I’ve always been a little live and let live around the pot issue; you like it fine, you don’t like it fine. I though it was novel that they might legalize the substance and tax it to help California climb out of the financial gutter. With that in mind, it didn’t seem like the worst thing in the world. It also seems like in some ways it could mellow out the drug war that we fund so ferociously on the border. Anyway, musings aside I started to think about what the business around the legalization would mean and it was sort of jaw dropping. The issue seems like a pretty crazy social iceberg.

Let’s play this through. Lets say Prop 19 passes (which by the way, looks like it won’t). If it were to pass, it would basically create an instant industry. I get that there are all sorts of illegal pot practices, but if it became legal large corporations like RJ Reynolds and Altria would immediately enter the space. They would set up shop with so much capital to operate you wouldn’t even remember it was supposed to be a local business growth initiative. If they can make a tobacco operation profitable, they would go bananas growing marijuana – much higher profit, much smaller operation. Much like factory food, they would systematize and standardize the product; it would eventually get cheaper and stronger, etc. And, if the measure held, they would lobby for national legalization. It would be pretty impossible to keep California from become the pot supplier to rest of the US. So even if it didn’t pass, people would buy it on the web.

As this all started to sink in, I realized that there’s just a massive irony to the story for me. This Proposition is sponsored by this progressive pro-pot activist in Oakland. (How he got thousands of pot-heads motivated to get enough signatures to force a state ballot proposition, I have no idea.) If that initiative passes, there’s a good chance he could create a market so appealing that bigger players would move in and put him right out of business. Most companies have a really hard time sizing new, untested markets. This markets been more or less sized through the war on drugs.

I don’t think I can think of any single event that has the potential to instantly create an industry. And to top it off, from a business perspective the measure seems like it would cause more problems for the people who hoped to benefit from it the most. We live in interesting times.

The way the service works is that businesses contact Groupon about a partnership and together they create a bargain that will run in over a period of time – could be a one day blitz, could be a longer-term cupon. (This deal includes Groupon earning around 50% of the coupon price for its service.) Since the business is deciding what to push and Groupon serves as the delivery channel, that’s not actually consumer buying power. It’s not driven by consumer demand, the Groupon community isn’t polling it’s users to figure out where they would like deal; Groupon makes the call. Groupon’s main customer is the business offering the bargain, the Groupon community is a means to an end. The service isn’t even a platform that allows consumers to connect with each other and organize for buying power – it’s a pop-up, loss-leader service that businesses can rent by the day to drive consumers through their doors.

So, say you’re a small business, Groupon sounds like a pretty great idea, right? All of a sudden you can help people learn about your services and it’s cheaper than buying expensive advertising, right? Well, maybe. Groupon reports that about 22% of the people attracted by their make return purchases. Growth can be good, but what about the customer experience?

Let’s say you just opened an ice cream store and the first time a new customer walks into your shop it’s jammed with people looking for a $1 ice cream cone (that usually costs $3). It’s hectic, everyone’s very transactional because they came for the deal, and it’s very hard to engage with the ice cream store because all of the electricity in the air. People are pushy, lines are long. The extra sales are great for the buiness, but you aren’t building any new relationships, you’re just ringing up (discounted) sales. It seems like if you want that atmosphere maybe you should open Crazy Eddie’s Bargain Basement, buy lots of sales advertising and run that game every day. (The WSJ ran a story yesterday with some small business owners with similar sentiments.)

I’m frustrated because I know the experience could be designed with the end customer in mind. Groupon could connect people, look for shared interests, and source a mix of deals tailored for their community. Groupon could encourage people to share reviews that would help the businesses they serve so they can improve (right now, all discussions are about ‘the deal’). Groupon could really would be help businesses grow on their own merits. I feel like Groupon could be about more than just blatant consumerism. I’m sure it will be a big business, I think it’s a big idea, I just wish it had a little higher purpose.

I usually find lots of inspiration from video games. I’m not a big gamer, but I’m fascinated with the space. Usually it’s less about the graphics or the game content, and more about the interactions that have been designed into the game. As games go, there seems to be a lot of really interesting things going on in massive-multiplayer games and web and phone-based games lately. Console games are sort of pushing each other deeper into this better graphics/extra gore niche. That’s mostly games for hardcore gamers. I’m more interested in what happens when there’s a wider cross-section of people just screwing around entertaining themselves.

