Tuesday, January 25, 2011

Breaking the Habit


There are two styles of consumer Internet ventures emerging in Israel: product perfectionists and money chasers. Despite our tendency to celebrate and learn from both of them, one of these has a darker side we should be cautious of.


Product perfectionists are founded upon a belief that a unique and differentiated product will create an avid and loyal customer base, which in turn will help build their brand and business. These companies understand that a great customer experience is paramount, and the result of a corporate strategy and culture that focuses on the customer, not merely the result of good product definition or an unbeatable price. I place a high premium on product perfectionist companies that can deliver a compelling customer experience, though it is far from sufficient to ensure success.

In contrast, money chasers are founded upon a belief that an effective monetization and distribution model can essentially define the product offering. These companies excel at driving traffic, accumulating users and raking in cash, but often at the expense of the end consumer (including the customers’ customer). While many entrepreneurs and investors are attracted to the money chasing model, there is a disturbing side to many of these businesses.
Money chasers often prey on naive consumers with aggressive marketing and monetization methods that often have nothing to do with the product they are providing, including changing your default search engine, gleaning your personal details for affiliate sales, or signing you up for a subscription you weren't aware of. To be clear, most of these companies operate legitimate businesses within the law, but push the bounds of acceptable behavior in order to generate profits, or let affiliate marketers do it for them. In the process, they ensure an awful user experience, weaken their brand, and hurt shareholder value.

Like in any attempt at categorizing, there is oversimplification in what I say about product perfectionists and money chasers. Internet entrepreneurs are pioneers, and many of the rules and standards have yet to be written. However, lately I have seen a new generation of money chasing companies, which seem to have learned their craft from the veterans of Israel’s forex, affiliate marketing, toolbar and gaming titans. Product perfectionists have much to learn from these talented individuals, who understand the math and economics of customer conversion like nobody else. But there are some unsavory practices that are also being transferred, and it is a dangerous path to be on.

A Review of the Unsavory


Some companies deliberately mislead the consumer into thinking that he is receiving something more significant than he actually receives, which is the case with several Israel-based sites that provide “services to assist” foreigners to fill out simple, seven question green card lottery forms.

Other times, it is more sinister with marketing tactics that deliberately mislead consumers into signing up for a survey or game and unknowingly committing to monthly subscription of some sort (often on mobile phones). This method, known as cramming, takes advantage of affiliate agreements companies have with cellular operators, which simply add on fees to you monthly phone bill.






(
(small print of this common quiz in Hebrew says 30 shekels/week subscription)

And finally, sometimes the consumer is very much a party to his own exploitation, which is largely the case with forex trading companies which make money only as fast as their customers lose their money(though this is in contrast with gambling sites, which at least allow people to win and have fun in the process). The prior “tricks” should perhaps be obvious to the consumer, and one can argue that such consumers are responsible for being so trusting. But there are additional methods that are much less obvious, but no less sneaky.

Monetization Models Prone to Abuse

When monetization models are divorced from the core product value, there is a greater tendency to exploit consumer ignorance. This occurs in business models where the consumer doesn’t pay for the product or service directly, but rather indirectly through search advertising or affiliates. I don’t have a problem with either of these monetization models per se, unless they are non-transparent to the user, which is too often the case.

Siphoning Search

Downloadable software that installs a browser toolbar that then changes the consumer’s default search engine is simply obnoxious (they generally use an aggressive ‘opt-out’ installation process). These companies operate as affiliate partners of one of the large search engines and are paid a cut of the resulting search engine revenue. Most of these publishers also change the consumer’s home page to a modified version of Google or Bing. 


How common is this? Just last week, it was revealed that the third largest advertiser on Facebook is a website site that forces the visitors install "a browser plug-in to present an enhanced experience." Make-my-baby.com is a Microsoft Bing affiliate and gets paid a hefty bounty for each install. This company’s deal is not unique, and it now widely known secret that Bing is paying such bounties in a land grab against Google. Forget the fact this is artificially inflating advertising revenues across the industry. Such bounties bring out the worst in publishers which are suddenly motivated by installs and altered home pages, not active or quality users, and certainly not happy users. This leads publishers to optimize consumer confusion by tricking the consumer into installing the search toolbar even when the consumer thinks he/she has chosen the opposite!


