How Netflix Can Ruin Your App's Value Proposition

When you are running a subscription-based web app, cancellations are a part of everyday life. At Skritter, we realized early on that knowing why people cancelled would be of critical importance. We ask everyone who cancels to let us know why, and a surprising 50% of people actually do. We get these missives via emails and I track them to keep a pulse on what we need to improve. And so it was a fairly routine morning a few weeks back, while reading one such cancellation email, that I was struck by what the user had written:

"I have no money these days. Great program, but $10 is a bit too expensive. Would sign up and keep it for 1/2 the price. Netflix costs less than you guys."

Comparing prices between products is nothing new of course, and the big players in any space will always influence prices for the little guys, but this was personal for two reasons. First, I use Netflix all the time and personally love the company and their product. Second, I also happen to run a small startup which charges more per month than the big red giant I so adore. This user's comment was damning because while Skritter helps people a lot, it was hard to argue that Skritter is more fun or better value than renting 20,000 streaming movies.

This got me thinking about web app subscriptions as a whole. For founders, choosing a price for your product is difficult. It's also one of the most important decisions you will make as a business owner. So it's no surprise, faced with such an important decision, that many founders--ourselves included--look to the market for pricing clues.

The market for subscription services is homogenizing and falling. Back when monthly subscriptions were relatively unusual, there was less consensus regarding what an online web application should cost per month. Was it $50? Or was it $2? There was and is no one right answer for all teams. Unlike the market 2 years ago, however, customers seem more certain today how about much web apps should cost. This certainty is being driven by relative giants, the Netflixes and Xbox Lives of the world, who seem to be settling on a base price between $5-10/mo.

Just as people browsing the App Store expect paid apps to be a few dollars [1], so too do customers now expect to pay a certain amount for consumer web applications.

Big companies are providing customers with price anchors which will increasingly impact customer perceptions of value. While individual web apps will always have unique aspects that enable variable pricing, I don't think the day is far off when a young entrepreneur starting a B2C web app will unthinkingly set his price at $8.95/mo because that's what everyone expects.

The trend, however, is worse still. Because large consumer internet brands--like the industrial widget manufacturers of old--can leverage similar mass production economics, the perceived "correct" cost of a web app is likely to decline over time. Netflix already benefits from a virtuous cycle of user adoption, which allows it to reap more profit by lowering prices. There will be some basement price at which Netflix will no longer want to lower their price, but given that it used to cost $14.99/mo to get worse service than I currently get for $7.95/mo, I suspect that price is lower still. [2]

For those of us in the far remote niches of the internet, I believe that companies like Netflix have an increasing ability to ruin the perceived value add of B2C products through increasingly lower prices. And here I thought the selection was the worst part of Netflix streaming.

[1] $4.03 for iPhones, and $4.37 for iPads, according to marketing firm Distimo.

[2] And perhaps more importantly, the predictability of revenue streams.

Why You Should Refuse to Build a Company on Content

As web business models go, content is well understood: you produce something of value and then monetize through ads, lead generation, or just charging for what you produce. I refuse to start a new business based on selling content and so should you. Here's why:

It Doesn't Pay

The web has produced an extreme abundance of content. It has simultaneously failed to fix micro-transactions. This has resulted in the expected value of any specific information falling to zero. There are isolated niches in which content is still worth money, but they are becoming fewer and father between [1]. As a test of this mindset: would you be reading this right now if I had asked you to pay me even $0.10 for the privilege?

The average piece of content is worth almost nothing. This means that most people in the US can't make a living wage producing content. If you are a good developer, for instance, your time is worth many times more producing code than it is producing content of almost any type.

Producing Content is Unpleasant Work

Some people have realized that content has become too expensive to have people keep producing it. These new content companies (like Demand Media) are highly profitable while traditional content producers (like newspapers) wither and die. Algorithms will be increasingly important in content creation, and they do it just well enough to invite a click and then frustrate you into (hopefully) clicking an ad. Sites like About.com and Mahalo flood search results with just-good-enough information at scale and it's hard to beat companies that wield hundred of millions of links.

With that as your competition, you are forced to create bad/mediocre content as quickly as possible. Producing content is therefore a race to the bottom in which you must compete with the lowest paid global workers to produce bad content as quickly as possible. I don't want to make anything that sucks, much less in large quantities.

