DM CONFIDENTIAL

The distinction sounds small, but to those in the performance marketing space it has, in the past, been the equivalent of a nationality. Confusing the two didn’t carry the same weight as mixing up Israel and Palestine, but it was arguably a little worse than assuming someone from South Africa was from Australia. It wasn’t the worst thing, but it came across as a ding against one’s identity.

The reason, at least historically so, is that publishers and arbitragers (the non-affiliates) thought of themselves as more skilled. They felt their ability to drive traffic instead of just send clicks made them a more advanced breed. And, for quite some time I think that was a fair assessment.

Thanks to issues with misrepresentations and low value-add products for consumers, the publisher and arbitrage businesses have lost a little bit of their luster. Affiliate businesses, on the other hand, have started to come into their own. The hardest part for those who typically identified with publishers is re-orienting their frame of reference to think of affiliate businesses as worth pursuing.

Ingrained Vision

With a media-buying mindset, we have certainly been guilty of automatically devaluing the affiliate world. It was the group buying world and the fashion/tech world that had us start to rethink how we thought of the affiliate arena. Even now, we still struggle to see the affiliate world separate from some of the businesses that defined it — “Top 10″ review sites, toolbar-based link hijacking and the countless number of reward sites.

It’s the reward sites that have in many people’s mind given the affiliate world a reputational hurdle. We could, for example, start the DMConfidential shopping portal and offer readers discounts on places they already shop today. If we did so, we’d get flack because the savvy readers would say something to the effect, “Yeah. That’s not so special. You’re not really giving discounts — only applying the affiliate commissions.” And they would be absolutely right.

Perhaps more amazing than the number of such sites, be it those that have been in existence for over a decade to those that are popping up almost daily, is the caliber of some of the companies that operate them — everything from the largest network marketing company, Amway, to one of the most storied consumer packaged goods firms, General Mills.

Fashionable Setups

Perhaps then, it’s time to no longer knock certain affiliate strategies but look for ways to do them a little better. We’ve found quite a few recently that seem to do just that. Some of the more unlikely come from the world of apparel.

One that we like creates a more individualized private sale experience. It learns what type of brands you like then monitors major retailers for sales that occur on the brands you like. When you happen to click on the link to go to the retailer, it just happens to go through an affiliate link. Over time, they will work directly with the merchants, but in the interim, using the affiliate channel has allowed them a potential monetization opportunity with brand name retailers out of the gate.

Another fashion-related startup focuses on a slightly different form of discovery and encourages people to tag styles on sites and clip images that represent their style. They use that data to try and suggest new things, monetizing not surprisingly using affiliate links.

There is even one in the group buying space. This startup focuses on setting up private buying groups for businesses, offering variable discounts based on the members of a group. It is meant so that DMConfidential could work with a technology service provider to create a discount for readers, but again, to get started this company backfills deals we might source with business related deals from the affiliate channel, e.g., Skype, GoDaddy, etc.

Work in Progress

We know we aren’t quite there just yet with the affiliate business model. When you suggest to some of the technology companies that they are just affiliate businesses, there is still a little bit of defensiveness, as if to say, yes, we know we monetize through affiliate channels but don’t think of us that way.

While they are still affiliate businesses, they are helping to at least alter our perspective of what affiliate businesses can be. Instead of viewing affiliate relationships as the monetization choice of last resort, the affiliate channel starts to look like a liquidity channel for commercial intent. It starts to become a more customizable version of AdSense as opposed to what you choose when you don’t know any better.

It will still take many some time to become comfortable with the idea of becoming affiliates, but if we do not, we might just miss out building a really interesting business.

Such an answer goes completely counter to what someone not as connected to the space would say. They would think, no way. Not today, maybe a year ago. Maybe two years ago, but not today. The world is too sophisticated for such a thing to happen.

Instead it’s the opposite. The world, namely the fraudsters, are so sophisticated that it can happen. As one lead buyer quipped, “I’m shocked at how much fraud there is, and that it is still a viable industry.”

This is not the first time that we have written about fraud, and it’s not the first time we’ve written about its brother from another mother, compliance. Compliance is the ongoing battle to not run into legal hurdles. The downsides of non-compliance are huge expenses. Fraud is the ongoing battle to insure data integrity.

It is like Chinese water torture for a lead buyer. What is fraud really? The problem is that fraud can be and usually is real data. It’s more insidious than click fraud, because it engages and wastes human capital.

