|the battle for
Netpreneurs in consumer
markets cut their teeth with early adopters who raced to the Net as the hot new thing.
Now, as mainstream consumers come online in a second wave even bigger than the first, they
bring a new set of buying behaviors. At this Morino Institute Netpreneur Program Coffee
& DoughNets meeting held November 10, 1999, Mary Modahl, Vice President of Research at
Forrester, used Technographic® research to explain the differences between these two
consumers groups, and why the new wave also means a new competitive threat from giant,
made at Netpreneur events and recorded here reflect solely the views
of the speakers and have not been reviewed or researched for
accuracy or truthfulness. These statements in no way reflect the
opinions or beliefs of the Morino Institute, Netpreneur.org or any
of their affiliates, agents, officers or directors. The transcript
is provided "as is" and your use is at your own risk.
1999 Morino Institute. All rights reserved. Edited for length and
mary macpherson: introduction
Good morning. We are extremely
fortunate to have Mary Modahl, Vice President of Research at Forrester Research with us this
morning. Her research and consulting work in the Internet economy spans media, retail,
financial services, consumer computers, networks, interactive software and business trade.
She is the author of the soon to be published book, "Now or Never: How Companies Must Change To Win The Battle For Internet
Consumers," and an influential and often-quoted analyst who has been profiled in The
Wall Street Journal and Wired magazine. She has appeared as a guest on CBS,
NPR, CNNfn and CNBC, and is a regularly featured speaker at company strategy sessions and
industry events. During more than 10 years with Forrester, she directed the company's
early research on computer networks and subsequently launched Forresters practices
in new media and E-commerce. She graduated from Harvard University in 1983.
Every informed business person knows that the Internet is
transforming the economy as we know it, but few people have the knowledge or the guts to
identify which companies will emerge as winners and losers when the dust finally settles,
and that's what Mary is going to talk about this morning. She has also offered to spend a
few minutes talking about working with industry analysts, and I know that will be
The work that Forester has done on
Technographics®not to be confused with psychographics or demographicscan help
netpreneurs understand Internet customers so you make business decisions accordingly. She
will take us through that, and a number of other things you'll find most interesting.
Following her presentation, Mary will be joined on stage by one of our favorite
peoplea trailblazer, groundbreaker, advisor, business leader, media maven and
principal of the Poretz Group
investor relations firm, Esther Smith, who will moderate your questions for Mary.
mary modahl: the sleepers awake
Thank you very much, Mary, and
I'd also like to thank Esther Smith for inviting me to join you this morning. I'm honored
to be with the Netpreneur Program, and I am very, very impressed. I think it's exceptional
among the entrepreneurial groups that I have seen in various towns.
My presentation today is about the battle for Internet
consumers, a battle that is being joined between traditional companies and .coms. When you
look at the marketplace, you see the de facto assumption that the .coms have won this
battle, that being a startup is much betteryou are freer, you can move more quickly
and are more exciting. Traditional companies are flat-footed. They are slow and their
management doesn't get it. That's now conventional wisdom in our marketplace, but I
believe that the market is beginning to shift. Traditional companies are not as DOA as
they may appear.
This morning I want to focus on some of the responses
traditional companies are making to the Internet. They know what's going on now, and they
are beginning to take action. As a startup organization, how will that change your
competition? I would submit that it's very different to be a startup in the Internet space
today than it was three years ago.
The theme of my presentation is that traditional companies
are responding, and that is changing the game for startup companies and .coms. We'll look
at how, but first I want to look at Internet consumers. I think we all know about the
movement from the early-adopter group into a more mainstream group, and I want to look at
how the two are different. I will share with you some of the research that Forrester has
done through more than 100,000 direct interviews with consumers this year. We will look at
the battle between traditional players and startups or .coms. What are the advantages and
disadvantages inherent in each? Which hand would you rather be playing? We will look at
how traditional companies are responding. What are the successful models that you see in
traditional companies? That's very important to have on your radar screen if you are a
startup company. Finally, what are the implications for you if you are going to be
competing against these traditional companies?
a new wave of consumers
Let's start off with a
look at consumers [slide 5]. We all know that when
consumers, or anybody else, adopts any technology, there are first the
early-adoptersthose people who love technology and are willing to go through
anything to try to use a new gizmo. Most likely, a lot of us in this room will do anything
to get that hot new gizmo, even if it takes you more time and it's a big pain. Mainstream
consumers follow after that, and, eventually, the laggards. How do these groups differ?