There Aren't Any Interesting Problems

You could argue that monetizing content in a sustainable way is an interesting problem, but I would beg to differ. Creating ever-more complex link farms at scale isn't my idea of doing great work. And past that problem, producing content is essentially the same process as it was 500 years ago. I do not mean to imply that creating good content is easy, but the problem is well understood, labor intensive, and has reached a level of development where success is defined more by cutting input costs than by creating better outputs.

Piracy Exists

But just for the sake of argument, let's ignore everything above. If you have a real itch to write the next revolutionary book of jQuery tutorials, there's the issue of piracy. Despite misguided legislation attempting to curb the behavior, piracy is easier today than it was when I downloaded my first MP3 on Napster in 2001. If it's easy to take from you and all you have is takeable, you are in a position of extreme vulnerability.

Again, there are content businesses that make money, but you'll notice such businesses are almost always established B2B companies operating in specialized markets where the liability of piracy is higher than the cost of acquiring material.

This Situation Is Deplorable

I say all of this with the greatest sadness. If people can't make ends meet producing good content, the world is a poorer place. I won't really miss another review of the iPad 9, but I will miss proper journalism. I just finished reading the book 1491. It was both enthralling and breathtaking in the scope of research that went into it. But reading it was a guilty pleasure because I knew the author had to take a huge gamble to write the book, and his odds of making money on his investment were poor. If societies lose people that make it their business to seek truth and produce content, those societies become worse. Watergate was only exposed because 2 Washington Post journalists spent more than three years researching and seeking truth full time. I want to live in a world where people like that can feed their children.

At the same time, I realize I'm not prepared to devote 10 years fighting this issue, and so I refuse to start a company based upon content, and I think if you realistically evaluate the costs, you will too.

[1] I can imagine a number of niche B2B content business models in which you charge for access to highly specialized technical information that changes a great deal. Perversely, one such content business model is law, which doesn't produce any economic value, law merely re-allocating resources between parties.

Marketing is Just Sales Without Accountability

Over the course of the last 7 years, I've spent a considerable amount of time managing sales and marketing for my own 2 software companies as well as a web consultancy. I've attended conferences, made sales calls, printed flyers, and schmoozed at investor gatherings. And I've come to believe that marketing is just sales without accountability. Bear with me for a moment.

Marketing is Sales

Both marketing and sales are intended to produce the same end result: make more sales. Marketing is the top of the sales conversion funnel; the first interaction with a potential customer in which good salespeople provide value and make a lasting impression. But let's not loose sight of the end goal: that first contact with a potential customer is fundamentally about sales.

Companies don't sponsor trade conferences and staff booths because they want to spend tens of thousands of dollars on snazzy signs and airfare, they want to make more sales. Companies don't maintain blogs because they want employees to become excellent writers, they want to be noticed for their contributions to their niche and make more sales. Companies don't buy television, print, and radio advertisements because they want to support actors and graphic artists, they (you guessed it) want to make more sales.

Marketing Isn't Measured

The problem with marketing is that it's so far towards the top of the sales funnel that it's difficult to measure. Sales calls either result in a sale or not, so it's natural and easy to measure their effectiveness. It's a lot harder to measure the value of meeting someone new at a trade show. Will the person become a paying customer? Will they refer someone to your business? Will they write about what great work you are doing? Or will they trash you to a potential customer? It's just not something that's obvious or easy to measure.

As a result, businesses and business owners (myself included) simply throw up their hands at some point and start generalizing. "We have to get our name out there somehow, and people watch television, so why don't we try a TV ad?" Or perhaps "We know some of our customers attend the BigConf Trade Show, so let's exhibit this year."

The unspoken rule of marketing is that most of it is wasted effort, but for a myriad of reasons, it's too costly to figure out which part is wasteful. My suspicion is that for companies in established markets, what most folks would recognize as marketing probably is worth the time and energy. Most companies can't prove that, or course, but the fact that they are still around means that they are either spending little enough on marketing  that their failures don't sink the ship, or the marketing efforts are actually paying off.

Stop Marketing and Start Selling

If you work for a tiny company or are building a new product, you can't afford to waste resources on unprofitable marketing or sales. You have to start measuring marketing efforts in the same way that you might measure sales. At this point you might be saying "Yeah, well, that's all fine and dandy, but how the heck do you propose I do that?"

Simple: pick some metrics and start recording data.

