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Groupon vs Facebook vs Google: The Rush for Multibillion dollar valuations.

April 5, 2011 13 comments

Back in the 2000s, Google was the darling of Silicon Valley. Social networking was at its infancy. It was fragmented with Friendster, MySpace and a few other niche players. If we imagine ourselves a couple of years back at the pre-Facebook era, Google was so dominant that, to the ‘uninitiated’, it was synonymous with the Web. (Some of you nerds might be saying, “Wait a minute, I was thinking AltaVista, Excite, Lycos, Yahoo!, FTP and Bulletin Boards on my superfast US robotics 14.4kbps modem”. I said a few years back, not freaking time-travel.)

Google, the Pre-FB years….
I, like most people then, did not think Google would be eclipsed quickly. Instead of creating a portal-like destination on the World Wide Web, Larry Page and Sergei Brin, both Stanford PhD dropouts, sought to organise and index the World Wide Web. Due to the explosion of information on the web, it was originally a cluttered place and users had no real way of finding the information they wanted with ease. Page and Brin devised a method of ranking search results by relevance. How would they know what was relevant? Bearing in mind search engines were not new then and Google was not the first, in fact far from it. How would Google distinguish between quality information and junk? Page and Brin reasoned that by ranking the results of the query in the order of the number of links linking back to that page, Google was presenting its users with results that other website/users have referenced – therefore the more ‘linkbacks’ a site has, the more relevant it would be. Hence the higher it would rank. It made perfect sense, as quality information would attract more people. Sort of like the same concept with academic citations and ‘wisdom of crowds’ or crowd sourcing. (Disclaimer: SEO has evolved greatly since those early days.)

Google’s superior search ranking algorithm helped direct users to the right place. In exchange for that free search service, Google opted for text- (only) based advertising that relates to the user’s search query – Pure Genius. Google went against the prevailing trend of banner advertising, flashy images and animated GIFs that were quickly polluting websites during the early days of the World Wide Web. So they built a money-generating machine and, for a long time, most people were unaware that Google was in fact the largest ‘advertising’ company in the world. The rest is history. Google’s clutter-free website still stands today as a testament of how successful their model is.

Facebook’s exponential growth
Along came Facebook. MySpace and Friendster already had millions of users. In a business of critical mass, that can and often results in an unassailable lead. Facebook kicked off with the premise of ‘exclusivity’ and relevance. In order to sign up, you first had to be a member of that particular school/college with the right email domain address. It became a platform for its users to find out what their classmates or dorm friends were up to. I mean come on: ‘Pokes’, ‘Relationship Status’, ‘Sending Sheeps’, and ‘Status Updates’ (newsfeed was to come later) – that was pure genius on Zuckerberg’s half!!!

While most of my friends were still on Friendster and MySpace (you know who you are), I had already defected to Facebook. Two years ago, I wrote about Facebook – why it deserves its valuation and more and why Google should be afraid. Everything I said has come to pass. For reasons as to why Facebook’s advertising monetisation is superior to Google’s read my earlier post.

 

Facebook really only came to dominate our daily tech news in 2008, when it crossed the 100 m user threshold. At the same time MySpace (which Murdoch paid $580m for in 2005 – Ouch!) was at its peak. Murdoch even tried to play a white knight in the Microsoft-Yahoo! struggle by proposing to merge MySpace into Yahoo! and save Yahoo! from Microsoft as long as Yahoo! agreed to value MySpace at >$10 billion. (Yahoo! was not that stupid.)

Facebook’s valuation grew exponentially. In terms of the sheer speed of its growth as a tech company, Google was eclipsed. I’ll be honest, I never thought Google would be unseated so quickly. I knew it would be unseated maybe 10-20 years down the line, but NOT in such a short space of time.

Groupon
Just when I thought the rush for multiple billion dollar valuations cannot come any faster than Facebook, along comes Groupon. I mean c’mon: talks of a $25 billion IPO valuation within two years?? I am just in awe. Like Facebook, which fended off a $1billion takeover from Yahoo! in its early days, Groupon turned down a $6 billion offer from Google when it was two years old! (Groupon almost failed before it stumbled on its current business.)

Groupon is a spinoff from The Point, which started life as a fund-raising site. It used a “tipping point model” whereby a threshold amount has to be crossed before there was any ‘deal’ – a feature that forms the premise of Groupon today.

You know why I like Groupon more than I like Facebook? Because of its simple Win, Win, Win business model. What is the Win Win Win I am on about? We first have to dissect the already simple Groupon business model.

You sign up to Groupon and you receive daily geo-located deals that are offered at cutthroat prices. The offers only last for 24 hours. Advertisers can afford to slash their prices on Groupon because of the volume of business it can generate in return. You on the other hand leverage your buying power by joining forces with hundreds or thousands of other buyers made possible by Groupon. In short, Groupon provides economies of scale to both sides of the value chain – Buyers and Sellers. Groupon magnifies the retained value for everyone.

I mean, how else would a freaking tiny Fish Pedicure business in London generate over 2000 paying customers in 24 hours? Sure, Groupon takes a cut. But it is great business for the vendor and great for the customers because they pay a fraction of the original price. Groupon has leveraged the power of economies of scale for the individual. Groupon users collectively have the purchasing power akin to large businesses and they enjoy a huge discount in return. Customers are happy with the bargain. Groupon is happy for taking a cut of the revenue. The businesses are happy because they enjoy more volume than they can cater for.

