Be an Ethical Entrepreneur, Marketer, and Business Builder

The Tipping Point: How Little Things Can Make a Big Difference

March 16, 2010 by 2 Comments

You have to absolutely love books that get you thinking in new and creative ways and Malcom Gladwell’s book, The Tipping Point: How Little Things Can Make a Big Difference, will do just that… Particularly if you, in some capacity, work in marketing or perform marketing functions at your business (which should be everyone who owns a business).

His premise at it’s core is very simple – little details can have a huge impact on results. For instance, he talks about a study done on a college campus designed to encourage students to get vaccinated for tetanus. Various groups of students were given 2 different pamphlets explaining the consequences of not getting vaccinated. One pamphlet was designed to be “high fear” including graphic pictures and dramatic descriptions. The “low fear” version had the descriptions toned down and no photographs were used. The study seemingly was trying to determine the power of “fear in marketing” which can incite quite the debate in marketing circles. Afterward the students were given a survey and, predictably, the “high fear” group said they were more convinced of the dangers of tetanus and were more likely to get inoculated. However when they checked the records at the Health Center a month later, a mere 3% actually got the shot. If they understood the dangers, why weren’t they moved to action???

The researchers considered what Gladwell calls the “Stickiness Factor”, kept the copy the same with the addition of a map to the Health Center (which all the students most likely already knew the location of), along with the dates and times vaccinations were available. That minor change, to an already 7-page report, tipped the conversion rate up to 28%!

If your mind is anything like mine, the possibilities of implementing such minor changes into your marketing with the power for such drastic results makes you giddy. 😀

Gladwell’s entire book outlines examples and case studies that demonstrate the fundamental pieces of an idea that make it go “viral” in the sense that Adam Penenberg discusses in Viral Loop. The beauty of Gladwell’s research, though, is how he directly applies it and teaches you the exact pieces necessary to create your own “Tipping Point” idea. That level of detail, sophistication, and education is certainly something that is missing from Penenberg’s book as he required the reader to analyze the information to draw his own conclusions.

From Sesame Street to Blues Clues to W.L. Gore Inc to Columbia House records and even Paul Revere (yeah, the guy who we all know said “the British are coming” yet for reasons that are easily explained, we’ve never heard of his partner who rode off in the same direction at the same time with the same message but who failed to rally the troops), Gladwell does a terrific job of getting the creative juices flowing on how you can improve every aspect of your marketing.

For any idea that breaches the Tipping Point, Gladwell informs us that 3 people are necessary:

  1. Salesman – Just as the name implies, they persuade us to buy a certain product or take a certain course of action and the great ones do it in remarkably subtle, non-verbal, and positive ways.
  2. Mavens – Do seemingly ridiculous amounts of research on products and services along with EVERY competitive product or service so that you trust when they tell you to buy something they know what they’re talking about. The crazy part is they just do it to be helpful. It’s how they’re wired.
  3. Connectors – The quintessential socialites. They know everyone and therefore can connect a product or idea to vast amounts of people very quickly.

This is just brushing the surface. If you’re looking for some inspiration and great ideas to market your product, service, and business whether in your local neighborhood or worldwide, you’ll enjoy The Tipping Point: How Little Things Can Make a Big Difference.

When you consider that Gladwell’s examples and research covered everything from educating children to effective group sizes for optimal communication (150 people), the value of his material actually extends far beyond business marketing to education, healthcare, leadership, even politics. When you can appreciate and understand a few pieces in the way humans interact, it’s amazing how powerful a tool that can be for you to get almost any message across. And more importantly to get people to act on that message.

To your Tipping Point success, Bryan

Filed Under: Business Books, Ethical Marketing Tagged With: , , , ,

The power of the Viral Loop and Viral Marketing

December 3, 2009 by 3 Comments

Adam Penenberg’s book, Viral Loop: From Facebook to Twitter, How Today’s Smartest Businesses Grow Themselves, is addictive. That’s quite ironic considering the content so maybe he even designed it that way. 🙂

In my last blog, I wrote about the amazing valuations that companies with little to no revenue and often huge losses can achieve. The mantra was more about getting big (meaning getting a lot of customers not necessarily profits) and getting bought up. It’s happened dozens of times with businesses ranging from Facebook (valued at $15 billion thanks to Microsoft) to Twitter (who still has no source of income) to Bebo.com (which sold for $850 million) to Myspace (which sold for $508 million) to…. Well you get the point. Companies got real big, real quick with no marketing. But how did they do it???

Well Penenberg focuses this growth on businesses achieving a Viral Coefficient above 1.0. That simply means that for every person who signs up for your website or service, they influence at least one other person to also become a customer of yours.