Here are some examples of things that I've personally tried:

1. Enter people you meet at trade shows in a CRM and track sales as they come in later.
2. Attach a coupon code to print materials and track how many times the coupon is used.
3. Ask incoming sales leads how they heard about you, be bold and ask for a name if the person is willing to give you that information.

You might now be saying "but I'll never be able to measure activity X!" One striking thing I've noticed about sales is that salesmen and sales departments are loath to invest time or money in anything that can't be tracked. That's a good starting point for marketing too. That doesn't mean you can't do activity X. It just means you have to get creative about tracking it. In cases where you can't find any way conceivable way to track it, that's generally a good indicator that it's not a profitable marketing channel.

Conclusion

You might well choose the wrong metrics to measure the first time around. For instance, the first two years that I attended trade shows for my company, I measured booth traffic. I literally just wrote down how many people talked to me at the booth. It turns out that people visiting the booth didn't predict sales at all. But that data saved us more than more than $10,000 when it came time to exhibit in year three. We had hard numbers that suggested that either 1) it didn't make money for us to attend trade shows or 2) unqualified visits to our booth are not related to making sales to qualified leads. Dodged a bullet there!

Marketing doesn't have to be blind, and when it does, don't do it. Treat marketing like sales, measure everything you can, and in a year or two you should be able to make at least one decision that saves your company $10,000.

Sivers is Right: Customer Service is the New Marketing

This post was originally published on 8/21/2011.

Recently I read an old interview with Derek Sivers about his CDBaby customer support. I've always found his writing educational, but in this interview his closing sentence struck me as particularly true: "customer service is the new marketing." That got me thinking about my own experience with my company and how much we labored to do marketing "right."

We started Skritter on a shoestring to teach Chinese and Japanese. We decided that we would either make money and support ourselves, or stop working on the site. After the first year, the site was generating cash, but not very much. Nick, Scott and I decided we needed to hit marketing hard. We partnered with a great guy in China to help us reach more customers and we set about our marketing.

We began with Adwords. We attended several relevant trade shows. We tried promotions and giveaways on the site. We started Tweeting and developed a strategy for Facebook content. We had two marketing interns in China talking to learners on the streets of Shanghai. We were present at Chinese testing centers, we contacted schools to sell site licenses, we did webinars, distributed print ads, setup an affiliate program, spent serious time on SEO, created a content strategy to improve SERP results, collected quotes from marketing consultants and agencies, redesigned the appearance of the site, and conducted A/B tests.

Throughout all of this, we continued to grow, but our growth curve didn't look a hockey stick, it was the gradual upward movement of a well liked company.

We always made it a priority to bake in tracking to our marketing, and after a year with little to show for our effort, we decided to give it a temporary rest.

That week we watched in amazement as the site kept right on growing, despite negligible marketing outlays. We nervously twiddled our thumbs, waiting for the growth numbers to level out and go into free fall, but that never happened. Instead, Skritter continues growing to this day, and we have strong evidence to suggest that it's because of the way we treat customers.

First, we conducted a poll of our user base and found that more than 35% of our customers had personally been in contact with either Nick, Scott, or I. That meant 1 of every 3 paying customers had traded a personal email or met us face-to-face! Considering the size of the site at the time, that was an astonishing number of customer interactions.

Second, even after months of no marketing, growth continued unabated. Moreover, we continued seeing a trend we hadn't paid much attention to earlier: people arriving at the site and telling us (albeit not in an easily quantifiable way) that they were there because of referrals. This was corroborated by a forgotten poll we had done more than a year before which attributed most new inbound customers overwhelmingly to referrals.

So, while we were trying our best to find scalable marketing solutions, all those hours spent in front of keyboards being sociable and helpful to current customers drove site growth. Our customer service has been our marketing, which directly supports Derek Sivers' opinion.

Marketing doesn't always make sense for companies. Where marketing is concerned there are two schools. The first is the "build it and they will come" school of thought. The second is the "most companies needs marketing" school. We clearly followed the latter and although we are just one data point, when we started my second company,  we took Derek's advice to heart and disregarded marketing at least. When you've only got 5 customers, there's a real temptation to focus all your time and effort on finding more customers. But that's missing the forest for the trees.

In our experience, the key to a larger customer base is the person right in front of you, money in hand, waiting to see how you'll treat them.