Data fraud is zero intent traffic. The person’s whose information is entered didn’t do it, and they have no desire to be contacted. They will pass validation software and could even score well as a lead, but the only customer they will turn into is an angry one.

Talk to any buyer or offer owner, and you will find that fraud is never far from their mind. One problem is that while everyone has it, there isn’t any standard by which to compare. Given that we spoke of indices in another article, it seems only fitting that we came across this new index below.

It’s from a leading fraud monitoring company, Fraudlogix. What it tells us is that the average company not using fraud verification has 15% of their leads coming from fraud. If they run a $100,000 per month operation, they are looking at losing $15,000. At $1.5 million per month, they are looking at $150,000 per month in lost revenue.

A Two-Part Story

The Fraud Paradox is what those who contemplate minimizing their fraud go through. They look at the above data and do the math. Then they decide that losing 15% of their business is a little more than they can stomach, but it’s not just 15% of revenue, it’s an equally higher percentage of profit.

Given all the headache that fraud causes downstream, it would seem, despite the drop, a no-brainer decision. It isn’t, because ead markets are not optimized. If a seller cuts out 15% of absolutely non-performing traffic, they do not see a 15% bump in prices to make up for the lost revenue. They could argue for a greater than 15% bump given that there are labor savings as well.

The fact is that they won’t see any bump. So, their incentive for using fraud monitoring is limited only to a last resort, where they will lose the business entirely.

The second part of the Fraud Paradox is what happens after someone actually starts to implement fraud monitoring. (The someone in this case is almost always an aggregator, and fraud monitoring, like compliance, only works when the landing pages of where the data is collected is tagged.) When someone starts to implement fraud monitoring, the fear of losing business has them only use the service sparingly… at first.

It then becomes like a radar detector for a car. They start to realize that instead of living in fear, they can actually start to open up their marketing efforts to more sources. The net result – virtually everyone who uses these services sees an uptick in their business over time.

An Ecosystem Shift

Fraud monitoring highlights the adage of taking one step back to take two steps forward. That it exists in the lead world is perhaps not such a bad thing as it is a complement to the maturity of the market.

The question with fraud, though, is not whether people should practice safe lead gen. It’s what will happen to change the ecosystem entirely so that running the business, not managing fraud, becomes the opportunity. It’s a question we’ve asked before, and according to one person, the answer lies in something that those in the performance space have not needed to embrace — venture-backed disruption.

We might either see the space continue as is, like search did, or we will see it upended. In this case, it’s not clear exactly what upending really means. It seems more a general observation that we’ve only touched the surface of what should be done, and hopefully we will be free to do so going forward.

Cross-published at the DM Confidential blog.

Having a head start has made all the difference in the world. The simplest example comes from Google or Facebook. Those early to those platforms made immense amounts of money, and, in the case of Google, those who got in early ended up building moats around their listings for no other reason than account history.

Thinking about the performance marketing space, the potential areas for leverage that come to mind are: access to offers, payouts on the those offers, access to traffic and creatives/optimization. Within each, something seems to have changed or better said continues to change.

For the longest time we didn’t quite understand what it might be. At the heart of the matter was this nagging question, “Why do new verticals seem to have a continuously shorter shelf life?”

The easy answer would be competition, that there are more and more marketers today than before, but we just can’t see competition as the reason why ringtones would have longer staying power than acai. It’s as though each new hot trend has an ever-decreasing half-life. It pops and then more quickly than before finds a less than desirable stasis after being driven to the bottom.

The Ad World Is Flat

While competition plays a piece on the shorter half lives of campaigns, we can’t help but wonder if the answer has nothing to do with specific market dynamics and more to do with our transparent world. If we think back to the “early days,” information about offers, payouts, creatives and traffic didn’t exist. It took a relatively long time before word of someone’s success got out, and it took even longer before specifics of their success became more widely known — where they ran, what page they ran, the ads they ran and even what CPA they received.

Forums have typically discussed many of these pieces, but they have an overall limited reach. That is not the case with the tools that exist today including those that show what offers each network has and at what prices.

There is a new breed of tools out there hastening this transparent world, ones like AdBeat that can do for creatives what keywords do for contextual placements and banners what keyword tools have done for search. The insights provided are significant.

Search tools can shed some insights on keywords run, but ad tools share what ads have run and where they run. It means that someone wanting to do a campaign can build a great media-buying list right away. These tools will do more than just frequency, in the future they will have the ability to show iterations of ads so that a competitor can see not just what runs now but what a company has run. This type of historical view would imply a glimpse into their optimization process.