It is a Win for the consumers, a Win for Groupon, and a Win for the supplier (advertising business in this case).

Now that is a winning business model! How many business models can actually proclaim that? Look around you, how many businesses can claim that they are not ripping their customers off AND not twisting the arm of their suppliers AND instead are beneficial to them both AND YET still make decent money for itself?

It is the simplicity and effectiveness that amazes me.

In addition, Groupon takes this further. It encourages you (the user) to help it advertise by giving you credits towards your next (already wholesale discounted price) purchase. Once you have bought a discounted item/service from Groupon you have the chance to get your friends in on it. And with every friend you recommended that makes a purchase, you get free credits. It is an ecosystem that feeds on itself. With enough credits, you literally get freebies!! This is as close to a free lunch that you will get on Wall Street or any street for that matter.

Like Facebook and Google before it, “We want to know what our friends are doing”, “We value their recommendations more than plain vanilla advertising”. This emerging theme of “wisdom of the crowds” appears dominant across all three Google, FB and Groupon business models.

Financials
And now for the financials… Facebook already has a $70 billion valuation if Secondmarket figures are to be believed. But Groupon is talking about a $25 billion IPO this year at just two years and three months old!!

I will spare you the financial modelling details on how analysts justify those figures. One thing for sure is that the assumption of revenue growth must keep pace with projections. According to WSJ, Groupon is “projecting that the company is on pace to make $1 billion in sales faster than any other business, ever!”

Are we talking about a mania? A tech bubble all over again?? Well, it is always and only a bubble in hindsight – never in foresight. Because given what we know now and based on the funnymentals (uh I meant fundamentals), we would avoid the bubble if we knew it was a bubble! DOH!

From the tulips mania in 1600s to the South Sea bubble in 1720, up until the housing bubble in the 2000s – it was never a bubble until it burst. To quote the greatest stock operator that ever lived –

“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again” – Jesse Livermore 1877-1940.

I have been raving about Facebook’s valuation. However, I think that Groupon might be slightly ahead of itself (just a tiny bit).

One thing that concerns me with Groupon is the fact that LivingSocial.com is snapping right at its heels. Although you could argue Facebook came from way behind to trounce MySpace. Secondly, perhaps more importantly, unlike Facebook, Groupon does not have that ‘stickiness’ factor. I would hazard a guess that most of you who read this probably spend more time on Facebook than any other site on the Internet (including Google)!!! Groupon on the other hand, you get in, get your shit and get out.

I would go way out on a limb here and say Groupon’s rush to IPO is to cash in on what they ‘know’ is a replicable model. In other words, Groupon, LivingSocial.com and other social buying sites are cannibalising each other (even though they have created this new ocean for themselves). Plus, both Groupon and LivingSocial advertise on Facebook, thus driving up ad prices, which will only benefit Facebook.

Strategy wise, Facebook seemed to have really positioned itself to capture and monetise the migration of our social lives onto the Internet. Then again, Google’s success was a black swan, so is Facebook’s and now Groupon’s. I look forward to the next big idea…

UPDATE: I have always maintained that the next big tech company will be one that facilitates the migration of our lives onto cyberspace. When pundits were saying that Facebook was just another Friendster, MySpace or Bebo and MSFT overpaid, I knew they were wrong. I argued that if Zuckerberg wanted he could literally incorporate Skype, EBay or payment services into Facebook. Facebook can do to Amazon and EBay what Apple did to everyone else. Like Google’s vision statement of organising the world’s information, I think Facebook is quietly positioning itself to organise our digital social lives. The latest upgrade on Facebook takes us one small step closer. It has combined chat with email to facilitate our evolving online communication preference. It has a history of all our chats, emails, places, friends, status updates and whatever you care to put on it. It literally owns your social life! Furthermore, Zuckerberg is young and savvy enough that he does not have the corporate America image (yet), so if China friends Facebook all bets are off…

Update 2: As of August 2011, I have now turned around and think Groupon’s biggest mistake is to turn down an offer from Google. I would short Groupon all the way to zero if they ever went public. Great concept, poor execution.

 

 

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Facebook’s $ 50 billion dollar question

January 18, 2011 6 comments

I posted an offhanded remark on a Wall Street Journal article regarding the Goldman Sachs – Facebook deal and it received a lot of recommendations. As such I am reposting it on my blog.

When a firm gets to a certain critical mass, governments take interest. If the SEC is not doing something about it, rest assured the EU is waiting. We’ve seen Bill Gates take on the government and lose, the same with Google. Now it is Facebook’s turn.

Facebook is doing a much better job as repository of data and information on citizens than governments who traditionally held that role. The Head of FBI knocks on Zuckerberg’s door because Facebook’s database is better than the FBI’s. Think about it, we have this little booklet called a passport and when we travel we get little stamps on them at certain checkpoints in a country. This will prove where you’ve been. Facebook not only knows where you’ve been, it has pictures of you and your friends, what you did, what your thoughts were at that moment. Those of you who have used ‘Facebook Places’ will know that Facebook even has up to date information on your location, your status update, and possibly what you are thinking of doing next. This information is stored ‘forever’ and can be accessed at the speed of light! And the beauty of it all – it knows this information because YOU uploaded it!

