By Nicholas Lovel
Chapter One – The Curve
In the service era of
quality, we asked ‘Is it any good?’ Now that we can get great products cheaply
whenever we want, we have started asking a new question: ‘How will it make me
feel?’
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The downward pressure
of competition and consumer expectations mean that it is irrelevant how much
something cost to make; what matters is how much customers value it.
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Value lies in the way
something makes us feel. Every time you choose to buy a branded product in a
grocery store instead of the own-brand version, you are paying additional money
because of how it makes you feel.
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With this abundance
comes a new scarcity: that of attention. The problem is no longer how to get
published; it is to get noticed when you have been published. That is the
challenge facing twenty-first-century businesses: how to attract attention in a
world of almost limitless information.
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River Pools is one of
the first websites that many people find when searching for the costs or
problems of fibreglass pools. The company’s website acts as a resource for
anyone trying to find out about pools as much as it acts as a sales mouthpiece.
Sheridan is honest about the shortcomings of fibreglass pools and that gains
him the respect and trust of his customers. A customer who has read a lot of
Sheridan’s online material, thirty pages or more, and then books an
appointment, converts to a purchaser 80 per cent of the time, compared with an
industry average of 10 per cent.
Chapter Two – Scarcity and Abundance
The competitive
advantage for an investment bank is not to have information: it is to filter
out the noise and find the important nuggets, whether public or proprietary, that
will be useful for their clients. In less than twenty years, information has
gone from being scarce to being abundant, changing the way bankers and clients
value it.
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In order to thrive in
the world of digital, we need to make sure that we are not like the man walking
past my kitchen window. We need to make sure that we adapt to the end of
scarcity and its replacement by abundance by seeking the new scarcity. When something collapses in value, something else
rises in value alongside it. We need to adapt to abundance thinking, where we
not only discover what will become cheaper, but also look for what will become
more valuable as the result of the shift. That is where the opportunities will
lie.
Chapter Three – Competition, Economics and a Man
Called Bertrand
Apple doesn’t care about making money from
the App Store.
What it does care about – deeply,
passionately – is making the family of iProducts the most desirable products in
their class in the world. It does that through design. It does that through
marketing. And it does that through making sure that there is a vast library of
applications available at very low prices or for free so that anyone
considering buying one of their products knows that they have all the software they might ever need for a very cheap
price just a couple of finger taps away.
Apple is interested in selling hardware.
That developers can make lots of money from the App Store is not in question
nor, as we will shortly discover, is it in doubt that they can make lots of
money by giving their apps, particularly games, away for free. But Apple’s
interests are not aligned with those of its developers. This disconnect -
between the needs of Apple and the needs of its developer ecosystem – is as
good an illustration of how the price of a digital good tends to free as any we
can find in the world today.
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Content has long been
charged for but, on the App Store at least, those heady days when you can
charge almost a dollar for a game are long gone for many developers. The
prevailing price point on the App Store is currently free. The good news is
that in 2011, at least nine games grossed more than $30 million. One Finnish
company, Supercell, is generating over $2.4 million in revenue per day from two
free games, Clash of Clans and Hay Day, through the sale of virtual goods to a subset of its
audience. In 2013, the company sold shares worth $130 million to investors at a
valuation of $770 million. British publisher NaturalMotion has stated that its hit game CSR Racing made $12 million in the first month.
Chapter Four – Everything Just for You
The mass media was
created by the needs of advertisers, not the wants of consumers. Mass marketing
supported the business world when consumers still worried about whether
products were available, affordable and of acceptable quality. But we have
moved on from ‘Is it available?’ and we have moved on from ‘How much does it
cost?’ We assume that good-quality products are available at a low price. What
matters now is how it makes us feel.
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Iyengar’s
recommendations for how to offer a vast range of products and services while
making it easier for customers to make purchase decisions employ the kind of
technology solutions that are widely used in the online world. She recommends
employing ‘the well-organized’ choice. Grouping products into categories helps
people make choices.
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Kevin Kelly, the founding editor of Wired, pointed out that in
the world of the long tail, where shelf space is unlimited and a vast array of
products can be ‘stocked’ cost-effectively, there are two winners: a few lucky
aggregators such as Amazon and Netflix and 7 billion potential consumers. ‘The
long tail is a decidedly mixed blessing for creators. Individual artists,
producers, inventors and makers are overlooked in the equation. The long tail
does not raise the sales of creators much, but it does add massive competition
and endless downward pressure on prices.’12
There is a solution to this problem. It
involves shifting our perspective. Those at the end of the long tail need to
avoid selling products purely on a volume basis. They need to find ways to add
value through personalization, self-expression, scarcity and by thinking about
how what they are doing makes their customers feel.
Chapter Five – The Tyranny of the Physical
In economic speak,
Extremistan is the land of the power law. The Pareto principle. The 80:20 rule
where 80 per cent of the reward comes from 20 per cent of the effort. The power
law, or an approximation of it, is the heart of the Curve.