Let’s say for every person who signs up for your new social networking site, they invite (on average) 20 of their friends to also join. Out of those 20 people who are invited, if  one person signs up (i.e. 1 out of 20) the viral coefficient is 1 (20*.05) and so the product is considered to be viral and therefore will experience exponential growth. If instead, 2 out of those 20 signed up, the viral coefficient would 2 and the growth would be ridiculous.

viral coefficients
0.811.2
101010
Number of Cycles1182022
2243036
3304054
4345074
5376099
64070129
74280165
84390208
945100260
1046110322
1147120396
1247130485
1348140592
1448150720
1549160874
16491701059
17491801281
18491901547
19492001867
20502102250

Table illustrating the power of viral marketing for viral coefficients of .8, 1.0, and 1.2 when starting with 10 initial users.

If we consider that it takes 1 day for a current customer to bring you another customer, after 20 days, you’d have 50 customers with a coefficient of .8, 210 customers with a viral coefficient of 1.0, and an astounding 2250 customers with a viral coefficient of 1.2! Some people might suggest that 1 day is a very short time frame and for some businesses it is indeed short, however when Mark Zuckerberg launched TheFacebook.Com at Harvard University with no marketing just by telling friends, he had 1200 people sign up within 24 hours! Within 24 hours of HotorNot.com launching their website (again with no formal marketing) they had 100,000 visitors. Adam Penenberg’s book goes through the numbers of many more of the businesses that I’ve mentioned above so I’m hoping you can start to see the amazing growth potential of businesses that can become viral.

So what does it take to become a viral business?

Well Penenberg’s book addresses this a bit, however he never really provided a precise formula simply because the way Facebook or HotorNot grew was not the same as Hotmail, or even Tupperware. That being said, he pointed out, and I’ll expand on some items that were similar in his viral businesses.

  1. It has to be something people REALLY want. – How do you know people really want it? Because they’ll pass it along to their friends without being asked to do so. Another way things can automatically get passed along would be how Hotmail put a tag at the bottom of all of their emails that said “Sign up for your free Hotmail account.” Obviously they’ve changed it to rotate marketing about Windows 7 now.
  2. It has to be simple. – Becoming a customer or user has to be quick and easy. The more steps or pages or data to fill out and the fewer people will join. That was obviously the beauty of HotorNot and Twitter. Even Ebay and Paypal make pretty quick work of buying and selling online.
  3. There has to be an incentive for people to spread the word. – At first it sounds like this may counter my first point, however that’s not the case…  An incentive can simply be “if all of my friends are on it, this <product>” will be so much better for me. Think of MCI’s Friends and Family plan for instance. I just bought some pants from Bonobos.com and for everyone I refer they give me a $50 credit. Obviously I racked my brain to think of people who might enjoy some high-quality pants.
  4. It has to be easy to spread the word. – Businesses like RockYou and Slide popped up literally overnight because of the viral design of Myspace and Facebook. Myspace and Facebook themselves even make finding and inviting new friends easy by accessing your email addresses from Yahoo, Gmail, Aol, and Hotmail. The easier it is for people to tell their friends, the more people will tell their friends.
  5. You have to be the first one to achieve critical mass for your market. – There are dozens of examples of this from Hotmail to Ebay to Facebook however let’s just look at Paypal for now. Paypal was the first to market and adhered to all the steps above including allowing you to send money to people without a Paypal account (which was simply a way to get new people to sign up). With their viral hooks built-in, they became extremely popular on Ebay in short order. However, Ebay (along with several other companies) wanted their own payment processing company and they even partnered up with Citi Bank to make it happen. They made rule changes to their online listings so that their payment system would show prominently for every item and Paypal’s logo would be pushed to the bottom of the listing. But they did it all too late. They spent millions to make their payment processing company work. Ebay even considered (threatened) banning Paypal altogether. Eventually they decided to just buy Paypal which at the time was privately owned. Unfortunately they didn’t think it was worth the $1 billion dollar asking price and so they let Paypal go public and a few months later were forced to buy the public company for $1.5 billion. You think you had a bad year, at least you didn’t make a half billion dollar mistake (at least I hope you didn’t).

As you know, I own a small “brick-and-mortar” business. Less than 1% of our business currently originates on the internet and my business has a designated service territory so my market is limited. That certainly is a much different playing field than all of the businesses in Penenberg’s book and quite realistically only a tiny fraction of businesses in the world will ever fall into that realm. So for the rest of us in the real world, how can Viral Marketing make a difference to us? Well, understanding the power of a viral business where you develop systems and programs to encourage every single new customer to bring at least one other new customer with them is the key. In the small business world we call this developing referrals. It’s a powerful (and cheap) way to grow any business so I look forward to addressing some ways to do that in the future.

