Web 2.0: Cutter IT Journal article that was published in October 2006: "Driving Revenue Growth With Web 2.0"

(For the most recent articles on Web 2.0, check out my full Web 2.0 articles category.)

Much has been written about Web 2.0 of late. Unfortunately, much of it is too conceptual, too utopian, too granular and technically detailed, or too basic in nature to be used by executives or IT managers to drive their organization’s success. It is the purpose of this article to attempt to fill that gap by clearly articulating a series of tactical applications of Web 2.0 that can be used today to drive increased shareholder value for your company. Much of the content can be equally applied to non-profit or government institutions but those types of organizations are not the focus of this article. It is expected that the reader will be familiar with the general concepts of Web 2.0 and many of the basic terms. This is not meant as a comprehensive laundry list but should serve as a starting point for readers to be able to assess their own organizations to see what would be most appropriate for their specific situation.

For the purpose of this article, a very brief definition of Web 2.0 is in order. There are many conflicting, overlapping, and somewhat contradictory definitions under development but for the purpose of this article we define Web 2.0 as the economic, social, philosophical, and technical transitions that are causing the shift from “personal computing” to “social computing”, from a read-only web to a readable/writeable/mixable/hackable web, and from the dominance of the desktop computer to the “web as platform”. That is both broad enough and simple enough to cover all of what we will discuss here.

Shareholder value is comprised of three key drivers (1): value drivers : revenue growth, operating margin, and external expectations. This article, the first in a series, will discuss how to impact revenue growth through the acquisition of new customers, the retention of existing customers, the increased sales from an existing customer base, and finally by optimizing pricing to maximize revenues.

REVENUE GROWTH THROUGH NEW CUSTOMER ACQUISITION

There are two primary drivers of new customer acquisition: marketing & sales; and product & service innovation. Both of these can be positively affected by using Web 2.0 tools and approaches.

Marketing & Sales

One of the first things one would normally be advised to do when looking at marketing and sales activities would be to focus on high-value / high-potential customers. Be warned – this may be a mistake if your business has digital product or could have digital/real product hybrids. If so, it may be subject to Long Tail economics which dictate that sometimes millions of markets of a few may be more profitable than a few markets of millions. (Long Tail theory is beyond the scope of this article – your best bet is to go buy Chris Anderson’s book The Long Tail and do an analysis of your business against the Long Tail principles.) Instead, focus on your most profitable products and services…and don’t assume that they are your “hits” and “best-sellers”. If your venture is Long Tail friendly, you may be making more profit off of the products you sell in smaller batches, and there may be an opportunity for you to drive further down the tail to sell fewer products to fewer people and to make more money at the end of the day.

Next, you will want to explore more effective sales channels and advertising channels. This is straightforward. If your product can be sold in a self-serve fashion over the internet and isn’t currently being sold that way, start doing it. If your product is too complicated to sell in that fashion, then consider building a simpler version if there is a market for it and selling it in a self-serve fashion over the internet. As for advertising channels, expand your use of internet search as a channel. Hire somebody or pay somebody to execute an effective internet search engine optimization campaign to maximize lead generation.

If your organization doesn’t already have corporate blogs, it needs to start. This is no longer optional when search is now becoming a primary way that your prospective customers will about you. Blog postings have inordinately high Google rank and always sit at or near the top of the Google listings. If you don’t want to suffer the fate of Kryptonite or U-Haul, both of which find themselves with pages and pages of negative customer rants on their first Google pages, then start blogging as soon as possible and have people say nice things about your company. There are many corporate blogging books and web-articles written on this subject. Two of the better books on the subject are Naked Conversations by Robert Scoble and Shel Israel (a good high-level overview of why companies should blog) and Blog Marketing by Jeremy Wright (a detailed look at how to “do” corporate blogging well.)

Product & Service Innovation

There are many routes to product and service innovation that can drive new customer acquisition. Among many other options, a company can: broaden its offerings (by rapidly modifying existing offerings to better suit customers or adding new ones) to appeal to more segments; move from a platform model to an eco-system model; increase the quantity and quality of offerings launches; improve time to market, improve the product design process, or improving the innovation skills of your people.