NYTimes op-ed writer Thomas Friedman has talked about a flat world. This might be the equivalent to the flat world in advertising. It is no longer about easy connectivity of where people are based but ease of connectivity when trying to gain insight to a market. All the pieces are visible.

In this new flat advertising world, we start to see what is running, where it is running, and what aspects of it are working. It’s a trend that will only continue, and its impact on the performance marketing world has already been significant.

Looking Long-Term

Like many things, the early impact might be negative. Now and in the near future, it probably continues to mean pressure on those running offers, that their “secrets” could be discovered faster and their lead taken away more quickly than before. That could accelerate the race to the bottom as people continue to try and squeeze out as much money as possible in the shortest time possible.

In the future, this flat ad world should have a very positive impact. As everyone starts to know everything and we start to operate with greater transparency, it should mean more overall innovation. It will mean more defensible businesses. People will start to scam less (not a bad thing) and build more (also not bad).

If people can’t do bad stuff and must do better stuff, we all win. The industry starts to get away from being a) just piggy banks to help others cover float and b) guardians of traffic trying to combat the bad. We might just get what many have wanted all long, greater separation between companies and more fun doing doing what we love.

In MLM parlance, it meant becoming part of their down line, but they most likely pitched it in a more team-oriented fashion than using a term that if not demeaning feels so limiting. In performance marketing terms, what the couple pitched was to become their affiliate, but there has always been something about MLM, known today as network marketing, that never sat well with us… at least from the standpoint of being an affiliate.

While similar in theory, we argued years ago that a huge fundamental divide exists between performance marketing/traditional affiliate marketing and network marketing. Part of that divide becomes more evident as we think of the latter as network marketing instead of multi-level marketing.

It still does promote a person getting paid on multiple levels (generations) — i.e., if you sign up under us, we get X; when someone signs up under you, we get some percent of X; and so on, often for five levels. Payouts on multiple levels sounds sexy, but anyone in our space can share that trying to pay out past one level quickly becomes an expensive proposition.

If a company can do that, it means that the products have a high amount of margin, be it through high cost or ancillary services that do not trickle down. But a high-margin business is just the enabler. It alone doesn’t explain why we struggle to like the networking marketing businesses. A recent conversation with a person who should have been a arbitrager helped explain why.

Limited Upside

Google created something like 1,000 millionaires. Facebook will create several hundred at the very least, and many of them did not come in that early. Not to call some “just engineers,” but many of the future millionaires will get truly lucky instead of actually being good.

They didn’t have to take a major risk or even a pay cut. They simply joined a company that has grown from $5 million to $100 million to $1 billion to more than $80 billion since inception. If you joined at a time when your options might have come to $100,000 at a $10 billion valuation (a small percentage of the total), they will turn into about $1 million when the company gets sold.

True enterprises experience a rising tide lifts all boats. Network marketing businesses do not. The bigger the network marketing company gets, the bigger only the head gets. Even if you come up with a new trick to help sales, which they will then take and tell others, you receive nothing for the growth you create.

Inequality

MLM businesses are deliberately closed organizations. As mentioned above, they promote a dream and a vision, but they treat those in the business like sheep. There is no upward mobility, no advancement and no room for creativity. How they are run is at odds with what they say a person can achieve.

A minor example that has always rubbed us wrong, little to none of the new member setup tends to benefit the referring affiliate. And, given that almost everyone fails, that long tail of revenue bypasses all of those doing the work.That was our rub from many years ago.

Another discrepancy for us is that they are always presented as chances to be independent business owners. You aren’t a business owner, though. You are a contract salesperson. Business owners run businesses and build assets.

Putting a Price on Friendship

Perhaps the modern-day MLMs should call themselves “social shopping organizations.” Calling them network marketing hits pretty close to home, though, as people are expected to sell to their network of direct relationships.

We spoke to one marketer, and they explained it so well. This person said basically that you are expected to delve into their emotional issues and figure out how you can position the business as a solution to some of their problems.

The conversation ended with the comment, “I cannot believe how many friendships I have seen this business ruin.”

These models want and demand the personal sale. They do not want a person to use more scalable techniques. Those that do can actually run afoul of certain programs’ guidelines.

It’s also why they don’t share the setup costs with the referrer. If you did, then you could create a truly successful online campaign.

It’s a Cult That You Pay to Join

More than anything, network marketers sell a dream, and they sell a dream through a series of ongoing indoctrination. Everything about the network marketing business is based not on reality, but on a buy-in of what could be. It operates like a religion in that they have an answer for everything where all success comes from proper behavior and all failure stems from an individual shortcoming.