Let's look at early-adopters versus mainstream consumers,
and here I'm talking about the North American population. Demographically [slide 6], the mainstream consumer group is bigger than
the early-adopter group88 million versus 60 million. They are far less male; it's a
much more evenly balanced group with respect to gender. The median income is $35K per year
in the mainstream consumer base, compared to $65K in the early-adopter group. That's a
very important difference, obviously, because somebody who is earning half the income has
a different set of needs when doing business online. However, the total personal
disposable income of the two groups is almost the same. If your company is so out-there,
so bleeding-edge, so .com-ish, so oriented toward early-adopters that you can't appeal to
the mainstream, you are only addressing half the market compared to positioning your
company as one that can deal with the needs of mainstream consumers.
Let's have a quick look at the data from a technology point
of view. Early-adopters overwhelmingly own a PC while only half the mainstream does. Only
30% of the mainstream is online. Let me note that this data was gathered in the first
quarter of 1999. These same people told us at that time that they expected to be going
online in greater numbers, so the mainstream should be up closer to 40% by now. In the
early-adopter group, we are probably reaching 80% today. It's moved fast during this year,
and we'll go back out to the field in another month and see where they ended up.
There is a very big difference between the two
groups in their online shopping behavior. You see early-adopters down at 19% They are
expected to be up around 20%-25% by the end of this year. Mainstream consumers are much,
much more hesitant about doing anything onlineonly about 7% have done online
Let's have a look at why. When we started to look at
these markets to understand what consumers would do online, we realized that there's an
essential problem in consumer markets. You can never go out and ask a consumer, "What
will you do in the future?" It's like asking, "Would you like to land on
Mars?" You get absolute garbage when you try to ask consumers what they will do in
the future. You simply can't ask, "How would you use this new device that I'm
describing to you?" We realized that we needed some kind of a predictive model,
something that would tell us what the consumer is likely to do in a variety of markets.
Demographics didn't work very well. We found out that you can't predict this technology
behavior very well based on gender, age or income. For example, if you compare my best
friend and me, we have completely different technology behaviors. She is a teacher. She is
not into it, she doesn't like it, she won't touch it. Her husband uses it, but not her. We
are identical demographicallysame age, income, everythingso demographics
doesn't help very much. Psychographics tends to help a little bit more; for example, is
this person adventurous? We realized, however, that you needed some mechanism that
specifically addresses a person's ability or desire to deal with or use technology, so
Forrester created a classification system that we call Technographics which
segments consumers based on their attitudes towards technology.
a technographic of optimists and pessimists
What you find is that
some people like technology and some people don't. We call them optimists and pessimists.
Overall, we find that optimists are far more likely to use any kind of technology than
pessimists are, and the differences are much more dramatic when it comes to
If you look, for example, at a fairly easy to use
technology like a cell phone, there will be more similar behavior between optimists and
pessimists than there is around a very difficult-to-use technology like a PC or shopping
online. Optimists and pessimists are also divided into high- and low-income categories,
because people who have a whole lot of money can spend more.
How does this map to our early-adopters, mainstream and
laggard groups? [slide 7] What you see is that it is
the high-income optimists who are the early-adopters. They love technology, they have
money to spend and they are out there to do it. One of the most interesting
"ahas" of this study is that the mainstream is actually composed of two groups,
the low-income optimists and the high-income pessimists. That's very important because it
tells us that in the mainstream consumer base about half of the people aren't buying much
online because they don't have the income to do it. When you look more deeply into the
data, you find that the low-income optimists are young people just starting out. They are
highly educated, they're mostly single and, if you project forward their future, they are
headed toward the high-income optimist category. They are going to marry up and turn into
dual-income couples and their incomes are going to rise as they develop their careers.