I can easily see $100 billion valuation within 36 months; it is in a blue ocean in terms of growth potential. Remember, buy the rumour, sell the fact.

Being the last of Generation Y (same age group as Zuckerberg), we are one of the last generations who remember life before the Internet. And as a full Web 2.0 generation, I know of a simple litmus test that can justify the $50 billion valuation right now. How much time do I spend on Google? An awful lot; it is indispensable. How much time do I spend on Facebook? Answer: a lot more time than I spend on Google. Not because I have to, but because I want to. It may not say much about my generation, but it says a lot about ‘Facebook Effect’.

On a side note, Goldman Sachs went down one notch in my book. They are no longer the smartest guy in the room considering how they handled the Facebook deal. GS is blaming investors for the leak and investors are blaming GS for the leak. It is ironic that GS did not see it coming. After all, Facebook and Zuckerberg’s mantra is about empowering people and encouraging us to SHARE information…

With regards to their current sky-high valuation of $50 billion and stratospheric price-to-earnings ratio, consider this – before Facebook came along, Google was the number one advertising firm in the world. That’s right, it is Google, not some Madison Avenue firm. Google’s genius in terms of monetisation was its ability to sell adverts based upon our search query. It had the critical mass and it was the largest search engine. Advertisers pay a premium to ensure that their adverts reach their targeted demographics. Google’s analytics can provide pretty accurate information about its user even though most of it is guesswork. Over time, Google built a database of its users’ surfing habits and tailored the adverts accordingly. Therefore, advertisers continue to pay a premium for this.

Now consider Facebook. Facebook knows exactly who you are, your age, your background, the school you went to, your music taste, your likes and dislikes, your interest groups, even your vocabulary and etc. How? Because you TOLD it. Unlike Google there is no guesswork involved. This is an advertiser’s dream! If you wanted to advertise only to women in Timbaktu between the age of 23 to 55 who herd goats, supports Obama and listen to Metallica – technically, you can.

So in terms of Facebook’s ability to grow and monetise this, if the past is any indication of the future and Google became what it is now primarily through ad revenues, then there is no reason why Facebook cannot hit $100b within the next 36 months. Facebook has already overtaken Google as the most visited site in the US. Only three years ago, who would have thought Facebook would hit every important milestone faster than Google?

When the Web arrived in the early 1990s, it went mainstream. The number of people on the Internet exploded, from 2.6 million in 1990 to 385 million in 2000. Facebook went from nil to 600 million users in about half that time…

More than a year ago I wrote a post on Facebook. Everything I said has come to pass. Remember when Zuckerberg turned down $1 billion from Yahoo, everyone said he was crazy. When it was valued at $10 billion by Microsoft, everyone said MSFT grossly overpaid. When it was valued at $25 billion by Russians everyone said the same thing – overpriced!. Now at $50 billion everyone is saying the same thing AGAIN, yet investors are throwing money at it like there is no tomorrow. My guess is when it hits $100 billion everyone will still be saying the same thing.

Remember the cardinal rule of Wall Street: Buy the rumour, sell the fact

See also: http://davidwong.co.uk/2009/11/08/no-business-plan-no-problem/

UPDATE: Two months after this blog post was first published, Secondmarket valuation of Facebook exceeds $70 billion (so much for 36 months.)

Update: On Facebook IPO with a $100 bn valuation my ‘call’ proved to be true. I shorted Facebook, got filled at 41!!, took profits at 38, thinking Morgan Stanley would support the IPO price. They didn’t and it crashed without me. I shorted again in low 30s, held it all the way to 18. When asked when I would stop shorting Facebook, I replied 17-18, which really meant that is when I am taking profits. This again came true. I think FB really should be 12-15; investors are unwilling to cut their losses so it will take time to get there. It will be volatile, but in the low double digits is where I peg FB (as of Aug 2012). However, due to margin of safety, I won’t short above 20 and this was my trade of the year… everything worked to plan. If only I had a way of getting in early, I would have rode it all the way up and shorted it all the way down…

Free News vs Paid News (Microsoft, Google, News Corp)

November 23, 2009 1 comment

Question: What happens when an industry is losing revenue and two giant companies are trying to outdo each other?

Answer: The consumer suffers and ends up paying for it.

The digital news landscape is changing fast, with Rupert Murdoch now deciding to charge for online news content. The media mogul’s News Corporation, the firm behind papers from the Wall Street Journal to the Sun (UK), is planning to stop Google from indexing its news websites.

You may ask, “What’s the problem?”  After all, the newspaper industry is suffering from declining print and advertising revenues as increasing media consumption is taking place over the Web, so certainly it makes sense for newspapers to charge for their content.

The problem is, as with everything else in life, nothing is ever so cut and dried. Throw Microsoft in the equation and things become interesting. The software giant’s search engine Bing has been playing catch up to Google ever since… god knows when.

Microsoft has been having discussions with News Corp, where the software firm will pay the news company to stop Google searching and indexing its news website. The desired outcome would be that Microsoft’s search engine Bing would be the place users will turn to for news – and if Google wanted to retain that kind of news content, it would have to start paying. It seems clear that Microsoft’s interest will also hurt Google’s margin.