Following are a few suggestions for how to achieve some of the above with Web 2.0.  By employing Long tail theory, there is the option to create more offerings that would appeal to the “Tail”. Or by moving a software company from desktop-based software development to a Web 2.0 “light, small, fast, and cheap” development methodology, there will be more opportunity to get feedback from your customers, learn from it, and adapt the product, leading to more rapid product innovation. Another approach worth exploring is moving from the traditional platform model to an even more richly connected eco-system model, by creating smaller web services that can be linked to many, many more companies, which in turn makes your systems more valuable to a customer. Finally, blogs, wikis, RSS readers, blog editing tools, and RSS aggregators could be deployed as a light-weight knowledge management system with which to share innovation best practices, learning, and content. By opening this system up to a broad set of employees, partners, customers, and even competitors, innovation ideas can come from anywhere in the eco-system, not just from the core design team or business leaders. As an example of this, IBM recently launched an Innovation World Jam where they are asking their entire eco-system to help them innovate in public.

Another significant opportunity lies in creating web services that access your systems, processes, and information. No matter what kind of business it is, there is probably some sort of opportunity to expand the number and type of customers that it serves by offering access to its data, services, and systems such that it makes it easy for a customer to interoperate without having to go down the outmoded and expensive EDI path. Lightweight web services are quickly replacing expensive traditional EDI links. There is a great article by one of the Amazon.com architects on how they re-architected their entire operation around Web Services and how that allowed them to build an ecommerce platform with over a million active retail partners. The article can be found here. Look at your operations. Think about how you could open them up to the world and make it easier for people and companies to do business with you. How could you make it easy for a thousand or a million customers to connect to you?

CUSTOMER RETENTION AND REVENUE EXPANSION FROM THE INSTALLED BASE

Next, let’s look at customer retention and revenue expansion. There are four levers that can be modified to drive higher retention and volume of business: product & service innovation; account management, cross-sell/up-sell, and general retention practices. Since we covered product and service innovation in the previous section, we will discuss the latter three below.

Account Management

Traditional account management best practice would suggest that one should focus on the high-value clients. Just as in the case above, this is a mistake because of the Long Tail. There may be more value found by paying attention to the low-value customers in aggregate. Related to this would be the standard approach of rationalizing your customer base, weeding out the low-value customers and keeping the high-value ones. If you have a potential Long-Tail business, this is a mistake. Do the opposite of what conventional wisdom would suggest and see if you can derive more value from the customers that are buying smaller volumes but that aggregate to be a significant portion of your business. This requires that you drive your costs down as far as possible so that you can make money farther down the tail. This means having a search keyword strategy, using blogs as cheap marketing channels, and moving to a self-service model so that customers can find, learn about, and buy your service without interacting with your staff.

Some other actions one could take under the general category of account management include improving your understanding of customer needs, customer satisfaction, and customer interactions in order to be more responsive to their needs. There are quite a few Web 2.0 ways to achieve this in the following example.

Let’s look at an example company and see where we might apply some Web 2.0 tools and approaches. ABC Widget co. makes consumer electronic devices including toys and games. They are having a tough year after the exploding doll recall incident from last year where they were hammered by bloggers for not recalling the doll sooner. They have supply chain problems that are causing some issues but the biggest problem seems to be the fact that their products of late aren’t really hitting the mark and aren’t selling that well, even when they do get them to the store. Customer support calls are up because of some complex product designs and they have a vague sense that customers are frustrated but aren’t sure how frustrated they really are.

