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traditional companies versus .com startups:
the battle for internet consumers

page four of four | previous page

Q: As everybody seeks metrics that serve in lieu of earnings, please talk about the concept of the unique customer or the registered visitor or the registered subscriber and how that affects valuations.

Ms. Modahl: Yes, I think there is room for a model around the net present value of a customer, and you see very, very different values. I think that's one of the most interesting things to do, and I certainly urge you to do it in your space. Look at every company that competes with you, certainly every one with a public valuation, and figure out how they are valued on a per customer basis. Significantly, different values are assigned to registered customers versus visitors. Yahoo!'s per visitor count is much lower than a registered user at AOL, and that difference is based on the idea that registration is a much firmer kind of relationship. I'm not clear how well that plays out, or doesn't play out, over time, but it is important to look at a stream of revenues per head. Go forward and ask yourself how much you should be spending per head to acquire these customers, because .coms get into this desperate situation where they want to create a business and they end up paying $100, even $200 a head to acquire people. That's pretty difficult to make up on a forward profitability stream.

 

Q: Could you talk about advertising revenue scenarios and how solid you think it is as an underpinning for revenue?

Ms. Modahl: Well, there certainly are revenues in the ad space. That's much more prominent than it used to be. Everybody would like a banner in their doorway. People are spending a good amount of money on it, so there are solid revenues. It's very difficult, though, to create a profitable business solely on an ad revenue stream. The companies that are highly ad-supported, like Yahoo!, end up having a very significant portion of their revenues come from their PR deals and sponsorships, and, increasingly, commerce. Our view is that there are very few businesses that are solely ad supported; more have some mix of transaction and subscription revenues.

It's interesting when you look at the business plans of supposed E-commerce companies to see how they are trying to position themselves. You see in their forward revenue plan something roughly like nine parts transaction-based revenue and one part advertising-based revenue. If you look at the plans of companies that are led by people who used to be in the media space, you tend to see something like six or seven parts advertising-based revenue and three to four parts transaction-based. You see different kinds of heritage, and it's interesting because it's not that evident how different those companies actually are.

 

Q: Can you discuss some other elements of your Technographics model, such as are their predictive elements or additional segments?

Ms. Modahl: Yes, there are additional segments. It takes a bit of time to go through that. There are 10 segments, all highly defined. Our Web site has an overview of it. The real strength of Technographics is that once you have a consumer classified by type—fast-forward, high income, technology-optimistic, career-oriented, let's say—it's a very good predictive element for something like the next hot wireless palm computer. That segment is likely to take up that device more readily than, say, the Technographic segment of the traditional family-oriented, high-income technology pessimists. The segmentation itself turns out to be an extremely strong predictor, and a lot of our forward marketing projections are based on the segmentation. We have been using it now for three years and we thought it was very accurate as a predictor.

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Q: How much information gathering on the Web site is too much? What's the consumer threshold when it comes to answering questions on a form?

Ms. Modahl: I think it has to have clear value for the consumer. People can be a little bit question-happy and there are a lot of stupid questions out there that don't deal with anything useful. It's like survey-itis. It's important to gather personal information one-on-one that lets you serve the consumer better, so ask yourself, "If I get this information, will I be able to do something to help him?" If the answer is no, don't ask for it.

In terms of data that you can collect off the site, things like time of day, behavior and when are most purchases made, that can be safely collected without informing people because you are not going to any individual record, you are looking at the site as a whole. You can improve your operational performance more by focusing on that kind of data than you can by trying to guess behavior. I always like to say, I have been married for over 10 years and my husband still has trouble guessing what I would really like.

 

Q: To follow up on that, I just read that 40% of people lie online when they're giving information. What do you do to guard against that?

Ms. Modahl: I think 40% of people probably lie offline, too. There are a lot of reasons for doing that. One is just being fed up when you're dealing with an obnoxious automated system. Anytime you can't follow it or are getting tired, yes, I think that there is a real issue there. Again, if you are asking stupid questions that don't help the consumer, why should they answer them? I don't blame them, and you shouldn't either.

Any time you start getting clearly false records, it may be worth looking at why. If Elvis is showing up a lot in your database, it may be because people are coming to your site and finding themselves bored, so they're taking action about it. That's a way of communicating.

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Q: How do you see the market for E-services to consumers developing and what kind of industries do you think will be impacted?

Ms. Modahl: E-services is a broadly defined category. When I hear E-services, I think of concierge services, help finding things and such. I think there are cost models that make that difficult in the consumer market space. There are very few individuals who are willing to pay for a huge amount of help in what is primarily a self-service category.

 

Q: You mentioned in the presentation that 30% of the mainstream population is currently online. Is the forecast that people will naturally move to the PC or will they move to the couch and the cable for accessing the Net?

Ms. Modahl: In the mainstream consumer base, and definitely in the laggard or low-income pessimist space, there is interest in other devices. One of the big hurdles for them is that it's a lot for them to afford. You are starting to see some pretty cheap PCs which address that issue, and you are also seeing some free PC models and cable.

Television offers a very interesting prospect because even among high-income optimists there is a certain group of entertainment-oriented consumers that love television devices even more than they like the PC device. They use PCs a lot, but they are also huge TV aficionados. As soon as technology can offer a fairly good value proposition for the consumer, the TV does have a fairly good prospect of becoming a useful device. The problem is that, to date, all of those packages have had some fatal flaws. One of my big red flags is, does it need to connect to the phone line? Anytime you have something that you have to drag on the floor across the living room to plug into the wall in the kitchen, that's a problem. It has to be something which is two-way and very easy to install. Right now, most of the devices fail on the two-way communication, but I guess we'll watch and be careful. The problem is on the supply side, not on the demand side.

 

Q: You mentioned venture capitalists and their patience with .coms. What's your take on how long this kind of environment can last?

Ms. Modahl: If I knew the answer to that question, I definitely would not be working anymore. I would be a rich person.

You ask me to predict the unpredictable, but I would say this. The tremendous thing about venture capital in the last few years is that they have been able to shift all the risk to individual investors on the market, and that's an incredible rate for them. The success rate for venture capitalists right now is huge. There is also an enormous return funding rate going on, so these profits actually lead to new return to the market. I do not see less funding; in fact, I see the availability of funds growing. As for the market itself, it's not likely that these bubble-like valuations can go on forever, but right now we are in a virtuous cycle that is supporting them. I can't hazard a guess, however, on how it will end.

 

Q: How important is customer loyalty in building a Web business? I gather the conventional wisdom is that it's very important, but do you think that's true, and isn't it tougher to build customer loyalty given the nature of the technology?

Ms. Modahl: Yes, the conventional wisdom is that customer loyalty is important. We have found in our research that customers on the Internet are not that loyal. Our research shows that if consumers go online and have a good purchasing experience, they are not only likely to buy from the site, they are also more likely to buy from other competitive sites. If they go online and have a bad purchasing experience, they are less likely to buy from this site and also less likely to buy from other online stores. You see what I'm saying? Having a good customer experience at the moment doesn't create preference for you as a store, it creates preference for Internet shopping as a method. The consumer, right now, extends good experience at one store to meaning good experience on all Internet stores. We are in a phase where everything you do that's good for you is also good for your competitors. I would expect that to change over time. There will be preference created for Internet companies that offer good experiences, but at the moment I'm afraid the research shows it doesn't.

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