In most cases , there is little doubt that the consumer was not in the market for a new search engine, and probably reached the said software publisher or website just fine via his/her current default search engine. Furthermore, the consumer may never know that the publisher has forever altered his search experience with 10 sponsored ads above the first search results instead of the typical two(and some sites work hard to hide the fact they are even sponsored results). Worst of all, uninstalling the software or the toolbar often leaves the hijacked home page in place until the next toolbar equipped piece of software changes it yet again! The search engines themselves are complicit in this behavior, but presumably hold their noses when signing search affiliate agreements. Recently, Google has been so appalled at how affiliates trick their consumers that they have tried to enforce certain standards around modified Google home pages. But this is like a drug dealer pushing back on his heroin addict for fear he will die and cease to be a regular customer. Some have complied, while others have moved to Bing or to super affiliates of Google like Ask.com.

Which search experience is more transparent?


Abusive Affiliates

In principle, the affiliate model of monetization is less devious, although many websites have begun to push the envelope in what is an appropriate use of customer information. The infamous case of Offerpal signing up consumers for subscription services they weren’t aware of is an extreme example of abuse because it was illegal, but there are numerous other examples of legitimate, yet unfair tactics using the affiliate model. For example, some large Israeli software publishers require the user to input key personal data like a phone number, which is then forwarded to a call center for use to push third party products unrelated to the product the consumer downloaded. There are others, which lure consumers to provide personal data with promises of guaranteed prizes like free iPads. It’s one thing to turn a blind eye to third party sites which are violating your own policy, like Facebook did, but much worse in my opinion to predicate your business on deceiving your own consumers.

Regardless of the source, it should be clear now that growing revenues and usage is not necessarily an indication of customer satisfaction or brand creation. The Internet affords businesses great leeway in how they communicate with consumers and such freedom can be easily. Net Promoter has its method of measuring customer satisfaction, asking the simple question of “How likely is it that you would recommend our company to a friend or colleague?” You may ask whether I am jealous or frustrated that I am not invested in some of the outstanding companies which operate in this way and which today are printing cash. Perhaps, but then I remember how difficult it is to believe in your investment and potential, when you are hesitant to use the product yourself.

If you are an entrepreneur or investor, I suggest asking yourself a slight variation of NetPromoter question: “Would you recommend the site or download to your own mother?” I am deliberately being provocative here, but that is how I think of my own investments. Would I let my mother use their product or service without any caveats?

So, why are money chasers bad for Israel?

Well, first off we are training a generation of Internet product and marketing experts to exploit the consumer, rather than serve the customer. We are becoming masters of deception, which is quite convenient when you are anonymous and can hide behind cute websites, big name search engines or a web of little known affiliates. Secondly, few of these companies will ever have long term strategic value because their monetization methods are will not endure in their current form forever. Affiliate search via toolbars is in decline, with Chrome, Safari and the new Firefox dropping support for toolbars (and Google stepping back). Additionally, privacy hounds, security sleuths and legal experts are looking out for abusive affiliates, and have proven they can shut companies down overnight.

Some money chasers are led by entrepreneurs who have made a tactical decision to generate revenue as a way of sidestepping angel and venture financing, which is fair enough. But when “product innovation” is merely a euphemism for squeezing more profit from unwitting consumers, the monetization model has in effect become a drug. It is difficult to slow down, let alone stop or reverse. Most often, it’s a slippery slope as companies push the limit of what is acceptable until someone exposes them or pulls the rug out from beneath them.

A sustainable business must be built on a great product and satisfied customers. I understand the need to optimize, test and influence consumer decisions, but companies should never allow such clever tactics to become their overall strategy. As a VC, I too need to go where the money is, just like the entrepreneurs I back. But sometimes we also need to step back and question what value our investments bring to the world.

No comments:

Post a Comment