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Iyengar’s work also
offers another possible conclusion: the challenges consumers face when choosing
from amongst a wide array of options can be addressed by an alternative
mechanism to curation. Technology solutions allow consumers to choose their
products or services based on filtering, not curation.
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Where much of the
content is free to access (as music and many games already are and books soon
will be), they can experience the content themselves to determine whether it is
worthwhile for them. Of course, this abundance creates a new scarcity, that of
attention, which means that consumers will seek out the forms of selection that
help them filter the stuff that is high quality that they will like from the
low quality and the not-for-them.
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More
importantly, it is easier to go from the knowledge that a friend liked
something to experiencing that thing for ourselves than ever before, especially
if that thing is free.
Chapter Seven – Freeloaders
In
technical terms, freemium is often implemented as a business model that focuses
more on audience size and conversion rate than it does on ARPU (average revenue
per user). In a world of the Curve, allowing your biggest fans to spend lots of
money is key. In freemium, the revenue you could make from your biggest users
is often capped. Subscription businesses face a similar challenge. A fixed
subscription caps the amount that your biggest fans are able to pay, forcing
you to focus purely on acquiring new subscribers rather than servicing your
existing customers so well that they want to spend more money with you.
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It turns out that ‘free’ is a very
different psychological price point to ‘cheap’. Psychologist Dan Ariely
demonstrated this irrational behaviour that relates to free products in a
famous experiment using Hershey’s Kisses chocolates.4 Ariely set up a table at a large public
building. He offered two kinds of chocolates: high-quality Lindt truffles and
ordinary Hershey’s Kisses. A large sign above the table read, ‘One chocolate
per customer’. Customers could only see the chocolates and their prices once
they stepped close to the table.
Lindt chocolates are high-quality Swiss
chocolates that Ariely describes as ‘particularly prized, exquisitely creamy
and just about irresistible’. They cost Ariel about 30 cents each when he
bought them in bulk. Hershey’s Kisses are less special: the company makes 80
million of them every single day. Ariely started the experiment by setting the price of Lindt chocolates at 15
cents and Hershey’s Kisses at 1 cent. ‘We were not surprised to find that our
customers acted with a great deal of rationality: they compared the price and
quality of the Kiss with the price and quality of the Lindt truffle, and then
they made their choice. About 73 per cent of them chose the truffle and 27 per
cent chose a Kiss.’
The purpose of the experiment was to see
what impact free had on people’s rationality, so Ariely then lowered the price
of both chocolates by 1 cent. The Lindt was priced at 14 cents while the Kiss
was now free. ‘What a big difference FREE! made. The humble Hershey’s Kiss
became a big favourite. Some sixty-nine per cent of our customers (up from 27
per cent before) chose the FREE! Kiss, giving up the opportunity to get the
Lindt truffle for a very good price. Meanwhile, the Lindt truffle took a
tumble; customers choosing it decreased from 73 to 31 per cent.’
Ariely repeated the experiment in
different circumstances and with different conditions. His conclusion is that
free is a very powerful motivational price. It gives us an emotional charge
that increases the perceived value of what we are getting. More than that, we
will often take the free option because it is perceived as being lower risk, as
eliminating the possibility of loss. We often ignore the externalities (such as
the time taken to download an app, or the limited amount of storage space we
have on our iOS devices) because the lure of free is so powerful. Most
importantly, Ariely shows that the difference between an app that is free and
an app costing 99 cents is much bigger than the difference between $0.99 and
$1.99. Even though a dollar is a tiny amount to pay for a game, an amount that
most of us wouldn’t flinch from spending on a cup of coffee with barely a
thought, it is vastly, unimaginably, infinitely more expensive than free.
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Free is a
powerful tool for getting users to your product, service or art. It is not that
users aren’t prepared to spend money on apps or music or online services. It is
that their fear of loss is strong and when companies find a way to let them
experience an app or music or a service for free, that fear is eliminated or
reduced. That means more users in the ecosystems to be advertised to, to tell
their friends or to move along the Curve to become high-spending customers.
Chapter Eight – Gawkers
Let me put it another
way. A decade ago or more, my wife explained to me the significance of flowers,
or indeed any similar small, non-event-specific gift. ‘It’s not about the
flowers themselves, although they are lovely. It is about showing that you
thought about me when I wasn’t there, that you bothered to spend the time,
effort and money on me, that you wanted to express that you were thinking about
me.’ The flowers are important, the gesture more so. (Virtual goods carry much
of the same symbolism that my wife ascribed to flowers, or they can do in the
right circumstances.)
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In
this world of digital distribution, where it can be trivially cheap to
distribute content and where Bertrand competition dictates that prices will
tend to move to the marginal cost of distribution, content will tend to be
free. Instead, consumers will pay for things that they value, like self-expression,
identity, status, expressions of friendship, and so on.