This suspicion was confirmed when the Financial Times reported that Microsoft has also approached other big online publishers to persuade them to remove their sites from Google’s search engine.

What is clear is that Microsoft and News Corp are united against the idea that Internet news should be free. Microsoft is willing to offer money to publishers to switch allegiance and News Corp is prepared to use legal means to prevent Google ‘stealing’ news.

However, if Internet users decide that Microsoft Bing’s results are biased because of alliance with news providers, they will be more reluctant to switch from Google and the plan could backfire.

In the words of James Harding, editor of the Financial Times, “We are setting out to rewrite the economics of gathering and delivering news…”

Harding likens the culture of free (news) to that of the music industry, which (according to him) has been all but destroyed (by P2P/piracy). Well, if the music industry is any indication of where the news industry is heading, then I am sure Harding himself would realise the concept of ‘free’ will never be completely stamped out. Just take a look at the amount of Internet traffic that is generated from P2P downloading. The ‘culture of free’ is still rife and there is nothing the media companies can do about it.

Nevertheless, I have always subscribed to the notion that whatever has value is worth paying for (this includes good quality news and information). But I cannot help but feel we, as consumers/users, are being seriously short-changed here.

Before: We had good ‘unbiased’ search results from Google and we had free news
After: We have ‘biased’ search results from Microsoft, and we pay for the news.

Go figure!

DWTC says: Competitive advantage is never sustainable. Rival companies will always find ways to chip away at your success. Google’s USP of being able to deliver accurate unbiased search results will be undermined if Microsoft was to have its ways. Do not be surprised if we one day see ‘pay per search’ on Google. DWTC is hoping Google will one day foray into news industry so he can cancel his Wall Street Journal subscription.

 

How Media Companies ‘Rip’ You Off

November 17, 2009 Leave a comment

How long will it take for consumers to realise that we are paying for the same thing over and over again? For those of you who have an iPod or iPhone and use iTunes, you will be able to relate to this pretty well. Picture this, you heard a song that you like on the radio and then decide to buy that song and download it from iTunes for $0.99. After enjoying the music you have paid for, you decide that it would be cool to have that song as a ringtone. But Apple does not allow you to do that (there are ways around this, which we will not cover), so you have buy it for $2.49. That’s right, you already paid one buck to own that song, and now to use snippets of that song as your ringtone, you have to pay another two fifty! What in the world?

Now, if you happen to want to use that song as a ringback tone (a song or sound heard by the calling party after dialling your number and prior to you answering) you have to pay another $1.99!!! FOR THE SAME SONG! Which you already legally paid for and own! On top of the $2.49 you paid again for a 30-second snippet as ring tone!

Consider the following table, taken from the book Television Disrupted by Shelly Palmer

Download the song on iTunes $0.99
Download a portion of the same song to use as a ring tone $2.49
Use a portion of the song as a ringback tone $1.99
Purchase a download of the video of the song on iTunes $1.99
Purchase a still image of the artist of the song to use as a wallpaper $1.49
Purchase the DVD of the movie featuring the song $14.99
Purchase the CD which includes the song $19.99
Watch PPV (pay per view) or VOD (video on demand) of the movie featuring the song $3.95
Watch the HD version of the VOD concert featuring the song $6.95
Total revenue from a SINGLE content source $54.83!

How many times can you sell the same ‘master file’? Well, it seems like sky’s the limit as long as people don’t realise they are paying for the same thing over and over again.

As Palmer noted, any time a consumer wants to move their files to a new device, the media company wants to charge another fee. For example, when you subscribe to some mobile phone games and you change to a new phone, you have to subscribe again.

You see, piracy/P2P downloading is taking a significant chunk out of the profits of those media companies. So they have to make up for it by repeatedly charging an obscene amount for what is essentially the same product. Problem is, like with everything else, 20% of the people are doing 80% of the illegal downloading. Now that 80/20 figure is just my two cents, but the 80/20 rule tends to hold up pretty well most of the time. Similarly, it can be argued that 20% of consumers are the ones buying and paying for 80% of the stuff on iTunes.

So I guess in a way, it is fair play for the media companies. Capitalism has a way of finding a balance, it is just that the distribution is not always fair. In terms of media consumption, those who should be paying a lot aren’t, and those who shouldn’t be paying that much are paying a lot.

DWTC says – Unless we consumers wise up and demand that we truly own the media that we purchased and insist on the portability of the media we own, media companies will continue to make us pay more than we should. 

 

No Business Plan? No Problem

November 8, 2009 2 comments

Can you really follow the mantra “Build it and they will come”? Apparently, yes, you can. Gather a large following first, then figure out how to monetise it later. YouTube did it, Facebook did it, and now Twitter is going down that same route.

Twitter recently closed another round of funding which values the company at one billion dollars. The only problem is there is “no clear” business plan, or at least that is what the media would have us believe. A simple Google search on the keywords “Twitter business plan” returned 275,000,000 results. I guess I am not alone when it comes to the obsession with Twitter’s plan to make money.

Sound like the ’90s dotcom boom? Well, not really.

If the ’90s dotcom boom taught us anything, it is, IPO first, make money later. The problem is they all had a “plan”, they just did not keep to the plan.

