Network Economy Practices

Background and Business Model

It was clear that these 200 clients would soon set up their own publishing operations, and that selling outsourcing for the entire publishing process was not a viable business over the long run.  New management came on board, with a new vision:  review magazines, focus on key articles, and help publishers sell subscriptions.  Sort of like a Publishers Clearinghouse with a different twist -- replace Ed McMahon, big prizes, and sheets of stamps with information, consistently low prices, convenience, and broad selection.

Key Current Business Issues and Approach to Market

The key web business tactics used to date to build share and early position have been:

• Targeted banner ads on portal sites.
• Guaranteed lowest prices.
• A focus on efficiency and high-performance in the site design.
• Use of a search engine to make access to the desired magazine as easy as possible.  If it takes too long to find the magazine the customer is interested in, the business could quickly lose the potential customer.
• Use of editorial content on the home page and throughout the site -- once the customer is there to buy a particular magazine, create interest in other magazines.
• Recommendations of related magazines:  If you buy Car and Driver, you might also be interested in Road and Track.

Ads: Building Traffic

Interestingly, this raises questions about use of advertising on the company's OWN site.  The company currently has a revenue stream from sales of banner ads.  But advertising takes prospects AWAY from the company's site.  That fact, combined with the apparent effectiveness of sales when prospects are ON the site, is causing the company to revisit the decision to sell ad space.  One key question, to which they do not yet have a firm answer, is how many sales come from magazine promotions and information that customers see after getting to the company's home page.  In other words, are the sales primarily because people see a banner ad, are interested in a particular magazine, and then come to the site to simply execute a sale?  Or is there substantial selling -- and further decisions to buy -- that happen once the prospect arrives at the site?  Such questions are not easy, and require sophisticated data collection and metrics.

Content

The company is certain that the success of the site is due in part to this content.  In reviewing the site, Fastwater agrees:  if you imagine the site without content -- simply a list of magazines and subscription prices -- no reviews or feature stories -- it seems clear that the site would be much less inviting, less likely to create "trust" in the buyer, and therefore much less able to sustain the strong success rate of completing sales once a buyer arrives at the site after clicking on banner ad.  As it stands, the content helps ensure that, when you arrive at the site, you are engaged, interested, and willing to stay, dig deeper, and proceed with your sale.

It is difficult, however, for the company to make specific connections between content and sales.  For example, they have found that a feature article on a particular magazine does not translate into an immediate spike in subscriptions for that magazine.  Or, consider the fact that the company has discovered that 25% of the visitors to the site use the search engine to take them to a specific destination, rather than browsing around the site using navigation aids.  Although this does not in any way show that content is not important, it does suggest that a substantial number of visitors have a specific goal in mind as they arrive at the site; they are not coming to the site to browse and read.

Such observations raise important questions for this company.  Like any other web startup, they need to try to maximize earnings from each dollar spent today while at the same time building a position that is defensible and capable of supporting growth in the future.  Today, in the early stages of growth, the company is focused more on building share than on creating community or on maximizing sales from a given buyer.  It is reasonable to expect that as the company matures, as it succeeds in establishing a leading market position, this focus will shift to community and maximizing revenues over the customer life cycle -- and that the content investment made today will be critical to that future success.  What is the best way to allocate resources today while still setting up structures that lead to the future?  The company is aware of these questions; they are the topics for a lot of internal discussion.  The company also understands that getting answers to such questions will involve collecting more detailed customer data over time.

Getting to Know the Customer

The company also offers a chat site where customers can talk about any one of a couple of dozen topics, ranging from current news to topics covered in bridal magazines.  The chat site does get used, but has not yet turned into a tool that the company can use for extending the customer life cycle or for increasing revenues per customer.  As with other dimensions of the business, the company has put infrastructure in place to support subsequent stages of growth, but is focused primarily on the initial task of growing share.

Syndication/ICE

Amazon, among others, has successfully established such affiliate programs.  The difference, however, is that the price of books doesn't change frequently, whereas magazine subscription prices change all the time.  The company is therefore looking to the ICE (Information and Content Exchange) standard as a critically important tool that will enable them to provide affiliates with up-to-date information.  (ICE is an XML based initiative to make it easier for companies to create systems that support automated inter-website sharing of transactions and content.)