These are faith-based organizations with no room to question and little tolerance for true creativity. They need and demand obedience. That they have a disproportionately large percentage of very religious — usually Christian — members is unsurprising. They either come from a branch with direct sales built in or just thrive in that type of environment.

Bright Future?

Network marketing businesses have existed for 50-plus years, but it would seem in the past five years, they have really started to take off (again). Many of the newer versions aren’t going by the traditional network marketing moniker. They call themselves direct sales businesses.

These are the modern day Tupperware parties, where people get together to view “sample sales” where those in attendance will ideally purchase and sign-up. Some of the newest come from known names — the doctors behind Proactiv — while others are even venture backed – Stella and Dot.

Whether the economy or simply that people have started to realize the power and flexibility of the model, network marketing businesses are going through a revitalization, and much to our dismay, we have not figured out how to run one yet; we mean, we have not seen them become that much better for the members yet.

Cross-published at DM Confidential’s blog.

His passing was not one of those details that you make a note of, not something of significance but ultimately insignificant. Jobs’ death is a social phenomenon. When we read the news later today, it will not surprise us to learn that his departure has received more mentions than when news of Osama bin Laden was finally terminated.

We say his is a social phenomenon not simply because of the numerous mentions on Facebook and Twitter. We describe it as social, because the reaction is not one of reflection of emails about his death. Friends didn’t write friends to discuss the impact he had on each others’ lives.

His life and, as a result, his passing is a profoundly cultural experience. We feel compelled to share that we know and that we too were touched by what he did. It is as though each person wants to share how much he has touched their lives. Remarks such as “I hope I can impact one person as much as Steve Jobs has impacted millions,” and, ” “This world wouldn’t have been the same without Steve Jobs,” are commonplace.

Even Nordstrom-owned Hautelook felt the need to post, ” Thank you Steve Jobs for creating the interconnected inspired world we know today.” The Obamas, Bill Gates, Zuckerberg all put out statements as well.

Washington Post contributor Hank Stuever says, “That is what Steve Jobs gave us: the future. A sense of ourselves moving forward into this century, which has proved especially hard to do, with its lack of employment opportunities and its addiction to panic. He gave us a look at the future and all the ambivalence and worry that comes with it. It was the most elegant form of social disruption, and now your kids won’t glance up from their iPhones. They’ll never need to.”

This echoes a sentiment we saw on Facebook — namely, “Some say it will end with him, but I say he gave us the tools and paved the way for something greater. Tomorrow we push towards the greatness and make him proud. ” All great sentiments, and we have no doubt that in the days, weeks, months, and years to come, there will be no shortage of additional eloquent reflections, amazing statistics and anecdotes.

While Jobs lived much longer than almost anyone with pancreatic cancer, most agree that this is a reminder that we are all human. His life though is the exception to almost any rule, and perhaps that is why we are attracted to him even more. Yes, he touched billions of lives, and he achieved what almost anyone would have loved to do — fame, fortune, and defining industries.

And in a movie-like ending, it’s almost as though he was holding on, beating the odds until he found a point where he could let go — like some hero in a movie that hangs on longer than anyone thought possible but slips away when everyone else is safe. Yes, there are no shortage of almost super hero story lines.

Yet, there is almost something more. Were Facebook CEO Mark Zuckerberg to unfortunately pass, he will not be remembered nearly the same way Jobs will be, even though he too has fundamentally altered people’s lives. There truly is something unique about the professional life of Jobs in how he had both early success, then failure, then astounding success across all things digital.

Perhaps, though, Jobs’ life is also a little tragic. It’s a life of a visionary. His products are revered. We love him for his innovations and perhaps curse him too for the rigidity and unwillingness to let us be us. In his products we saw a version of utopia that had some slightly scary aspects to it.

But, the inventions is where the love ends. No one talks about or will talk about Steve the person. No one will remember him for being kind, caring and making other humans better. We love what he created and almost revere him as a result, falling into the carefully crafted persona, the bitten apple and him as our cult leader.

We can’t love him, and those who say they do are being disingenuous. People worship him and his products, and that’s why it’s a social experience as we all have something in common. He gave us something, but he has not impacted our humanity — only the human experience.

Sounding familiar? It should. We’re talking about Dan Ariely, and he, along with another well-renowned professor and author, Michael Norton, gave an all-day seminar to a hundred or so in the NYC tech scene this past weekend. It wasn’t called a seminar on user acquisition, but as we see with behavioral economics, it should have been.