That's so different from the high-income pessimist
group which has plenty of income. In fact, their median income is up in the $65K range
with the early-adopters. But you know what? They don't like technology. My dad is a guy
like this. My dad is a high-income guy, but he doesn't like technology. He would not get
an answering machine. He will not use any kind of voicemail. He absolutely detests it, and
he won't get involved with technology at all. What's interesting, however, is that a
high-income pessimist does sometimes go online and take action. When they do, they are
difficult to tell from the optimist because they spend so much money.
Let's stick with the example of my dad. He doesn't like to
go online. He doesn't browse or read news online and he is not interested in the Web at
all. However, my dad is very interested in books. In fact, he translatesif you can
believe thisancient Greek into English as a hobby. Don't tell anyone about this,
okay? He is kind of an intellectual guy.
One of his friends said, "Hey, Bill, did you
know you can go online and buy all the books you ever dreamed of?" So he gets a PC,
gets it set up, goes online and he's at Amazon.com.
It's that easy. He doesn't even know there is any Web other than Amazon. The Web is just
books to him. The first time he went online he spent $500 on books. He looks like an
early-adopter, but is he? N-O-T, not. So, it's very important to understand the difference
between these two groups in the mainstream because you have to decide how you are going to
pitch your company to them.
targeting mainstream consumers
Let's have a look at a
couple of companies that have appealed to these two types of consumers. One that I want to
bring out first for the pessimist area is Fidelity Investments, a traditional company.
Fidelity is marketing in a space where there are a lot of
startup companies. E*trade is out
there, Charles Schwab, and so many
more. Fidelity has been reamed in the press for not being as fast in the day trading
space. Their trading systems aren't as fast. Everybody has gotten all over them about it.
But Fidelity looked at their customer base and realized that they had half high-income
pessimists. What do these people really want? Familiarity. They need to feel
comfortable because they don't really like technology. When a high-income pessimist gets
online, it looks like the lunar landscape. It's so weird for them and they are so
uncomfortable. All they're looking around for is something they are familiar with, and,
thank heavens, Peter Lynch is here. [slide 9] I'm so
glad to see you. This is a relief.
It's incredibly simple. You want to invest? Click on Peter.
You want investment strategy? Click Peter. Return? Peter. It's very easy. They have
understood that high-income mainstream consumers are not out to experiment, they are out
to get familiarity.
How has Fidelity done? Very well. They manage over $200
billion in assets. E*Trade has $7.8 billion and Charles Schwab has $81 billion, so
Fidelity is doing incredibly well. It is a traditional company, it is not hot and not
winning the news stories, but it is doing very well by going after high-income pessimist
Now let's have a look at the low-income optimist group.
These are our young folks. They like a lot of technology, but they don't have a lot of
money. Let's look at a startup company that has done a good job of appealing to this
group, theknot.com, a wedding site. The folks at
theknot realized that young people who are technology optimists are living in a different
world. I don't know about you, but when I got married, in the traditional kind of marriage
model you would plan a hometown wedding, get together with your mom, choose some china,
send those hand engraved invitations and all that stuff. There was a set of traditions
around that. Young people today are in a very, very different kind of situation. For a
start, the bride's parents are divorced, right? Her dad got remarried after leaving his
second wife, and now the bride is closer to the second wife than she is even to her
biological mom, and her dad's on to the third wife now. The groom's parents are probably
divorced as well, and he is probably a different religion from the bride, so they have
some fairly touchy etiquette questions when it comes to their wedding.
What do they do? Go to theknot [slide 12] and Carley is there to answer those etiquette
questions that would have made Emily Post faint, such as: What do I do with my college
lovers at my wedding? These are the true questions that we deal with today. Even the
brand, the word "the knot," touches on the ethos of young people getting
married. Over half of them have divorced parents, so their view of weddings and marriage
is a little bit different.