Chapter Eleven – Make-It-Yourself
If you want to make
tens of thousands of the same item, traditional methods are likely to be more
cost-efficient. But consumers are going to start seeking out the personalized
more. As we move through the journey from commodities (is it available?) to
goods (how much does it cost?) to services (is it high quality?) to experiences
(how will it make me feel?), manufacturing is only just beginning to offer that
personal, social, emotional bond that is where real value will be created in
the twenty-first century.
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The Curve suggests
three linked strategies for building a business in the digital age. Use the
cheap distribution of the web to find customers; use technology to ascertain
who the best customers are; let them spend money on things they really value.
Chapter Twelve – We're all Retailers Now
Let’s
start with some basics. The heart of the Curve is that you need to use the
power of free to reach the widest possible audience of your product and then
use the one-to-one interactivity of the web to let your biggest fans spend lots
of money on things that they truly value. That is not to say that your
audience needs to be massive or your product needs to be a
lowest-common-denominator populist one. The Curve enables the niche to survive
as well as the mass market. The items in trouble are those that used to be
‘good enough’ but not remarkable, that squeaked through the system because
gatekeepers determined what got released and what was successful more than
consumers.
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It’s
not to say that the gatekeepers are going away either: in the new world of
digital, businesses like Google and Facebook and Amazon and Steam and Apple are
new gatekeepers.
These gatekeepers are often more open than
the old ones. They embrace choice and filtering rather than curation.
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The battle we should all be fighting with
Amazon is not about co-operative marketing or pricing. It should be about
getting access to the data about our products. We should be able to test
different marketing copy on sales pages so we can see what works. We should be
able to follow users on a journey so we can discover if making a video makes a
difference, how price sensitive customers are and whether a different colour
book cover changes the conversion rate. Amazon has all this data, but it isn’t
sharing. It controls the customer relationship, it controls the customer
information, it controls the opportunities for upselling and cross-promoting.
Why on earth should I be putting any effort into improving Amazon’s ecosystem
when I could be putting all the effort into my own tiny little ecosystem at
www.gamesbrief.com?
The simple answer is because Amazon is
where the customers are. If I want people to be able to find what I sell, it
makes sense to be in the largest shop on earth. I need to go where my customers
are, no matter the disadvantages. That doesn’t mean I have to be stupid about
it, though. In my head, I think of Amazon as a customer acquisition channel,
not a revenue channel. It just so happens that it also generates revenue, which
is a marvellous (and important) bonus. I am not in a position where I would be
happy to make no money from selling products via Amazon, but I can conceive of the
day when that could happen. It would work something like this:
Amazon is a recommendation engine that is
highly sophisticated. It gives me the potential to reach an audience that
dwarfs the audience I can find myself on my own dedicated website. I will
therefore launch a number of books, both physical and digital, on Amazon and
use the algorithmic recommendations, keywords and other tools available to me
to help make my books appear to the kind of readers who are likely to be
interested in the things that I do. I will share links on social media that
drive my audience to Amazon too, because they will then share the links in turn
to people who are outside my direct reach. Assuming that I have products that
people want to buy at cheap enough prices, I will make some sales.
That is when it becomes up to me to do
more with my books than simply let Amazon sell them. I need to use those books
as a stepping stone to a direct
relationship between me and the reader. Maybe I will link from the book (and
particularly the ebook) to more resources on the website. Maybe I can find a
way for every purchase to entitle the reader to login to an exclusive area of
the website where they can chat and compare notes with other readers. Maybe I
will provide them with an incentive to visit the website and give me their
email address: another free ebook, access to an exclusive webinar or video
series.
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As
President Eisenhower once said, ‘Plans are useless, but planning is
indispensable.’
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Ilkka Paananen is the youthful founder of
Supercell. In his mid-thirties,
although looking a decade younger, Paananen is a second-time entrepreneur. His
first games business was called Sumea and he sold it to mobile publisher
Digital Chocolate in 2004. Based on the track record of Paananen and his team
of co-founders, Supercell was able to raise $12 million from Accel Partners and
London Venture Partners before they had even shipped a game.
Paananen is opposed to micro-managing.
‘When you set up a company, the only thing – the
only thing – you should care
about is getting the best people,’ he said. ‘From that, good things will
happen.’10 He then gives those good people the
flexibility to work in small teams, typically of five people or so, which he
calls cells. The entire company, consisting of a number of these small teams,
is the Supercell. Supercell is relaxed about projects that fail provided they
fail quickly. ‘This year [2012], we’ve killed more products than we’ve
launched.’ It is also focused on keeping the small, cell-like structure that
enabled it to find the hits:
You’ll often see a gaming studio get a hit, then
they’ll start to grow at an astronomical rate. Then the next product they do
has to be bigger in terms of the team, the headcount and the budget because
they think they’re better. But this model has been proven wrong multiple times.
This leads to companies being risk averse and copying what has already worked.
Our guiding motto is, ‘Think Small, But Get Big’. We prize extreme independence
and have a flat organization with little bureaucracy.
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