I’ve seen a couple of interesting design/stratgey things lately, here’s my take on a few things I’ve seen. Hopefully you find some inspiration along the way.

Always Farming
I was reading this article that talked about a pretty interesting concept embedding in a game called Happy Farm. (The article is about a Chinese game but there’s also a Facebook app called Farmville and a few other knockoffs….farming seems to be the new shooting.) The gist of these games, which are massively popular at the moment, is that you have a virtual farm that you grow crops. It’s pretty simple and there’s a heavy fiddle factor around maintaining things. It sort of occupies your mind like Tetris or Minesweeper.

One of the things that makes this interaction interesting to me is that users can steal one another’s crops. The grounding concept behind the game is that it’s always on. When you’re away form your crops they grow, and you need to tend them. Sort of like a networked tamagotchi. The interesting interaction here is that if you’re not around tending your virtual farm, someone could nab your spinach.

This interaction is that makes MMPORGS like World of Warcraft pretty fascinating. Since you’re pitting real people against each other, anything can happen – you can’t design all of the foolish deviousness human opponents can create. If you were playing against the computer, that’s a rational device…playing against another player brings the fuzzy interactions that make the game interesting. I love how the simple act of making the experience open for multiple players takes something that would be very static and makes it quite dynamic. It’s a new flavor of immersion; if you’re into the game enough and you’re “AFK”, you might actually worry about someone stealing your crops and getting credit for it. That type of interaction adds this extra level of chance and richness to the experience, there’s the chance anything could happen.

Alternative Currencies

Continuing on the farming theme, many of these apps have a few ways to earn the crops you have. You can pay with time, waiting patiently for these cyber-sprouts to grow and slowly cultivating your empire. You can intervene and pay dollars and that allow you to grow crops faster. Or you can pay in effort – by taking quizzes or signing up for credit cards the game gives you some sort of currency or in-game tools in return.

Michael Arrington has sort of made a huge stink around this idea. He argues that paying through effort is a scam and it’s unfairly baiting users into all types of shady activity. Judging from his examples, he’s p right about the scam part, but the fact that you can pay through different means other than dollars is interesting. (In other gaming circles this buying in game currency rather than earning it is called ‘gold farming‘ – shocking amount of ‘farming’ going on here.)

I’m pretty interested in games that run internal economies. Lots of multiplayer games have this interaction and much like real life, money is one of the scarce good people compete for and use from trade with other goods. Most hard core gamers hate gold farming because it breaks their economy, goods aren’t scarce anymore when you can buy them in real life. This path to alternate currency is interesting because it doesn’t necessary throw an entire economy off, but it gives people an option in how they want to pay – time, money or effort. This is an interesting way to level the playing field and let the player chose which path is least scarce for them. For example, Tweens have more time than money, adults often more money than time (broad generalization, I know).

Pay For What You Get
OK, the final inspiration continues the thread around online currencies and economies. online multiplayer games usually have a two-stroke revenue engine. You pay for the software to play the game, and then you pay a subscription to play the game. It’s easy math to figure out these immersive models are big. money. Not only do you sell a $50 game, but each player drops $15 as long as they care to continue playing. To drive subscriptions, the games usually release minor patches to improve the game and major content releases (in another $50 shrink-wrapped boxes) to continue the experience.

Mike Masnik posted an article a few weeks ago talking about a pricing change to play an online DUngeons and Dragons game (yes, the exact one your thinking about). This change did away with the initial software fee and subsequent subscription in favor of allowing people to play for free and charging for certain features in the game.

The inspiring thing about this is that it orients the model around what the users really want. They want to play a game where tons of people are playing and wreaking havoc (that’s why they opted to play a massive multiplayer game in the first place….if it’s not massive, it’s not quite hat they’re looking for). ANyway, the other bit was how by removing the subscription fee, they actually “took the ceiling off of what people were willing to pay for the game”. There’s an interesting dynamic going on here, if you pay $15 you have an expectation of getting something. If you aren’t forced to pay, you’ll pay for what you want (and value what you receive). Additionally, if you take a break from playing the game for a few months, you don’t have a bagging feeling of getting charged for something you aren’t using. This segment is pretty hardcore games that switch between a few games, to keep things fresh. (The original article linked by Techdirt here.)