The gift registry for theknot is very
interestingand I don't mean to position them as unique in this because there are
certainly competitors that do it as well. In the traditional wedding model, the bride,
primarily, would go out and choose the gifts, and the polite thing to do was to order them
and send them to the bride's parents' home before the wedding. Traditionally that's the
correct thing to do, but now the question comes up, which bride's parents' home? Besides,
this couple would much rather take delivery of the gifts after they get back from the
honeymoon, and theknot does that. They give the couple a set of pre-addressed, pre-stamped
thank you notes. To us it might be very rude, even to just a slightly older generation,
but to these kids it's obvious convenience. Moreover, they don't want traditional gifts.
The last thing they want is china and silver. They like mountain bikes and things like
that, but what they'd really like is for you to just make a deposit to their
mortgage account [slide 13]. This is the ethos of young
people today, and theknot has tapped it. These are the low-income optimists. They have a
different feel to them than what you think of as the early-adopter consumer who is mainly
a baby boomer.
How has theknot done? They are a startup. They had about a
$1 million in 1998 revenue. I probably shouldn't be talking about them since they've just
entered the process, but they have nearly a million unique visitors per month so they have
done well on the startup side.
who's got the winning hand?
That's the consumer
mainstream, with a startup and a traditional company that have done a good job of going
after what those consumers are really looking for. Now let's have a look at the battle
between these two types of companies, the .com and the traditional. Let's have a look at
the hands these guys play. [slide 16]
First, in the funding area, I would argue that the .coms
have a tremendous advantage over the traditionals, not least because they can get venture
funding. Those venture capitalists are patient with the risk. They understand the kinds of
expenditures that need to be made, and you don't even have to be profitable to go public.
This is a magical, magical moment in the financing area. I'm not sure how long it will
last, but for heaven's sake, it's a tremendous advantage over traditional companies that
have to function through a traditional process that is a lot more risk-averse.
Leadership, I would argue, is a big advantage for .coms.
Now, you may like to think it's because the IQ is very high among .com leaders, but I'm
not sure there is a gigantic difference in smarts between traditional leaders and .com
leaders. It's just that at the traditional companies only 1% of their business is on the
Internet. If you are leading a company and you are focused on the 1% instead of the 99%,
that's a mistake.
Since there's a real difficulty for traditional companies
to get in focus, that's also reflected in the organization of the .coms. They're totally
focused on the Internet. The traditional company, of course, can't be.
One of the biggest advantages of all for the .coms is
channel conflict. Most traditional companies have distributors and retailers, and these
guys aren't just a little bit difficult to deal with, they are unbelievably
difficult for traditional companies to deal with. They threaten to pull your products off
the shelves at retail. They threaten to stop distributing your products. They call up the
president of the company. It's very bad. Anytime a startup can get in a position where
it's selling direct against an indirect-selling traditional company, that's a real
Finally, I would argue that technology skills are an
advantage for .coms. Again, it's not so much that .coms have better technology
peoplethough in some cases they might, since they have the prospect of going public
with which to compensate peoplebut as much as anything, it's the fact that the
traditional companies are burdened with keeping up a huge number of internal desktop
systems and human resources systems and payroll systems and financial accounting systems
that are all internally focused.
But, and it's an important but, the traditional companies
have some real advantages, and I will put brand in this category. People like you and me,
the early-adopters, we look at companies like Amazon.com and Yahoo!,
and those guys have done incredibly well with branding. We know of companies like Mercata, but mainstream consumers have
no idea who most of these .com companies are. There is nowhere near the kind of brand
equity that exists in a Victoria's
Secret or a Wal-Mart. Among
early adopters there is a willingness to try out new companies, but among mainstream
consumers there's much less of a willingness to do that, particularly the high-income
pessimist groups. Brand is a big advantage for traditional companies, if they use it.
The customer base is a big advantage with traditionals,
their buying capacities in particular. They can say to a manufacturer or partner,
"Hey, come and do this with me online."
Finally, physical presence should not be underestimated.
When you walk down the street and see the signs for a company, you know they are real.
While that has not been such a significant issue for the early-adopter, it is for the
mainstream consumer. Seeing something physical in the world for the company with which you
do business is important.
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