The Decoy Effect

I just finished reading "A Beautiful Mind" about the game theorist John Nash. If you haven't read the book, or seen the movie, I highly recommend that you do. Nash's life is as dramatic as it gets: genius, fame, tragedy and finally redemption.

Game theory is an interesting, if somewhat dispiriting, lens with which to view decision-making processes. It's astonishing how predictable we are. Even when we're unpredictable, we tend to be unpredictable in a systematic (i.e. predictable) manner.

How does any of this relate to software, technology and innovation? Only this: I think it provides a useful set of tools for product managers and marketers to have at their disposal as they think about their target markets and adoption of their products. There's one interesting example that I remembered reading about in grad school. It's a phenomenon called "The Decoy Effect" and provides an insight into how consumers value different attributes in a given product set. The wikipedia article explains it very well so I won't discuss this in any more detail here.

Thinking about current products within this framework can be a clarifying experience. As an example, consider the market for web-based meetings. There are two major players: Webex and GoToMeeting. Customers value two attributes: ease of use (to set up as well as to participate in meetings) and collaboration features. Based on my experience with both products, Webex is harder to use but has more powerful collaboration features than GoToMeeting. What sort of decoy product would increase adoption of Webex over GoToMeeting? What about vice-versa?

By the way, the decoy effect can be used in a wide variety of circumstances. Take a look at this fascinating article in the Washington Post about the decoy effect applied to the 2008 U.S. Presidential Elections.

Sector Watch: India's Entertainment & Media Industry

At a time of flux in the entertainment and media industries in the United States and elsewhere (declining subscriber base for print media, disintermediation from internet video hosting), the Indian market is experiencing heady growth.According to a newly-released report, co-authored by PriceWaterhouseCoopers and the Federation of Indian Chambers of Commerce and Industry (FICCI), the Indian Media and Entertainment industry is expected to grow from its current size of $9.7 billion to $22 billion by 2011, a compound annual growth rate of 18%.

The table below summarizes the components of this growth. Some of the numbers are almost certainly understated. For example, the size of the music industry is probably distorted by piracy, while the internet advertising market is distorted because of a lack of reliable reporting services.

All Together Now....

Will Price (who is fast becoming one of my favorite bloggers) has another great post on the virtues of alignment. The key point he makes is that entrepreneurs can context-switch effortlessly, but that same capability cannot (and should not) be expected of the organization as a whole. In fact, this is the key test of the maturity of an early-stage company founder.

When your company starts out, you are hunting for validation, for a niche. You conduct small-scale experiments, involving marketing campaigns and product prototypes/demos. You then gather feedback and hopefully find a segment or two where the value proposition is easy to demonstrate, the need is urgent, and there is money available to solve the problem. You then double down on those segments. First, work your tail off to get anchor, referenceable customers, and then use those to streamline and accelerate the sales process. All the while, the product team is conducting small-scale experiments to identify the next couple of segments to target.

At least, that's how things should go. In practice, this discipline is very hard to achieve, and organizational alignment falls directly as a consequence of not following this disciplined approach. I've seen a couple of key areas that lead to a lack of alignment in the organization:

• Failure to set up clear, time-bound success (and failure) criteria. Early-stage companies do need to experiment; its unclear up front in most cases where you should be selling your product, who the ideal customer is etc. However, too often these experiments are not controlled. Without an up-front definition of when to consider the experiment a success, and when to walk away, its too easy to be led into one rat-hole after another, where success is just over the horizon, just one demo away. A common case is when you're able to get a toe-hold into a large enterprise and keep trying to accommodate their every request for information, for endless meetings, for product enhancements etc, without a clear idea of the end game. While the sale may eventually happen, the opportunity cost for the organization is immense.

• Trying to do too much. You've conducted a couple of experiments, and found a couple of areas in which your product might add value. However, these areas don't have a lot to do with each other. You might rationalize this away and find connections where none really exist, but really you know that you've come to a key decision-point. Do I invest in solving problem X or problem Y? The thing is: you have to pick and quickly align the organization behind your choice. If you don't, the default trajectory is that there will be people in the organization who try to solve each problem, and the organization eventually splinters.
  