This balance is a pretty hard thing to pull off, and you sort of need an existing market. (Techdirt’s comments mention that the D&D brand equity really helps here.) Still, transparently pricing around exactly how consumers use your product seems so amazingly liberating. You’re now free to concentrate on how you can make them happier, and you just price against it, lots of the original complexity seems to fall away.

I’ve always liked the idea of these two moments working together, it’s kind of a nice reminder to not over-promise what you can offer. It’s also reinforces the importance of having continuity between your identity/packaging and your product. At one time or another, we’ve all been really excited to buy something only to be disappointed later with the results of what we’ve bought. In that case, the first moment was won, but the second was lost…you have to nail them both, I like this act of bringing things into harmony.

From here I started to wonder what actually happened next. It struck me that those marketing moments are missing a bigger, more important truth – you’ve bought something, you’ve tried it…now, knowing what you know, would you buy again? Would you repeat? If you’re in the business of thinking hard about FMOT and SMOT, shouldn’t you also be worrying about the Third Moment of Truth?

(Important note: The world doesn’t need any more clever marketing phrases, that’s not really the point here. It’s a term that references the other two moments…I’m using it for the thought exercise. Also, the core concept isn’t new – companies obsess over repeat purchase.)

Ok, so if you argues that the First Moment of Truth was about believing a product was for you, the second moment was confirming, or knowing, it was for you, would the final more important moment be about preferring what you’ve had over what you could have? Framing these things linearly might look roughly like this…

What I sort of think is interesting is that you make different investments to get people to try something than you do to get them to love it. And while consumers move across that line left-to-right, companies have to earn those capabilities right-to-left.

I think getting product experience right is more about culture than it is about execution. When an organization agrees on an idea, it can motivate around it and execute against the concept. (This is sort of the reason someone in P&G coined the First Moment of Truth and the Second Moment of Truth….and why P&G does this type of thing very, very well.) If CPG companies had lingo and agreements around product experience, I wonder how different the products we use today? It’s really hard to agree on what passes for ‘excellent’ vs. ‘good enough’. WOuld these companies deliver differently if they had to ‘win on the third moment of truth’?

Maybe everyone gets this already, it’s pretty straight forward. But if everyone got it, wouldn’t every car door close like a BWM? Wouldn’t every airline have amazing service? Wouldn’t every burger taste like In-n-Out? You see there’s the rub, I don’t think most companies worry (or spend) as much on their offer and they do on their marketing…and I wonder if that’s a cultural problem more than it is a business problem.

The site seems to have built some pretty interesting ideas around investor transparency – you can see current holdings and trades, investors are rated on returns over time, etc. The metrics aren’t so different from what’s offered by mutual funds (at least on a quarterly basis), but there’s something very powerful about the service being framed around an actual person. It also allows KaChing to position themselves as an interesting alternative against this big, evil, opaque $10T mutual fund industry.

On the face of it, it seems like a pretty brilliant service. This total transparency puts you ‘in control’ of your money. Doesn’t everyone want more control? The truth is I have a job, and when I pay an investment service, I’m paying them to watch my money, that’s their job. I pay them for a service, you get the idea. Now that bit aside, I think KaChing’s ability to tell a very simple, human story is an indication of a bigger trend to come in financial services.

Financial Services is pretty much an arms race. For the most part, financial service providers do they best they can to offer the most attractive services while exposing themselves to the least amount of risk, and charging as much as their competition will allow them to get away with. (I know that sounds cynical, but let’s just call it like it is). What KaChing could be evidence of is that people want/need/will-go-out-of-their-way to invest on their terms.

People cross a confidence chasm when they make an investment. The big trick is how can service providers help them feel more secure when there’s inherent risk at play. Would it help if I boiled the offering down to an actual person (instead of a faceless mob of traders)? Would it help if I could see any and all historical trades to see if my provider really walks the walk? Would it help if I could compare across money managers so I can align on investment philosophy? Would I just like to be able to scratch the service (not that I would, but I could)? Would that feeling of control help me cross the confidence chasm?

The thing is KaChing isn’t even promoting all these types of interactions – they aren’t a mutual fund, they’re an investment portal. But because the service starts with a certain amount of transparency, they create all these interesting byproducts around trust and possible pretty compelling investment interactions. Those interactions don’t have anything to do with what I invest in, but rather how I invest. I’m hoping that this site and a handful of others will start to mold financial services into a very different beast in the next 5-10 year. I think it will be a cocktail of new service providers, and new visualizations that help us slice and interpreting all the data and transactions going on. My bet is that the big guys will be compelled to offer similar services, or they’ll wither because they force everyone to view the world as they view it.