User acquisition is all about getting users to take an action. Getting users to convert means understanding why users do what they do, and that’s exactly what behavioral economics focuses on. As researchers, they didn’t design their experiments so that marketers could make better converting pages. Their research just happens to be one of the few with amazingly applicable insights, ones that could alter the trajectory of a performance marketing business.

“The Two Greatest Words in The English Language — De-Fault”

Unlike more traditional disciplines of economics, behavioral economists begin with the viewpoint that humans aren’t inherently rational. We might strive to be, but by and large we do not know why we do what we do. The narrative of our lack of understanding is told through experiments and analysis.

One such analysis has lessons directly related and already well used by our industry. It’s all about organ donation in Europe where a group of countries has amazingly high donation rates and others, many of whom are neighbors and similar to those with high rates, have incredibly low rates. It’s a confusing situation, but a small reason explains the variation – the sign-up form.

On the high donor percentages, the form is opt-out. On the low donor sign-up, it is opt-in. What this and other research confirms is that when there are complex decisions involved, we as humans often let the person in charge (of the form) decide for us. The default choice in so many situations is the most compelling, because it is the path of least resistance.

Another example of the default comes from the experiences of prescription mail-order company Express Scripts. Instead of getting drugs at the store, they will mail them to you in three months supply.

At some point in using them, the company wants you to save money and switch to generics when applicable. If you asked people do they want to save money, they answer yes, but judging by the number that actually switched, you would think that people either didn’t want to switch or didn’t like generics.

So what did they do? They tested many calls to action emphasizing the costs savings of switching. Eventually, they said, either you pick which you prefer or we stop sending you medicines period. Guess what? People took action, and the company actually got a pretty good feel for people’s real preferences between brand-name drugs and generics.

Complexity only makes things worse on our ability to decide… or better from a marketer’s standpoint. Think about 401Ks. In the beginning, we set them up. They are brutally complex so we just go with some allocation.

The markets change, our needs change, but do we really ever change our allocation? No.

Studies continue to show how this plays out including one with jam. It’s one of those items that actually ties in well to performance marketing as people don’t go to the store to buy jam. Unless it’s on your shopping list, who really thinks to themselves that today is a good day for that?

Research by Ariely looked at what happened when at a store there was a display for six jams versus 24, — i.e., what percentage of people approached the stand, sampled the jams, and ultimately bought jams thanks to some incentive at the table top? The results in the beginning were intuitive in that the percentage of people who approached and tried were higher in the 24 jam layout, but in terms of purchase, it was factors higher with the six jam set up.

The lesson among these studies is that the moment something becomes the default is more likely to be carried out; marketers shouldn’t underestimate the default and how it can be positioned in a way the people wouldn’t think to change it.

Second, people generally find it hard to move away from whatever was their first choice, and if someone throws in additional complexity, that will only increase the odds of someone keeping the choice at the default or in the case of jams not taking the action desired. Coming up in future articles on this topic are the quirky nature of preferences, behavioral economics style relativity and more.

Cross-published at the DM Confidential blog. Check out more insight from DM Confidential.

That’s pretty hard to do in a world where so much of what gets done is reactive. You can have all the best ideas but be forced to abandon them almost in a heartbeat. The only way around that is when you reach a certain point where, like Salesforce.com’s Dreamforce, you have such an engaged audience that lives and dies by the platform, or Apple, which enjoys the halo of a technology company with the physical product cycle of a more traditional product manufacturer.

Somewhere between the more straightforward shareholder meeting and Apple’s World Wide Developer conference sits Facebook’s experience. Their platform reached a level of prominence in the programming community where the company needed to start having its own event. An overall industry still makes sense, but for the company to truly capitalize both strategically on the corporate buzz as well as more tactically mobilize the developer base, it had to control the environment and messaging.

That’s what the company’s f8 event, that took place yesterday, is all about. Tickets to the event sold out about as fast as those to I Heart Radio festival also taking place today. I sat next to someone who couldn’t get tickets and it required the chairman of this billion-dollar business to call up a favor and get this person in.

While Facebook doesn’t enjoy the manufacturer’s product lifecycle like Apple does, they too have begun to use their conference to announce significant product enhancements. Many people claim that this event ranks among the most important as the company hasn’t had a truly meaningful release since the Like button more than a year ago.

