be improved.  I think a lot of what I wrote back then could easily be applied to some Web 2.0 business models.  Here's an excerpt from that paper.

So what should marketers do? How can they improve their image? How can they convince consumers that they are a valuable source of information on product offerings? How can marketing departments stop wasting money on advertising that’s never seen or heard?

I propose that marketers change the way they view the consumer. Currently, it seems marketers see their function as a game of “cat and mouse.” They are chasing the consumer and the consumer is trying to escape.  Instead, they should view the consumer as a partner. In a partnership, both parties benefit from each other.

Marketers should begin to appreciate the consumer who is willing to learn about their product offerings. Consumers should be rewarded for this willingness. Learning about product offerings takes time, and as the old saying goes, “time is money.” Thus, it seems only logical that marketers should pay consumers to learn about their products. That is, marketers should pay consumers to watch, read, and listen to their advertisements. This strategy has been gaining popularity recently, and smart marketers will begin to incorporate it in their plans.

So how does it work? Two examples:

  1. A marketer sends a brochure on a new product to a consumer through the mail. The brochure includes a questionnaire on the content of the brochure. If the consumer answers the questions and mails it back, the marketer sends the consumer a check.
  2. Marketers put informational commercials in movie theatres and pay targeted consumers to watch the movie. Of course, the commercials would be entertaining ― most already are.

An interesting extension of this concept was recently proposed by two professors at Yale School of Management. Their idea was to apply this thinking to the Do Not Call Registry. Households that sign up for the Do Not Call Registry would be allowed to authorize their phone company to connect any call that meets their price-per-minute. Households could charge different prices for different times of day or for different types of calls, a kind of reverse 900 service. Telemarketers of course pay only for the households that they reach, not for the ones that hang up. And if the telemarketer doesn’t think the consumer is listening, they can simply hang up. Consumers are equally free to quit the call and stop getting paid.  This idea could easily be extended to faxes and emails.

Given the way that marketing has been done in the past, this may seem like a radical idea. But after taking a second look, it seems much more plausible. Think of the advantages for both the marketer and the consumer:

For the marketer:

  • No more wasted marketing dollars on mass advertising. Rather than paying millions of dollars for mass advertising campaigns that reach consumers that will never buy their products, marketers could focus their ad budgets on selected consumers. Because the consumers are getting paid, they would be willing to give up specific demographic information. People are more than willing to give personal information to their employers, as long as they keep getting a paycheck.
  • An improved image. People generally trust the people that they work for and because it is clear that consumers are getting paid to learn about products, the image of the sneaky marketer will slowly fade away.
  • Compensation would make consumers much more open to exposing themselves to marketing messages.

For the consumer:

  • Less exposure to annoying marketing tactics. While questionable marketing strategies will likely always exist, smart companies will cut down on traditional “involuntary” advertising strategies.
  • Getting paid to watch TV. Many advertisements are already quite entertaining. Some people actually enjoy watching commercials on television. Getting paid for watching TV is a pretty good deal.
  • Getting paid to learn. Many people like to learn about new products that make their lives more enjoyable.

Over time, marketers will be seen more as educators than salespeople. When companies realize the benefits of this image makeover, they will realign their marketing tactics to see the consumer not as a potential customer, but as a potential partner. Conversely, consumers will begin to see marketers not as adversaries but as partners.

"Freemium"

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New word...for me, anyway.

Freemium.  First articulated by the venture capitalist Fred Wilson.  Basically, it's the business model of generating traffic and users by offering a free service.  Then, upselling that customer base on premium services.

By the way, I've been reading Fred Wilson's blog lately.  It's pretty good.  I'll post some responses to his posts in the next few days.

LinkedIn

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LinkedIn, a great site which provides a good service, is a good example of the difficulty of monetizing web traffic.  Should they survive on service fees (mostly from headhunters) or from advertising? I hear that, like most other networking sites, the majority of their revenue comes from advertising.  This fact underscores a really interesting problem.

There are so many cool industries that have popped up from Web 2.0 -- social/professional networking being one of the most exciting.  But like Web 1.0, many of them are simply surviving on the ad model.

What is it that makes these companies say, "hey, we've got this awesome site that millions of people love and are using daily, why don't we take away from the experience by distracting our users with ads?"

I think the answer is that they simply can't come up with anything else.

There are three possible solutions to this problem, I think.

  1. Continue using the ad model (a great short term strategy but in the longer term users will only get better at ignoring the ads; oh, and just as important, the advertisers will simultaneously get better at measuring their effectiveness.)
  2. Use the service-fee model (which, for what it's worth, I happen to think is a great long term strategy but it could never support the ridiculous valuations that LinkedIn and others are chasing.)
  3. Discover a new revenue model.