Alignment is relatively easy to test for: ask your marketing and sales people what they think the company does. Then ask your engineers. Ask the back office folks: finance, adminsitration, HR. Ask your customers. Ask analysts and the press. Ask them once every quarter. If the responses are roughly the same, then congratulations! You've kept the organization aligned. If not, don't fool yourself - you've got a serious problem and you need to address it as quickly as possible. Alignment is relatively easy to test for, but I don't see it happening too often. Could it be because we don't particularly want to know the answer?

Resources for Entrepreneurs at Stanford

The fact that there are so many resources for entrepreneurs available online is both a blessing and a curse. It's hard to know which sites to focus on, and how to make sense of sometimes contradictory advice. I will not attempt to provide a comprehensive list here - it'll be obsolete as soon as it's published. Instead, I would like to point you to some entrepreneurship resources provided by my alma mater, Stanford University. There is a lot of great information, videos, podcasts among other resources, all available freely and online. Take a look at these sites - there's great information available for you here:

• Stanford Entrepreneurship Network. The umbrella organization for all entrepreneurship-related groups within Stanford.
  

• Business Association of Stanford Engineering Students (BASES). Lots of great information. Particularly recommended are the weekly newsletter that highlights entrepreneurial activity in the Bay Area, and the Thought Leaders seminar series (of which, more below).
  

• Center for Entrepreneurial Studies, Stanford University. Deals with all things entrepreneurial at Graduate School of Business. Lots of research papers, videos of speeches given by entrepreneurs and venture capitalists, and an "Entrepreneur Resource Database" that connects entrepreneurs with potential partners or investors.

• Entrepreneurial Thought Leaders lecture series. The lectures are free and open to the public; they occur every Wednesday from 4:30 to 5:30PM at the Skilling Auditorium at Stanford. If you can't go, the lectures are all available online, along with handouts and other supplemental material.
  

• Stanford Technology Ventures Program, Stanford University. Deals with all things entrepreneurial at the Engineering School. So far not a lot of useful material for entrepreneurs - most of the presentations have to do with teaching entrepreneurship - but stay tuned.

Can entrepreneurship be learned? Probably not, but you can certainly benefit from understanding what others have done, and forming your own pattern recognition rules.

India Poised

Some of you might be familiar with the "India Poised" ad campaign organized by the Times of India media group. It's an ambitious undertaking, and basically amounts to a nationwide call to action that consists of three points:

• Think big. Think scale.
  
• Don't ignore social inequality.
• Build an engaged civil society.

The website is an interesting combination of the positive (e.g celebrating unsung heroes) and the cautionary (e.g. underperforming sectors). They even have a slick TV ad that's worth a watch.


This is the second large scale branding/nation-building campaign I've seen out of India in the recent past. The first was meant for an external audience, the India Everywhere campaign at Davos last year, while this is targeted domestically. It's an interesting use of marketing to drive economic growth & empowerment. I wonder if there are analogues in other developing countries, and if so, how effective these campaigns tend to be.

Yahoo Panama: Initial Data

The web design and advertising firm Avenue A/Razorfish has some preliminary data about the impact of Yahoo's new Panama platform. Here are their key statistics:

• Search Impressions – Up an average of 5%
• Cost Per Click – Down an average of 6%
• Click Rate – Up an average of 10%
• Conversion Rates – Down an average of 5%
• Overall CPA – Up an average of 6%

The results look underwhelming, and could reflect either early teething problems with the platform, or just poor statistics. I'm inclined to believe it's the latter: the results reflect 33 data points, with a wide variation in performance. The jury's still out on this one.

(via Paul Kedrosky)

This Time It's Different...

I keep hearing about how this time is different. There will be no repeat of the 2001 bust. The reasoning, as I understand it, goes something like this: we learned our lesson the last time, clear evidence of a business model is a prerequisite this time around, its cheaper to start a company now, so risk is more widely spread, and so on. However, all that VC money still has to go somewhere, and I see more examples of "irrational exuberance" than before. There are two classes of companies that I think are leading indicators of an overly lax investment climate:

• Great products with no business model.
• A feature trying to pass off as a product.