As to what Facebook unveils, the pre-launch consensus centered around content consumption and sharing, adding music and television to the preexisting suite of photo sharing and status sharing. Reading the Business Insider list as to their predictions, which spans everything from an iPad app to increased emphasis on Facebook Credits, you can’t help but gravitate towards a saying that noted internet analyst Lou Kerner coined while talking about Facebook. He called it “the second internet.”

Reading through the pre-announcement list, if even half of the predictions come true, the business starts to feel eerily like AOL in the mid 1990s.

For those who remember the original AOL, it truly was the Internet. There was no browser. It was the walled garden much like cell phone content pre-mobile web. You connected to the internet via AOL and all your activities took place within the confines of AOL. As it was still early at the time, some things didn’t take place like commerce, but for just about anything else, the only thing that mattered for a brand was their integration and inclusion in AOL.

We may not have entered an exact parallel because there are so many other sites and services outside of Facebook that people will use, but everything we seem to read has Facebook creating services to make it hard for people to need to leave Facebook. The site not only has their entire social graph, but it will soon be their social graph. They are making more than just an identity play but what can only be described as another version of the Internet.

Like Google, most of the services don’t appear to have any immediate revenue potential – think Google News or Google Docs. They seem designed simply to make sure your online life revolves even further around the company. If Google is the doorway to the first internet. Facebook wants to simply be the internet.

Facebook has stated, perhaps less for grandiosity and more for focus, that it would like to become the first trillion dollar company. With almost a billion users world wide, and a current estimated value of $80 billion dollars, that goal doesn’t seem quite as far fetched as it might sound.

The $80 billion puts them at half of Google’s value and just under a fifth of Apple’s value. Given that Google trades at five times its opening amount, things bode well for Facebook. If it can do what Apple has done over the past decade, then the company could pass the current world’s number one and find itself pretty close to one trillion.

All fun speculation, but just as we couldn’t help think of Groupon and Webvan in the same light, we can’t help but wonder where we are in the second Internet bubble and what path Facebook will take once they finally go public and have money in the bank. Will we see a similar outcome as AOL where they acquire a more traditional company only to years later be a standalone entity once again at a fraction of the size and value?

That’s the question now. Facebook clearly has incredibly lofty ambitions, but the track record for large, high-flying consumer Internet companies is spotty at best. We thought the answer was to continue to focus, like Google, on serving businesses.

The current trend is focusing more on consumers spending their time. It may or may not work. Perhaps the best thing it has done is to draw Google into a battle that can’t be won.

Cross-published at the DM Confidential blog.

Of the two, it looked almost certain that Groupon would have taken over the mantle of Internet-high-flier to become for this generation of internet companies what Yahoo! represented more than a decade ago. It even seemed possible that Groupon might go public and then buy out Yahoo! What a great investment that could make — guaranteed deliverability to some of the best consumers online.

Yahoo! still earns more money than Groupon even if it has had no growth. It has weathered booms and busts. Converting Internet years into typical years, Yahoo is The New York Times of digital media.

And what of Groupon? Today it feels as though we cannot put any scenario aside.

As we wrote last week, while it would seem unlikely, would it be impossible to imagine Groupon going completely out of business? What would it take for that to happen? They have a business model but not enough cash. Are they like Webvan in that regard — i.e., too early for their time only to see their business recreated slightly differently by either those with industry experience, like Whole Foods, or local upstarts with a better grasp on costs, like Max Delivery? With its thousands of employees, Webvan like Groupon today probably looked too big to fail.

“Too big to fail” is always an interesting concept. Live long enough, and you will likely see every company hit a rough patch. Some seem to pull through. IBM went from virtually invincible to one giant mediocrity back to an upper echelon institution. General Motors went from no. 1 in the world to bankruptcy to a leaner, maybe meaner but at least still fighting machine. Apple is the most valuable company in the world after nearly going out of business in the 90s.

All of these companies achieved the absolute pinnacle only to fall almost into a black hole and in real jeopardy of not just visiting but staying at the real Hotel California — oblivion. While those who return from the brink or even having visited the other side rarely climb their way back to the top or surpass their previous level of prominence, (á la Apple), they each have something in common: they made it first. This is the potential issue with Groupon.

Groupon has had success and light speed growth, but they haven’t made it. They haven’t truly stood on their own two feet. They have been the college student or fresh graduate showing immense promise but still living off the doll. In this case the doll just happened to include almost a billion dollars in funding, not nearly all of which went into operations.