Actually, there’s a little more to it. In general, I’m OK with the flying experience. I know it could be better, but for the most part, it’s good hearted people doing the best they can in a very tough, complicated, interlocking service industry. (Full disclosure: my bother is a pilot.)

The hatred I have for airline comes from their management decisions. I hate them for their inhuman inflexibility. I hate them for their nickel and dime tactics. They remind me of banks, both lay out very narrow rules of engagement and give themselves the right to tax you if you deviate from the plan. They let the policies play bad cop and stand unaccounted for some pretty unfair treatment.

This week, American Airlines hit me with a $200 change fee on a $300 airline ticket. Even worse, I booked a ticket for two passengers, that change fee applied for each passenger – $400 to change a ticket. At this point I’m hamstrung. I can walk away from $600 or pay $400 to make use of my money. What am I going to do scream at the ticketing agent? I literally have no recourse, I’m being heisted.

Then I see this article via Kotte.org. The article is an account of an airline exec lamenting the industry’s further march towards ancillary charges.
It ends with a nice thesis:

But the overall numbers don’t lie: The faster airlines add fees for basic services like checked bags, the faster their total revenue declines.

While this is comforting in the face of my American Airlines heist, I also think revenues are also down because people just flew less this summer.

More interesting to me are the interactions going on between the airlines and the analysts.

The legacy airlines–Delta/Northwest, American, United, Continental and US Airways–lost a lot of money. Collectively about $1.9 billion, in fact. Their revenue plummeted, too.

And do you know what most of them wanted to talk about? You guessed it. The baskets of ancillary revenue they’re harvesting by charging us fees for checking bags, choosing coach seats or whatever. Forget that their houses are burning down. They found a tap in the bathtub with some water leaking out, so they’re thrilled.

The airlines aren’t boasting to customers that they’re bringing down prices and creating fair use-based pricing, they’re bragging about the a-la-carte charges to the analysts. If the analysts believe the fees are a good decision, they’ll give a favorable recommendation that helps keep the stock price up. As airline management obsesses over their fate through the market they seem to miss the big point…the experience matters. If they’d take care of customers, customers wouldn’t obsess singularly over price.

Oddly, I think the major airlines maybe leaving some of the traveler experience on the table that could position online travel aggregators to deliver value in a way they weren’t able to before. As the airlines chop up the total travel price, the aggregators can stitch it back together again and start to evaluate airline more on total experience.

You might imagine Priceline/Kayak/SeatGuru/Orbitz launching a “True Price” feature and making a lot of noise about how you can make more informed comparisons through their site. While they’re at it, they could start to add consumer ratings for the different flights. Each flight is different, but I bet consumer preference for certain airlines shows up pretty quickly. That would sort of leave the airline with their plants down. All that brilliant airline cost accounting would go right out the window and consumers would know who the dirty birds were.

I feel like if airlines spent more time trying to create an unbeatable experience rather than hiring a herd of smart shiest-y shell-gaming consultants to screw me out of my money, I guarantee they’d be in a much better position than they are today. It seems to be working for Virgin, JetBlue, and Southwest.

I sort of live for these moments in presentations. It’s probably the same attraction that keeps baseball fanatics glued to their television for hours of what appears to be a pretty boring game. After waiting patiently, and watching things slowly play out, something goes very wrong, At that point, all hell breaks loose. At that point, you see who’s the power player in the room, who’s done their homework, and who’s completely out to lunch. This part of the meeting was pretty mush a wash, that argument basically threw itself out the window. This presenter had just committed a pretty common error, one I now refer to as a Large Market Fallacy.

I’ll get to the details on LMF, but first a slight detour.

When I was in undergrad, I remember that some odd curriculum requirement forced me into a course on Logic. I think I was somehow dodging some history requirement, and the class ended up providing me with one of the few textbooks I kept beyond school. There was this fabulous section in the book that listed out scores of logical fallacies. Things like red herrings, slippery slopes, etc. were explained in detail. The book did a great job of taking pretty common arguing topics out of context and explaining why the arguments were problematic. This is where my head went when the overall market hit the trillions, (really?)

Ok, back to the market sizing.