If YouTube, Facebook and Twitter are going to teach us anything, it is to build a large following first, make money later. Even though they had “no plan”, they are all making money (except Twitter for now) or show great potential to.

Moral of the story: most business plans are not worth the paper they are printed on (or the hard disc they are ferromagnetically etched on)

Leaked documents show Twitter is hoping to be the first to one billion users, and, in their own words, to become “the pulse of the planet”,

Think Google and Facebook are gonna sit and wait and do nothing? (Forget Microsoft, Bill Gates is too busy redistributing his wealth now that he’s retired.)

Perception, Persuasion, and Promotions in Media (Part 2): An inside look at how advertisers affect your buying decisions through media manipulation

November 4, 2009 Leave a comment

“Advertising is the art of convincing people to spend money they don’t have for something they don’t need”

Will Rogers

 

 The Case Study

The 1970s played host to a showdown; one with no romanticised Wild West connotations, but a competitive rivalry in the world of business. The participants were legendary direct marketer Lester Wunderman and Madison Avenue[1] firm McCann Erickson, and the reason was the Columbia Record Club account. Wunderman is widely considered the creator of modern-day direct marketing, and among his list of credentials are the advent of the magazine subscription card, the toll-free number and loyalty rewards. McCann Erickson has offices in over 130 countries and was named “Global Agency of the Year” in 1998, 1999 and 2000. Among its achievements is the now-famous Mastercard slogan, “There are some things money can’t buy. For everything else, there’s Mastercard”.

In the 1970s, as now, Columbia was one of the largest mail order clubs in the world, and from its inception in the 1950s to the showdown in the 1970s Wunderman presided over the advertising. This was set to change, though, as Columbia decided to hire McCann to devise a series of television commercials to support the direct-marketing print ads that Wunderman was creating. While the idea itself was clearly beneficial, Wunderman took exception because he resented losing even a small part of the business to a competitior; understandable considering he had been in charge for 20 years. He also lacked the belief that McCann’s advertising would be productive and increase sales revenue, so to bring the issue to a head he proposed a test: Columbia should run his adverts in TV Guide and Parade magazine in 26 separate media markets across the USA; McCann would run its ‘awareness’ television commercials in 13 of those while Wunderman ran his television commercials in the other 13. Whoever’s television appeals generated most awareness in response to the magazine adverts would be awarded the entire Columbia account – meaning if Wunderman lost, he would sacrifice not just the small percentage he was fighting for, but his entire stake. The results were tabulated a month later, and while McCann’s markets rose 19.5 per cent, Wunderman’s rocketed by 80 per cent. It was a landslide victory for the experienced advertiser.

Wunderman’s success was not merely because his adverts were better – in fact, they may not have been better at all. McCann took the usual routes of advertising and employed them well; he even outspent Wunderman four-to-one to ensure his commercials reached the widest possible audience. Wunderman, on the other hand, was aware that successful marketing is not just telling lots of people about your product, nor is it just making them want it: it is making them believe they need it. And so Wunderman devised his advertising campaign to exploit this and focused on reeling in consumers rather than offering them the product.

The real key to his success was a subtle form of persuasion to entice the public to put confidence in his advertising. The proverbial trick-up-the-sleeve, referred to by Wunderman as the “treasure hunt”, was a gold box. More specifically, every TV Guide and Parade advert contained a small gold box in the corner of the order coupon, and his firm followed this with a series of television commercials explaining the “secret of the Gold Box”: if viewers could find the gold box in their issues then they could write in the name of any record on the Columbia list and receive it for free. The fact that every issue had the gold box is irrelevant because the readers were not being cheated, they really did receive the records. Wunderman’s long-term objective quelled any anxiety of taking an initial loss. By giving readers something for nothing, they jumped at the chance and made Wunderman’s campaign a success. As he put it himself, the gold box “made the reader/viewer part of an interactive advertising system. Viewers were not just an audience but had become participants. It was like playing a game. The effectiveness of the campaign was startling. In 1977, none of Columbia’s ads in its extensive magazine schedule had been profitable. In 1978, with Gold Box television support, every magazine on the schedule made a profit, an unprecedented turnaround.”

What the competition really shows is that the power of suggestion and persuasion is far superior to other methods. McCann, for instance, is a firm renowned for its creativity and it spent four times as much money on media time as Wunderman did – its adverts were on prime-time television, while Wunderman’s were on at times when most people were sleeping. McCann knew that a huge part of advertising was making your message reach as many people as possible and focused the campaign accordingly. Undeniably, the strategy far outdid that of Wunderman. Yet the company lost spectacularly, because Wunderman’s campaign went beyond reaching a certain number of people – he made sure that the ones it did reach acted upon it. McCann made the message widely known, but that does not guarantee people will like it. Wunderman opted for the ‘quality over quantity’ technique; he was aware that reaching a million people will be useless and wasted money if only one per cent acted upon it, but reaching 100,000 people with an advert that will make the majority react will be far more successful.

The Takeaway

Reaching consumers is not the hard part for advertisers; even a small budget will allow the product or message to reach some degree of the population. The truly difficult part is creating an advert that will grab the attention of the potential consumer, and provide a message that they will remember and act upon. It is precisely for this reason that marketing strategists conduct mini-experiments with a test panel to determine what ideas resonate with the target market, although there are of course preconceived ideas about what makes a successful advert: humour, advanced graphics and/or celebrity endorsement.