What they did with their “parents” money is exactly what they have done with our money. They have transferred bad habits to businesses and consumers. Discounting isn’t new, but it’s a privilege not a right. We don’t deserve to get everything for so cheap. We should have to earn it. That type of business, though, one that rewards good behavior and turns customers into repeat customers just doesn’t make as much money as one that picks up the seniors and drops them off at the doorsteps of the casino for the weekend.

The other problem with being on the doll is that it didn’t teach proper discipline. They learned to continue spending without really having to worry about the impact of that spending. That they needed to hire up in order to reach sales goals and penetrate new markets faster than anyone else makes sense.

At what point, though, do you do so sustainably as opposed to simply razing the land? The company has a customer acquisition machine, but they got a little complacent with the ingredients of their recipe. They would go out and buy names almost indeterminate of the true quality just to have enough names in a given market.

Had they done so efficiently, it might have required a third of the names. Had they done so in a more “green” manner, they might see more brand awareness, loyalty and long-term quality for their end customers. The problem is that they didn’t need to do so, and now they find themselves in a fight unlike any other.

Groupon isn’t the entitled kid with unlimited funds any more. The trust fund is about to go dry. They should have the skills they need, but it will take some real cleansing for them to stand on their own two feet, and a large dose of humility to work their way back up on their own merits.

Cross-published at DM Confidential’s blog.

The volatility in the stock market hasn’t helped. All of a sudden the path to liquidity doesn’t look as clear. Several companies have managed to exit, but some of the ones that seemed all but assured just a month or two ago look less certain, namely Groupon, Zynga — even Facebook.

It’s not as though all of the companies are going to go out of business. LinkedIn, now public, isn’t going anywhere, but just maybe there is a collective concern over the ultimate upside.

Of all the companies that seemed certain for success in the public market, one of them now seems less certain — Groupon. From leaked memos to forward-looking statements, the company has recently been referred to as the poster child for “how not to go public.”

In some ways, it is probably hard to be Groupon. While they no doubt have executed like champions, their success came fast — arguably too fast. In some respects, they didn’t experience the type of failures and setbacks that others do. Theirs has been a rocketship fueled by almost limitless capital. Color.com’s $40 million of funding pre-product and revenue is a lot, but Groupon’s $1 billion is hard to top. You might think they were a biotech company not a digital marketing, direct selling machine.

One of the biggest questions facing Groupon is their cash position. The company is losing money. What that really means is harder to understand. Companies seem to lose money all the time but stay in business. Amazon and Priceline managed to lose a kajillion dollars but ultimately succeed, so doesn’t that mean Groupon could too?

I wish I were financially astute enough to read between the lines in their public filing document to guess one way or another. With so many people so concerned, though, it seems we must start to consider the fact that perhaps this revenue machine needs a major overhaul to stay road worthy.

Working at Groupon and being involved with the company from early on must be a little bit like having been involved in Webvan, one of the dot com one’s biggest implosions. Ironically enough, we could compare it to Webvan, which was like Groupon was Online to Offline — people ordered from the web but had an offline experience. While not a perfect analogy, Webvan also had the benefit of seemingly unlimited funding, having blown through $830 million.

None of that could prevent the message that was spread early July 2001, namely that, ”The company has no plans to resume operations, and it will pursue an orderly wind-down of its operations and sale of its assets and business.”

During the same time, Chief Executive Officer Robert Swan said that while the company “made significant progress” in cutting operating losses and reducing its burn rate, order volume in the quarter just ended “declined considerably,” accelerating the need for new capital, which they ultimately couldn’t obtain. The company was public at the time but unable to meet the minimum threshold for staying listed on the Nasdaq.

Groupon has roughly the same headcount as Webvan when it went under, and had the markets not turned drastically south, Webvan might have received the funding they needed to stay afloat. Reading over past stories of the final days of Webvan, we see that Groupon is nowhere near where Webvan was, but at the same time, seeing that such a high-flying and large company as Webvan could not only fail but fail relatively fast, must give us pause.

A domino effect could sneak up on a company like Groupon – merchants pulling back, consumers buying less, and the capital markets drying up. A few staff reductions and the company continuing to chase profits that aren’t quite enough to cover overall costs, and almost before we know it, they decide to simply close up shop because no one else has the money or desire to keep it going. Hard to imagine such a scenario, but we would have said the same about Webvan.

Not that there was a question, but the answer might be hubris. When things are good and momentum is strong, a company can seemingly do no wrong. But very few companies get so lucky as to never face challenges, and it is times like those when you want to see a greater level of awareness and a business maturity.