Until companies can be as creative about monetization as they are about generating traffic, the industry is stuck with 1 and 2.

Advertising Outlook for 2008

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There's a great article in today's WSJ about the outlook for the advertising industry in 2008.  Check it out here. If half of it is true then this new marketing thing is pretty real.

The article points out five trends to watch out for in 2008.  I love all of them because they clearly support the theory that marketing is getting flipped upside down.

My thoughts:

  1. New structure.  The article points out that marketers want more collaboration between web advertising executives and TV advertising executives.  To me this means a lot more than marketers simply recognizing that attention spans have shifted from traditional mediums to the web.  This is a recognition that marketing is changing...quickly.
  2. Screen Wars.  Many advertisers are turning to outdoor television screens to get consumers' attention (gas stations, doctor's offices, etc.).  Another bad sign for old marketing.  They don't have TiVo at the gas station (yet).  And other sign of how interruption-based marketers can stay ahead of technology (for a little while).
  3. House Guests.  The idea that marketers want to know more about consumers that simply what they're watching on TV -- they want to know about their lifestyles.
  4. Green backlash; i.e. because of things like blogs if your company isn't serious about Green then you'll get caught.  Now that I'm writing one, I can't help but be stunned on a regular basis by how powerful these things are.
  5. The antisocial movement.  Social networking is already beginning to feel the effects of hyper-growth; that is, as the article says, "nobody has 5,000 friends."  This section includes this quote which is best part of the whole article: "...the [social networking] sites will be much more effective as a consumer-research tool than as a venue to peddle products."

I love it.  Now there's a business model worth pursuing.  Social networks could be monetized by providing companies with real-time, accurate and aggregated consumer data; rather than irrelevant, wasteful and annoying banner ads.

I truly believe that consumers will happily give up more data than most people think if they're actually getting value in return.  So rather than accepting more ads or forcing more users to pay service fees, simply ask users to allow their data (on an aggregate, not individual level!) to be viewed by a third party.  If this value proposition is made clear in an honest and direct way, I think there's a business here.

Raising Capital

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A couple thoughts on raising money.

  1. Venture Capital financing is only done out of desperation. There’s simply no other way to get $1 million plus investments if you’re a private company.
  2. Venture Debt.  Basically this is when an entrepreneur uses equity to back a loan from a venture firm. If the loan can’t be paid, it turns to equity. Often, if the loan is paid, there’s an option for the investor to transfer a portion (or all) of the loan into equity.

This is a great deal for the VC. If things go bad they can use equity (ownership of the company) as a backup. If things go well they own equity in an early-stage, high-value company.

Too often what's good for the VC is bad for the entrepreneur.

Super Bowl Commercial Experiment

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A bit more on my Super Bowl commercial idea. A quick Google search on "Super Bowl Commercials" and you get around 296,000 results.

The first one you'll find is this.  An entire site dedicated to Super Bowl ads.  Don't miss the ironic TiVo ad towards the bottom of the page.

I've been searching for a list of companies planning to advertise this year.  As I mentioned earlier I'm pretty sure that any company that opts to advertise during this game will see a significant decrease in their stock price over the next few years.  I'll post the list as soon as I find one.

Accessories

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Accessories.  What a great business. I just bought a  protective cover for my new iPod Nano.  $34.95.  You can see a couple samples here.

These things can't cost more than a few cents to produce.

I think it's true that the best new business ideas come from an entrepreneurial person noticing a problem and starting a business around the solution.  Often, I fear that we're going to run out of problems and entrepreneurship is going to fade away.

But then I see a ultra-high margin business like this one built around a simple solution and, instead, my fears fade away.

The Best Business Lesson Ever

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Perception minus expectations equals satisfaction. I believe the first time I heard this was in reference to Disney World.

Disney's customers would spend hours waiting in line for a 2 minute ride.  They would enter the line really excited about the ride (high expectations).  But at the end, after waiting more for two hours, they felt like it was a waste of time (low perception).

So Disney had two choices:

  1. Improve Perception (create a better ride/create more rides to reduce demand/let fewer people into the park.)  Or...
  2. Lower Expectations (make it very clear upfront what the customer was getting into.)

You've already guessed that Disney went with the second option -- they lowered expectations.

They simply added a sign at the end of the line that would tell each customer approximately how long they would have to wait (I heard that they even added a few minutes to these estimates just to be sure that expectations were really low).

This was a brilliant (and nearly free) solution to a big problem.  The net effect was that satisfaction increased because expectations decreased -- the perception of the ride itself stayed the same.