As mentioned at the start of this article, a key part of advertising is the power of persuasion. A researcher’s ability to tap into the potential consumer’s psyche – without them being aware – can be the difference between success and failure. Proof of this is all around us, from how we respond to subconscious body language to the impact of campaigns. A prime example of this can be found in media moral panics, or warnings of an epidemic. The elements that make these things successful can be just as apparently trivial as Wunderman’s gold box. The psychologist Howard Levanthal conducted an experiment in the 1960s to see if he could persuade a group of college seniors of Yale University to voluntarily receive a tetanus vaccination. As John Hallward explains in his book Gimme!: The Human Nature of Successful Marketing, “Levanthal wanted to study the effects of ‘high fear’ versus ‘low fear’ messages.” The students were separated into two groups and each was given a booklet explaining the dangers of tetanus, how vaccination was important, and that free inoculations were being offered at the university’s health centre. The booklets were slightly different, with the ‘high fear’ one containing graphic images – including a child having a tetanus-induced seizure and victims with urinary catheters and nasal tubes – and highly-descriptive language to present tetanus in a very negative light, while the ‘low fear’ one lacked the pictures and descriptive language. Group one received the ‘high fear’ booklet while group two received the ‘low fear’ one. The aim of the study was simply to see whether the different presentations of the booklets impacted the students’ attitudes differently i.e. whether the ‘high fear’ message scared the students into getting vaccinated more than the ‘low fear’ one.

Predictably, the ‘high fear’ group was much more convinced of the dangers tetanus presented and was accordingly more convinced of the necessity of vaccination. Despite this, however, just three per cent of the ‘high fear’ group were actually motivated enough to get an inoculation. This is the same figure as the ‘low fear’ group, showing no difference in the campaigns in terms of actual success, even though the ‘high fear’ group had higher awareness of the perils of tetanus than the ‘low fear’ group. So, then, for 97 per cent of both groups the lessons (or fear) did not translate into action. For some reason, the contents of the experiment did not stick with the students.

In the book The Tipping Point, Malcolm Gladwell describes the Stickiness Factor as a thoroughly imperative factor for any successful campaign, and were we ignorant to its existence it would be all too easy to conclude that Levanthal’s booklet was not explaining tetanus properly. For instance, one might wonder whether attempting to scare the students was the appropriate course of action, whether there was a social stigma surrounding tetanus that persuaded the students to admit they were at risk, or maybe that the idea of an injection was scary. Whatever the reason may be, it would be a certain universal agreement that with only three per cent of each group receiving vaccinations there was a long way to go to increase the numbers.

Yet the ‘Stickiness Factor’ does offer an explanation that’s quite different. This offering is that the booklet, and experiment, had nothing wrong per se, but rather it was just lacking its own gold box; the small feature that would take it from somewhat effective to totally successful. Indeed, when Levanthal repeated the experiment he included a small change: an inclusion of a map of the campus that clearly showed the health building circled, with a list of vaccination times. Levanthal’s own gold box increased the vaccination rate to a sizeable 28 per cent. This small detail eradicated the possibility of students not getting vaccinated because they didn’t know where and when they could get inoculated.

Interestingly, the number of students who opted for a vaccination was equal in both the high and low fear groups, meaning that the differences in presentation of the booklets were irrelevant. The students, as seniors, were old enough to know the dangers of tetanus and that a vaccine existed; they did not need graphic pictures to encourage them to protect themselves. Moreover, they would have been at the university long enough to know where the health centre was located and most probably did not even use the included map. Therefore, the real reason for its success is most likely the simple fact that it was more personal. The fear and graphic imagery was fruitless; what the students really responded to was the knowledge of what time they could go to get a vaccination at a time suitable for them.  The addition of the map and timetable helped the students to plan their day, akin to a secretary handing the boss his daily schedule. Because we are bombarded daily with an onslaught of advertising messages we learn to filter them out, so the new presentation of the booklet made the students accept it as something to slot into their timetable. In this way, they were no longer feeling forced to visit the health centre, but made the choice to do so. Making them feel like they had the choice of whether or not to receive a vaccination made the booklet memorable, and that made it successful.

Yet another relevant example comes from the work of Dan Ariely, a visiting professor at MIT. An advert for subscription to The Economist offered three options: 1) a one-year subscription to all online content as far back as 1997, for $59; 2) a one year subscription to the print edition of The Economist for $125; and 3) a one-year subscription to both the print version and all online articles of The Economist as far back as 1997 for $125 – the same price as option two. When this was shown to 100 people, the majority wanted option three, the combo deal, and nobody wanted option two. So with that knowledge, option two was removed as it was considered pointless keeping it if no one wanted it. The adjusted offer was sent out to a further 100 students and this time the results differed: whereas previously option three was most popular and option one least popular, this time around the results reversed. So we can see, therefore, that option two did actually serve a purpose after all. The premise is that we are not fully aware of our preferences or what we want and as such are easily influenced. When the advert was sent out with only two options, people saw a cheap option and an expensive option. When all three options were offered, however, they saw a cheap option, an expensive option, and what they considered a bargain. Option two encouraged people to buy the combined subscription. This subtle difference accounted for thirty per cent in sales revenue, which means that advertisers can influence their revenue by clever marketing. In essence, then, what has been shown is that we are not totally in control of our opinions, but are very impressionable by external factors i.e. how something is presented drastically alters how we perceive it.