Collecting Customer Data

All of these questions point to a need to collect customer data and, later, to building or buying tools that will help the company analyze the data.  Fastwater divides customer data collection into four different categories (see the issue of Fastwater Rapids that describes these distinctions in more detail):

• General Site Usage Metrics:  how many people visit the site, where to they come from, when do they visit it, and so on.
• Navigation Patterns and Diagnostics:  once they are on the site, what do they do there?  How do they move through the site?
• Data to Drive Content Delivery in Response to the Customer:  at the simplest level, this consists of making decisions about content (ads, articles, lists of related links, and so on) on the basis of the previous pages, purchases, and so on.  At the most complex level it includes previous history with the customer, including information about the customer coming from sources other than the web.
• Lifecycle Information:  historical data for numerous customers is aggregated to produce insights and metrics with regard to the purchasing patterns of typical kinds of customers over time.

Because this company uses Vignette to deliver the content, they have the capability to deliver customized content based on user profiles (3rd level of the customer data hierarchy).  In fact, they used to do this.  If you were a returning customer, they would look you up in a database and use the home page to promote magazines related to your earlier purchases.  Interestingly, they found that the computation demands of this process were not necessarily repaid in increased sales.  They chose to focus on fast response rather than customized responses.  As they install new, more powerful server hardware that enables them to provide both rapid response and custom content, they will revisit this issue so that they can better understand what works and what doesn't.

When a customer does make a purchase, this company offers "you might also be interested in" information.  Because the number of magazines is relatively small, and the associations are pretty straightforward, the company is currently doing this through rules that they have developed on their own.  Since the new version of Vignette includes NetPerceptions, a product that automatically generates recommendations, the company will use NetPerceptions to do this work in the future.

The company is most aware of the value of also collecting data that would give them a broader picture of the customer life cycle.  But there are only so many hours in the day, and only so many people to do the work.  The company has decided to focus on immediate growth first.  Broader understanding of how their customers buy and how their business works will have to wait. First things first.

Lessons for Others

• Tying business model to strategy and to market:  This company is operating in a market where long term success depends on access to a scarce resource:  strong working relationships with a few key publishers.  The market is therefore one that favors early entrants who can create these relationships.  Solidifying those relationships depends on being able to produce results for those key publishers, and that, in turn requires building web presence quickly.

This is therefore a business where an all out focus on building share, without paying too much attention to immediate costs, make a lot of sense:  there is a substantial, defensible prize for winning the race.

We note that the critical element in this model is that there is a scarce resource that can be dominated and defended by early entrants.  Companies who cannot quickly create real barriers to entry by newcomers will not necessarily have the same success with an "initial growth at all costs" strategy.

• Appropriate positioning of advertising in the business model: There are businesses built around selling advertising.  Portals are a good example in the consumer market, VerticalNet is a good example in the business-to-business space.  And then there are businesses built around selling something else, be it books, magazine subscriptions, or stocks.  We tend to be concerned when companies fundamentally in the business of selling "something else" lean too heavily on advertising to make the pieces of their business model fit.  The company examined in this case study illustrates that, when you are succeeding at selling goods, you may even end up questioning the contribution of advertising sales to your revenues.

• The role of content in a web business model:  This study shows that it can be indirect, and notoriously difficult to assess.  In some ways, there is nothing new here:  newspapers and magazines have, for hundreds of years, dealt with the fact that content is not directly tied to revenues, and yet is, at the same time, absolutely essential to revenues and success over the long run.  But, for this site, and for e-commerce sites in general, it is not clear that such analogies are completely applicable.  A website is not just a publication -- it is, for many vendors, a place to buy things.  But it is also not just a store, with a list of goods to be sold.  In some way, a web site needs to become a "place" that is familiar and trusted.  What is the role of content in creating "place?"   The point for other readers is that they should not be surprised when such questions arise with regard to their own sites.  In fact, they might consider being concerned if such questions aren't popping up.  We believe that a company's ability to make direct, measurable connections between content and commerce will emerge as a requirement for success in web commerce.

• Collecting and using customer data:  Data collection is constrained by the realities of limited hardware capacity and limited human bandwidth to look at, understand, and analyze the data.   Like many other companies, this one is currently only making use of basic data collection and analysis capabilities.  The critical need to focus on gaining share, early, means that concern with customer life cycles will wait until a bit later.