To your viral success, Bryan

Filed Under: Business Books, Ethical Marketing Tagged With: , , , , , , , , , , ,

Business Valuation – Public, Private, and Internet Businesses

November 28, 2009 by 1 Comment

As I’m reading Adam Penenberg’s book Viral Loop: From Facebook to Twitter, How Today’s Smartest Businesses Grow Themselves, 2 main themes have caught my attention. Firstly, the power and consistency of creating a viral loop for your business. Secondly, though the item I’m blogging about first, is how differently businesses can be valued.

I’ve written regularly about valuing small businesses based on the mantra “it’s all about profits”, and yet have learned of dozen’s of businesses worth hundreds of millions to billions of dollars with little to no profits to back that up. Penenberg references HotorNot, Hotmail, Paypal, Ebay, Bebo (even though they didn’t use their venture capital money), Myspace, Facebook, BirthdayAlarm, Netscape, Ning, Twitter and others that almost universally had substantial losses each month when venture capitalists started investing millions or 10’s of millions of dollars into these businesses. A good friend of mine, and MBA student, had argued with me many times that business is all about getting customers. I always countered that you can have a million customers but if you lose $1/month on each one, that’s not a good business. It seems, however, that both of us weren’t looking at the entire scope of business.

So when we value businesses, there are basically 3 primary groupings to consider:

  1. Small, closely-held businesses (which is what I most often write about)
  2. Internet Businesses
  3. Public Companies

In small, closely-held businesses, I am right. It’s all about profits and your business should be valued on that. If you’re buying one of theses businesses and it has a loss, you may just want to offer to take it off of the seller’s hands for them so they don’t continue to incur the losses. These are your every day “main-street” (pardon the cliche’) businesses that you find for sale on Bizbuysell.com and other websites. Theses businesses are generally your first step toward wealth creation.

Internet Businesses open up an entirely other ball of wax. These businesses rarely have any income and certainly no profits early on in their life-cycle, however manage to attract anywhere from hundreds of thousands to hundreds of millions of dollars in investment capital before turning a profit. Does that mean it’s not about profits for these businesses and that’s not their top goal? Of course not. That’s just crazy talk. The difference is simply this. These investors appreciate that their is profit potential when you’ve captured the daily attention of hundreds of thousands or millions of internet users. One particular story that caught my attention was the start of Hotmail. Initially Hotmail had no users, no website (didn’t even have the hotmail.com domain name) but they had an idea and managed to raise $300,000 for a 15% stake in a company with no customers or income or profits, in return for being the first company to come to market with webmail. About 2 years later, that initial $300,000 investment from the venture capital firm was turned into $60 million dollars as Hotmail was sold to Microsoft for $400 million dollars. Without going into the details, the power of a viral business model made this all possible. So our question is, how did the venture capital firm decide that a 15% stake in JavaSoft (which eventually became Hotmail) was worth $300,000? Negotiating. The only thing JavaSoft had was an idea. Through negotiating they decided the idea was worth $2 million and so 15% was worth $300,000. For the dozen’s of businesses I’ve mentioned above that have followed a similar trajectory, obviously there are hundreds that failed. Beyond that, Microsoft, has certainly profited far more than their original $400 million investment in Hotmail in the last 10 years so don’t ever lose site of the importance of profits. 😉

Public Companies can potentially bring another set of rules. Firstly, you can’t buy a public company for less than it’s stock is worth. In other words, if a stock is trading for $10 and there are 100,000 outstanding shares, the business is worth $1 million dollars ($10 x 100,000) and you can’t pay less for it. In theory, the company’s stock price should be based on it’s profits (generally called earnings) however many public companies have price to earnings values ranging from 5:1 to 50:1 or higher. This simply means that the business is “worth” anywhere from 5 to 50 times more than its profits. If a business is currently losing money, it’s price to earnings ratio effectively doesn’t exist. So, for instance, if the business above had $100,000 in profits, it’s PE or Price to Earnings ratio would be $1,000,000 to $100,000 or 10:1. Make sense? So the natural question is, what determines a business’ stock price? And the answer to a great degree is the same as with an Internet Business. It’s based a lot on speculation. More specifically, if a bunch of people think a business is a great business, and so buy a lot of stock, the price of that stock will go up regardless of whether the business has profits or not. In theory, over the long-term the stock price will match the actual value of the company which is how guys like Warren Buffet have made billions investing in companies that are undervalued.

So what does this mean to us? If you have no profits but can convince a bunch of people you have a great business anyway, you can make a lot of money. 😀

The reality is actually, if you can convince buyers, venture capitalists, or investors that your unprofitable business has the potential to return remarkable profits in the future, you may just be able to throw EBIDTA out the window and value your business on whatever feels right at the  moment. In other words, no matter where or what your business is, your business is worth whatever you can convince someone to pay for it.

To your success, Bryan

P.S. If you’re looking for a real-life argument between a small business “profit is king” entrepreneur and a “customers are king” large business builder, check out Perry Marshall’s blog.

Filed Under: Business Books, Business Buying/Selling Tagged With: , , , , , , , ,