The lesson from these examples is universal to all advertising, and indeed all campaigns. That lesson is simple: it is not the amount of exposure a campaign or advert receives but how well it relates to its target audience. Nowadays, almost 40 years on from Wunderman’s advertising campaign in question, we can see proof of this every day. The content of adverts are moving increasingly further away from the product they are trying to sell, instead using the principle of relating to something they feel is important to the target audience. This causes the advert to be memorable to the consumer, which in turn prompts them to buy the product. One example is how the adverts for facial products focus on the confidence levels of those who need them, saying those with clear skin are more confident and will be successful with the opposite sex. To the self-conscious adolescent, this will encourage them to buy the product.

Our capitalist society has reached such proportions that we are bombarded constantly by people or companies trying to convince us to spend our money on their product, be it a book or the latest technological innovation. The scale is so large that the past decade alone has seen a rise in television adverts from six to nine minutes, and it continues to grow annually. The New York-based consultancy company Media Dynamics now estimates that the average American is exposed to 254 different commercial messages each and every day – a bombardment of various companies and individuals attempting to convince us we need their product. More alarming is the fact that this figure is a 25 per cent increase from the mid-1970s. This is easily fathomable though, because in the mid-1970s the primary media for advertising were magazines, television and radio. In the 21st century we now have literally millions of websites hosting adverts or producing pop-ups, cable systems offering over 50 channels of programming, the aforementioned increase in television advertising, and an almost overwhelming number of magazines – the numbers of which are increasing rapidly – each full of adverts and promotional information.

All of this increased advertising produces a problem for businesses; it is known as the ‘clutter problem’. This problem has, inevitably, made it increasingly hard for any single message to stand out. With a seemingly infinite amount of adverts being thrown at us each and every day we are bound to switch off and it takes something very special to grab our attention. Coca-Cola paid 33 million dollars to sponsor the 1992 Olympic games, yet only 12 per cent of television viewers were aware that they were the official Olympic soft drink. A further five per cent thought it was Pepsi who was sponsoring. In fact, one advertising research firm produced a study that discovered when there are four or more different 15-second commercials in a two-and-a-half-minute timeframe, the effectiveness of any one of those commercials sinks to almost zero – making the time and money invested in it borderline wasted.

Yet the work of Levanthal and Wunderman has shown there are simple, cost-effective ways to enhance the effectiveness of adverts. This has been reinforced in another study, which took a large group of students for what they were told was a market research study by a company making high-tech headphones. Each student was given a pair of headphones and told the company merely wanted to test how well the headphones performed when in motion. Accordingly, one group was told to nod their heads vigorously, the second group was told to shake their heads, and the third group was told to remain still. Each group listened to songs by Linda Ronstadt and the Eagles followed by a radio editorial arguing that their university tuition fees should increase from $587 to $750. When this part of the experiment was complete, the students had to answer a short questionnaire. The questionnaire masked the true purpose of the study by asking questions about the sound quality of the songs and the effect the shaking had, if any. Tucked away innocently at the end of the questionnaire was the question the researchers were most interested in: ‘What do you feel would be an appropriate dollar amount for undergraduate tuition per year?’ Incredibly, the group who remained motionless felt that $582 was about right – a figure almost identical to the rate they currently paid, highlighting their neutrality. The group who had to shake their head vehemently disagreed with a proposed increase and felt it should fall to about $467 a year, while the group who nodded their head found the editorial proposing an increase very persuasive and wanted it to rise to an average of $646.

What the study shows clearly is that the subtle tactic of making the students move their heads – or remain still – triggered their response to the proposed tuition fee increase. The reason for this is very simple: we associate nodding our head with agreement and our tacit approval of something, while shaking our head shows discontent. Remaining still shows our opinion is rather flexible and we do not have strong opinions either in agreement or disagreement. Thus, the study proves once again that subtle persuasion is unsurpassable as a means of influencing behaviour.

According to Gladwell, another example of advertising prowess can be seen in ‘Market Mavens’. The word itself, Maven, derives from Yiddish and describes a person who accumulates knowledge. Economists have spent much time in the past ten years studying Market Mavens for the obvious reason that the people with most information are most important to a marketplace. One example of this is supermarkets, or more specifically how supermarkets trick the buying public into thinking they have reduced their prices by advertising ‘Low Prices In Store’ when really the prices have not been adjusted at all. The only difference is that the featured product will appear more prominently within the shop, thus attracting more people’s attention to it. Research has shown that when supermarkets employ this technique the product sales increase drastically, in a similar scale to if they were genuinely on sale. The cleverness lies in the deception: whilst the product has not adjusted in price, the store has not explicitly said that it has either; rather, they merely advertised it was a low price. The public, however, invariably interpret this to mean lower price. Despite there being no outright lie involved, it is disturbing because the supermarkets are directly targeting our line of reasoning in that they know we, the buying public, are attracted to what we consider bargains. In this way, the supermarkets appeal to our materialistic side by indirectly tricking us. The disturbing part is that if we really fall for this as intended, there is no reason for supermarkets to ever lower their prices because the public will increase their profit margins by being lured by a sign declaring low prices. Of course, supermarkets, like most stores, do lower their prices and offer sale periods. One reason for this is undoubtedly because management does not want to take the risk that a customer will notice the prices have not been lowered and promptly tell all family and friends to avoid the store. These people are known as ‘price vigilantes’ or ‘Market Mavens’ and they are responsible for keeping the marketplace honest. Despite their existence, we can still see how the subtle persuasion techniques of an advert impacts on potential consumers: by offering us one thing but making us believe it is something else, we compliantly purchase.