The last thing you want to see is defiance and fueling the fire of a cocksure attitude. A teenager must become an adult, sometimes faster than they might like, but they must. A company is not a rock star or other diva personality who can simply do what they want and have the world adapt to them.

Hopefully, we’ll see the rebellious outbursts lessen in our teenage superstar, Groupon. Otherwise, this business prodigy could end up burning out and become an unfortunate and expensive case study.

Cross-published at the DM Confidential blog.

That model, while not perfect, has both unlocked local commerce dollars and been a scalable, repeatable process. Acquire and monetize. Mobile is still struggling with both – acquiring and monetizing.

The mobile deal space is as of yet, fairly non-existent, or at best confused. Part of that is because of the platform. Mobile means different things to different users at different times. The earliest version of mobile was either a direct port of web functionality or a slight extension of web functionality.

In the case of the deal space, mobile meant a way to view deals, purchase deals, update account information, or more often than not, a way to redeem deals with merchants for those that didn’t want to print or forgot their vouchers.

Mobile as a redemption vehicle for consumers makes sense. And, were we two years from now with the deal space just starting, redemption probably wouldn’t have started so low-tech. From the deal companies perspective, mobile is anything but about consumer redemption. It’s all about transaction.

It is their hedge for what all of them see now — higher cost-per-user acquisition and lower lifetime value. Mobile is their best guess at staving off the quick and eventual flattening of margins and consumer overload from the email channel.

Mobile doesn’t work like the web. Today, I spoke with KimaLabs, ex-Amazon guys and makers of some cool mobile commerce apps. They’ve been thinking about and operating in mobile a lot longer than I have, and explained that mobile is a much more ADD user experience.

It’s all about short bursts of attention. You’re competing with life much more when on a mobile device… or at least Angry Birds or its equivalent. It’s also a very browsing oriented medium not search oriented. More scrolling, swiping, and pinching, less typing.

The same things that make mobile different from the web in theory make it quite well suited for the deal space. Deals are impulse decisions. They aren’t the product of searches, and they are very local.

The issue is the psychology. Deals work so well on email because it’s a captive audience. It’s why branding works so well on TV. It’s about how it is received. (Email also means easy access to a deal you might want but don’t want that second.)

Flash sales like Gilt can work on mobile because the threat of losing an item means people will buy from any connected device. Deals are time based but not scarcity of quantity based. Nor are they on the whole so overwhelmingly compelling to stop what you might be doing to buy just because you saw the deal on your phone.

Search has been the first iteration of mobile deals. Groupon helped conceptualize the process with their interface that makes sense – Eat Something, Go Out, Get Pampered. The problem? The deals and the behavior.

1. The Deals: Evergreen vs. Perishable

The mobile deal landscape on the major players still kind of sucks. The holy grail are temporary deals that help attract users when merchants need them. That problem either requires great integration (OpenTable knowing availability) or lots of effort on the merchant to upload and activate. Deal sites don’t have the first and merchants don’t have a lot of the latter. What we see instead are evergreen deals that merchants don’t mind showing at any time, but they don’t bolster the “now” vision.

Examples are those that Mobile Spinach offers – easy to consume deals that don’t ever expire, e.g, $3 for $6. Then again, perhaps the problem has been trying to use perishable deals on mobile instead of promoting more easily digestible options. The sheer management factor for merchants using the typical “now” platforms almost insures subpar user experiences.

2. The Behavior

I’m no expert on mobile, but I like to watch people. When do they use their phone a lot? I’m hooked on Google Maps, but that doesn’t seem to be the majority. When looking at Twitter, Foursquare, Instagram, Facebook, and even Email we see the problem.

Deals on mobile are not social — the space is called group buying, not social shopping; you don’t need friends or feel compelled to share with friends. They don’t make you want to broadcast. The apps don’t compel you to open them as part of your behavior.

Deals on mobile are not games — browsing feeds is fun and passes the time well; scrolling for deals, not so much. As is the case with not being social, you just have limited reason to open up a deal app; you don’t check-in on it; you don’t get rewarded for using them; you don’t get hooked on the crack. You don’t need both, but you do need at least one.

Is All Hope Lost?

No, but as a direct-response business (local discounting), they still need a reason to message their consumers. That’s not there yet in mobile. We could see a world with great push messages based on location, interests, and other social / geo data. Not now, though.

My advice from the cheap seats, help those apps with touchpoints to consumers monetize better as you, the big deal sites have the merchants. For now, though, don’t try to be the vertically integrated play in mobile. Treat mobile like the international space. Watch others, learn from the data you see, then, buy the better ones.