(The third class - "really bad companies" - is, unfortunately, a lagging indicator; whether a company belongs in this class or not is only clear after the fact)

Just in the last 24 hours, I came across two companies that fall into these categories. There are many more where this came from:

• Virtual Ubiquity. They bill themselves as the "first real word processor for the web" and you have to love that chutzpah. Based on Flash rather than HTML, it's been getting rave reviews and it does look very cool. Check out the screenshots in the GigaOM post about them. Very cool product, but what's the business model? Paid subscriptions seem unlikely, given the number of free alternatives. An ad-based model is possible, but a tough slog given the difficulty of driving enough traffic to make it worthwhile. Interoperability with other online productivity apps will be an issue. Online suites will have an edge here, even with a smaller feature set.

• Seriosity. Allows the creation of an email "economy." Everyone is allocated a certain amount of a virtual currency, and you can attach different amounts of your "money" to emails you send to indicate its importance. It's an interesting, though overly complex, approach to the real problem of information overload. But this is not a product - it's a feature. $6MM in VC funding to date.

Will it really be different this time around?

Diagnosing Startup Problems

One of the classic issues that every startup is faced with is identifying causality in the face of uncertainty and noise. This is true for both positive and negative outcomes. For example:

• A large bank just bought your software - great news! But can you isolate the specific reasons why they bought and make it repeatable? Or is it a special situation or relationship driven sale?

• If sales are stalling, what's the issue? Is it the product, the market or sales execution? If the organization is heading towards dysfunction, this often leads to finger pointing and a revolving door among the executive team.

I recently came across one of the best posts I've ever read on the subject. Will Price of Hummer Winblad, has a post called "Isolating Causality: Bad Market or Bad Company." This should be required reading for entrepreneurs and employees in any early-stage startup.

India Everywhere?

It's that time of year again. As we speak, the rich and powerful of the world have gathered together in the beautiful Swiss town of Davos for the 2007 World Economic Forum. (For more info, check out the New York Times Davos blog). This got me thinking about the last Davos conference.

Last year, India was the topic du jour. The marketing/branding team at the India Brand Equity Foundation did a spectacular job at grabbing people's attention with their India Everywhere campaign. The press were all over it (see here, here and here). Nandan Nilekani, CEO of Infosys was even blogging from Davos.

So what happened this year? I saw no media coverage, no India marketing campaign at all. Was I missing something. As it happens, I wasn't. It turns out, after some investigation, that there is no campaign this year. This year is all about participation without the glitz. More delegates, more meetings, and less buzz.

I found this rather dry and tactful comment from Peter Torreele, Managing Director of the World Economic Forum, instructive:

The feedback from the participants was that it was extremely well-done, because it was business driven. There is need for follow-through and this has to come from Indian CEOs taking a clear place at the plenary discussions and have to be seen to be part of the global discussions. If India wants to be seen as part of an upcoming global economic power, then it has to play its role globally.

In other words, if 2006 was about marketing, 2007 is about execution. Like an entrepreneurial venture.

Are you being served?

Great video here from a talk that Seth Godin gave at Google. His central premise is that the only way to bring products of lasting value to the market is "permission marketing." He defines this as "the privilege of marketing/selling to people who do not want to be marketed/sold to." Essentially, make a product that is worth talking about, that spreads virally, and that contains network efforts (he calls these "permission assets"). A great case in point is "Gmail" which grew mostly by word-of-mouth because their users saw so much value in the product.

It strikes me that this notion has yet to reach India. I'm amazed at the levels of intrusiveness that Indians put up with from marketing campaigns. Spam SMS messages, hundreds of pop-up windows on websites: direct marketing hell. In India, you can still shove a product down people's throat by sheer force of outbound marketing. Why is this the case? I'm guessing it's because direct marketing is a relatively recent phenomenon; its still a novelty for people. Consumers tend to be more credulous and less cynical about what they hear from direct marketing campaigns. I still get forwards from friends in India who think the notorious Nigerian email scams are for real. Maybe a backlash will begin in a few years, as consumers get jaded and the volume of intrusiveness increases to painful levels. Until then, I'm not sure that product quality will win against a carpet-bombing direct marketing strategy.