The common factor amongst the four examples in this study is that the success depended on subtle persuasion of the audience. Firstly, the audience was defined. Secondly, the message applied to them directly. The headphone study is perhaps most alarming however, as it shows that our decision making can be manipulated purely by how we connote things i.e. shaking our head during an advertisement makes us think of ‘no’ and thus our opinion is negative. There are clear implications of this for advertisers in that they now have field-tested evidence of how to improve their campaigns and drive up sales. The dream scenario has now been placed in front of marketers: they have direct knowledge of how to minimise expenditure while simultaneously maximising sales and profits.

Wunderman demonstrated that consumers like participation, while Levanthal showed they like a personal touch and clear instructions on how, where and when they can get the product in question. The supermarket sale offers highlight that we believe what we see – even though prices haven’t been lowered, we believe they have because we are told they are low. Ariely’s work showed that presentation matters; our decision to buy or not buy can be essentially made for us depending on how the offer is presented. Finally, the headphone study showed our opinions can be moulded by merely associating positive, negative or neutral movements with an advert. Therefore, advertisers can limit advertising to their target audience and improve the odds of success by being as clear as possible to how the product is obtained and why they need it. They can also see that by offering participation success can be heightened further, and if they are able to create a situation like the headphone study whereby they have contact with their consumers then they can subconsciously persuade a sale.

In almost every industry there are accepted truths, or conventional wisdom that guide decisions and actions. And in almost every industry, including advertising, many practitioners and marketers are unwilling or unable to observe the world systematically because they are trapped by their beliefs. For example, the gaming or casino industry is rife with conventional wisdom, some so widespread that it is known outside the industry as well. The common misconception is: casinos have to build ‘Las Vegas-style’ theme parks filled with restaurants and entertainments in order to attract high rollers and punters. Data driven research has shown that it is simply not the case and profit margins can be maintained or even increased without such ‘lavish’ enticements.

In management, managers tend to espouse the virtue of “do unto others as you would have them do unto you”. Research has shown that highly rated managers treat their subordinates individually and “do unto others as how they would like it” instead. To quote the author, “Everyone is an individual, and how I’d like to be treated or managed may not necessarily be the same for you or anyone else”

One deeply held belief in the advertising industry is that adverts have to be highly graphical in order to be visually engaging and effective. The findings from the Levanthal experiment proved that whatever extra persuasive muscle of high graphic adverts can be rendered virtually ineffective when other factors are taken into considerations. Another belief is that advertising on radio and television is among the best ways to build customer traffic and revenue, which often overlook other more effective methods such as digital signage and Transit-TV.

What has been demonstrated repeatedly is that ‘consumer/audience management’ is of paramount importance to advertisers. Evidently, such management of consumers is very easy and very effective, a seemingly fool proof measure to achieve success (if you know what you are doing). To paraphrase Professor Ariely, “…we wake up in the morning and we feel we make decisions, we decide what to wear, when we go shopping we think we decide what to do, when we see an advert we think we decide what to buy, in fact much of these decisions are not residing within us, they are residing in the person who designed the advert; the person who designs the advert will have a huge influence on what we end up doing.”

Perhaps if Will Rogers was alive today he would have said “advertising is the science of convincing people to spend money they don’t have for something they don’t need.”


[1] The term “Madison Avenue” is often used metonymically for advertising. The north-south avenue in the borough of Manhattan in NYC became identified with the advertising industry after the explosive growth in this area in the 1920s. Madison Avenue is the “Wall Street” of advertising.

 

Outdoor Advertising Forum – Abu Dhabi National Exhibition Centre

October 18, 2009 Leave a comment

sim-expo

I will be speaking at the Outdoor Advertising Forum. It is the Middle East’s only dedicated annual forum for the Outdoor Advertising Community. 2nd edition of the forum will be held on 20th October 2009 at the Abu Dhabi National Exhibition Centre, Abu Dhabi.

An exclusive platform for Media Owners, Brands, Agencies and Integrators to come together, debate, network and seek solutions on issues related to the outdoor advertising industry. OAF 2009 will follow the successful format of a one-day event and will feature interactive presentations and panel discussions by industry experts.

Outdoor Advertising Forum seeks to promote the successful use and benefits of outdoor advertising across the region.

The Signage, Imaging and Media Exhibition & Conference is the Middle East’s most comprehensive trade show for the regional marketing communication industry.

Middle East is still one of the fastest growing markets in the world for digital printing and signage sectors.  Demand for both indoor and outdoor signage solutions is growing as never before. The outdoor advertising market in the Middle East is one of the most buoyant in the world and as the rapid expansion of the retail industry continues unabated, demand for signage and display graphics will continue to increase at an exponential rate.

Keynote Speakers

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