This company needs to start blogging. Yesterday. They need to get out there and tell their side of the story with a human voice. Apologize for the doll incident and ask forgiveness. This is not the job of the PR department or the Legal department, the first of which will speak in corporate speak and the second of which will deny responsibility in order to protect against lawsuits. Next, they could implement some RSS reading infrastructure to start tracking what people are saying about the company. When people say negative things, the company needs to admit it if it’s true, or defend it if it’s false. Engage those bloggers online and learn how to do it well. They are not the enemy – they are ABC’s customers, partners, vendors, and suppliers who now have a forum for their opinions that ABC doesn’t own or control. ABC’s only two choices are to ignore that conversation or to join it. Once it has begun to engage its customers, the company should consider building out some online community for its users so that it can begin to find out what those users really care about. ABC could design and build a site that serves their customer’s needs and that allows them to meet and interact. Post community guidelines up front. Invite customers to help build the community, generate content, and moderate the site. Reward the good contributors, and sanction/isolate those who are harmful to the community. These people are ABC’s future. Now, invite them in to help design new products. Invite them to be on a panel where they can provide both qualitative and quantitative feedback on your plans. Fixing product design and development up front will cause lower support issues later on in time. For now, all the company can do is add more bodies to the support team, and maybe put up blogs and forums where customers can explain their support issues and maybe even help ABC to document the problems in an open wiki. After all, they know ABC’s products better than the designers or the support personnel. If there are any web-based aspects to this business, then ABC must immediately begin to instrument their web-applications so that they can watch every single action that users take. There are nuggets of gold buried in that mountain of “usage pattern data”. By watching their users’ use the web-based systems and applications that interface with the ABC toys and games, it is possible to deduce needs that the users themselves can not even articulate but that are obvious from the patterns. There are many more things that could be done but that is a first sampling of ideas that would all support better account management practices.

Cross-sell / Up-sell

This leads us to cross-sell and up-sell improvement. Now it will become apparent that when we apply Web 2.0 tools and thinking in one area, it often has positive spill-over effects in other areas. For example, typical cross-sell thinking would have us once again revisit the high potential customers and the high potential products, both of which are covered above. We should also look at our sales and advertising channels to identify opportunities to cross-sell/up-sell to existing customers and when we do that, we now know to be aware of the entire tail and to use low-cost models where appropriate to move further down the tail into potentially more profitable territory.

Back at ABC Widgets, there are a few things that could be done that seem pretty straight forward. They could examine their total customer experience and make sure that those experience touch points are fast and functional. People are getting used to Amazon.com, eBay, and Google where the time space between thinking of what they want and receiving what they want has shrunk and the quality of that interaction has gone up compared to dealing with other companies. Revising heavy ERP systems doesn’t count as Web 2.0 thinking, but there might be some places that ABC could apply some light-weight application development to solve some particularly knotty issues, build out moderated forums for their users to improve the support, and/or move their traditional CD-based software applications online where they can build, learn, and adapt them to the users quickly. This will give them a faster order to delivery cycle time (search for the software/game, click a button, and pay for it and play it immediately.) Again, much of this was covered by earlier initiatives. One big area of weakness and opportunity is in brand strength and goodwill. There is no longer any place to hide. Companies that used to bury their customer horror stories in their online forums (or worse, delete them from the forums as Apple Computer has done many times in the past), are now faced with the ugly truth every day when they search for their name. This was discussed above in the Marketing & Sales section but bears repeating. Chris Anderson said it best: “For a generation of customers used to doing their buying research via search engine, a company’s brand is not what teh company says it is, but what Google says it is.”  If ABC wants to retain their current customers and sell them, more they need to react to what their customers are telling them. And if their products are crappy, then they should admit it, fix them, and then move forward in collaboration with their (remaining) customers.

Retention practices

Traditional retention policies use a fairly heavy-handed approach whenever they can get away with it. This would include setting up barriers to switching. The telephone companies used to rest safe in the knowledge that people wouldn’t leave, no matter how awful the service was, because they didn’t want to give up their phone numbers. Once local number portability passed as a law in the United States, people defected in droves (often unfortunately from one frying pan into another fire.) The entire concept of creating barriers to fence your customers in is wrong-headed and disrespectful.

Here are some suggestions for the management at ABC to improve retention. Start by trying to get a grasp on defection drivers, candidates and metrics. This is a lot easier if you are delivering some sort of hosted services. It has been suggested that the sales people at Salesforce.com and Jot (hosted software companies that specialize in CRM and wikis respectively), know within 24 hours if a new customer will become a real paying customer. They also know if an existing customer is declining in their usage and likely to stop paying for the service. They have done this by measuring everything and then looking in the usage pattern data for patterns that predict buy signals as well as defection signals. Without having frequent touch points such as those in an online environment, most companies can not take advantage of this type of approach. But for those with online interactions with their customers, this is a must. Measure, recognize patterns, and then intervene before things go too far wrong and it’s too late to retain that customer. Establishing customer communities, forums, advisory panels and the like are good ways to solicit feedback, find out issues that are causing customers to consider defection so that they can be addressed early and often.

PRICE REALIZATION

Finally, we come to price realization. There are two key levers that can affect pricing. Harkening back to Economics 101, it is easy enough to remember that if you want higher pricing, you can restrict supply or increase demand. And you can also optimize pricing in your market such that it maximizes revenues. Remember the old lesson that if you price your widget at $20 and sell 10 of them, garnering $200, there is also the possibility of selling it for $18 and selling 20 of them, realizing  $360. (We’re assuming that you are still profitable at the $18 price point.)

So, where can we apply Web 2.0 to impact the price we receive for our offerings? Let’s start, as we have with the others, by disabusing some traditional thinking. Standard economic pricing theory dictates that you want to find price insensitive buyers so that you can drive the price higher. Except that Long Tail theory challenges that assumption and states that you might find very price sensitive customers way down in the tail that might still buy a lot from you (in aggregate) if you get the offering / pricing matrix right and it can still be profitable for you to produce. Once again, review your offerings with Long Tail glasses and be careful not to be trapped by this old mode of thinking.

Back at ABC Widgets, in order to drive higher prices, they could increase product innovation and work on their brand image (and related search results), both of which have been covered off above. Next, by moving from their software offerings from perpetual license CDs to recurring revenue Software as a service models, they can shorten time to market (using Web 2.0 development methodologies such as Ruby on Rails. AJAX, and general agile development principles), and improve the functionality of those offerings through rapid customer-driven iteration. In order to optimize pricing, ABC could experiment with pricing in the new customer segments and run tests on the web to see how prices affect conversion rates from prospects to customers in order to maximize conversions and therefore revenues. And the blogs, customer advisory panels and communities they have already set up can be used to explore and better understand the benefits of their offerings that their customers really care about so that the features can be modified and the pricing can be optimized.

SUMMARY

The examples and suggestions above are not encyclopedic and nor were they meant to be. They were intended as a general starting point for companies to begin to explore how they might think about driving revenue as well as to begin to understand how the various technologies and attitude shifts fit together and map to the various shareholder value levers.

We have seen how specific Web 2.0 approaches and tools such as Long Tail theory, blogs. wikis, RSS readers and aggregators, online communities, web services, metrics, usage pattern recognition, user generated content, and self-service can be used…today…to drive revenue growth in an organization by impacting the acquisition and retention of customers, the amount of revenue that is earned from those customers, and the prices that your company can charge for its products and services.

As for next steps, pick up a Deloitte Shareholder Value Map (or map out your own business), read up on the various technologies and see if you can fulfill any of your business goals using the tools above. Then prioritize them, and start building. Test, learn, adapt, and repeat!

BIOGRAPHY

Troy Angrignon is the Emerging Technology Strategist for Business Objects, where he is tasked with identifying new growth opportunities, offerings, and business models that arise from new and emerging technologies. He is currently focused on Web 2.0 strategy, software as a service, and web services strategy. Outside of that role, he also mentors and advises startups on business strategy, business planning, and market analysis. In addition, Troy is a passionate outdoor sports enthusiast and non-profit volunteer and lives in Vancouver, BC, Canada.

1.  The fourth value driver in the Deloitte Shareholder Value Map which was used as the basis for this article is “Asset efficiency” but there were very few ways to impact that driver so it was excluded from the discussion. The Deloitte shareholder value map can be found here
2.  The Long Tail. Anderson, Chris. p. 99.