I read a great piece in the WSJ around Large Market Fallacies earlier this year. (They weren’t using the phrase, but that was essentially the problem). This author used a great metaphor around selling a can of coke to every kid in China. The general idea is that people created flawed plans when they assume that the market holds an opportunity just because the market is massive. These business plans just want 5% of a MASSIVE market, which seems totally reasonable, right? I mean, 5% is a small share, so how could they fail.

I often wonder how people end up in this situation. For sure there are many reasons, but I have to believe that you only drive down this road if you don’t intend on executing the plans your making. If your on the line for these projections, you have a wholly different approach to things.

Ok, so enough ridicule, how do you get around this type of thing. Some markets are actually huge, how might you go about entering? Well, try to make the market small. Think about finding a niche (or creating one). Either cut it down to something digestible, or use a DDP and build a bottom-up estimate of investment versus return. (ex. “In the first year we’ll hire 50 sales people and we estimate that those 50 people will generate $20M in revenue.)

It’s not about being a hero in the business plan, it’s about getting closer to figuring out how you’ll actually launch your venture/product/service. If you just serve up a large market with no logic around how you’re going to success, there’s a pretty good chance you don’t really know who your customer is.

A small side note: I really, really wanted to refer to this sort of thing as a Chinese Market Sizing. Partly because I’ve seen it a lot when people size market opportunities in China (it’s a massive market and the plan has no idea how things really work there). However, taken out of context, I’d just sound like an ass, but still I think it would be a hilarious scenario.

You: “What was the problem with the plan?”

Me: “Chinese Market Sizing”

You: “Ohhh, Too Bad.”

Converse just won an Effie for flipping Google Adwords completely on its head. In the past, if people wanted to sell shoes, they would by the Adword for ‘shoes’ or ‘footwear’ or if they’re feeling adventurous, ‘kicks’. Then if people search for “shoe” they’ll see the link. The more marketers buy the same words, the more expensive that Adword is. That basically means every shoe marketer in the world is inflating the price of the word, creating more competition for themselves, and probably not meaningfully reaching anyone. (When’s the last time you searched for shoes? You either hit the brand or you go to Zappos.)

Converse flipped the script, they started buying Adwords that their demographic were already searching on. How did they know what they were searching? They just looked at Google Zeitgeist. So now, when a teen is searching for ‘how to kiss’ they might see a link for a Converse mini-site. The mini site is a moment to connect, and it’s a link back to Converse (if they want it). The only way you get to pull that off is by intimately knowing your customers and knowing what they want.

I would expect that Google will start to price terms in Zeitgeist slightly higher (if they don’t already). I think this campaign will probably change the way people buy Adwords. It’s like human-centered media planning…what an oxy-moron.

That statement sort of offended my sensibilities at first. How can business models just happen? They take time, they’re complicated, and most of the time they fail. Also, edge economies are less proven. Wouldn’t that require more big brains and lots of ‘innovation’? It felt odd to say those models just happen.

Then, last week, I was doing some client work with experience models. I think I made my own offhanded statement saying something like “well if there’s nothing to experience, there doesn’t seem to be any value to pay for.” Not a real lightening rod of a thought…but then I realized; no experience, no value…no value, no business model. I was starting to get it.

So I went back to Haque’s article, and things made more sense. It’s all about what type of value are you delivering – connections, experience, physical goods, service, piece of mind, whatever. If you create that (and it’s valuable to someone), the business model will happen. It’s not that the business model doesn’t matter, it’s just that the model is only part of the platform. Without the value, you have no (real) model.

I was left wondering why this concept had been so difficult to digest at first, seems straight forward enough. I decided it was tough to swallow because business models just don’t change that often, and new business doesn’t mean new model. You may sell something new to the world over the web, but if it’s just about web fulfillment, it’s not a new model (which is fine). In fact most businesses are buying into proven models and spending all their resources making that model survive.

All this just takes me back to why prototyping is so important for building a new venture. It’s abou tfiguring out the need and the value first and then building a model that will complement the core promise. By prototyping, you’re committing to exploring different ways of delivering value. If you do it right, you’re not too invested to learn. If you do it right, you’re making room for some serendipity. If you do it right, you aren’t looking for shortcuts, you’re looking for answers.

Can you imagine how much this dials up the experience for the diner? Instead of wading through a crowded restaurant to speak with a stressed out greeter, you’re going on an adventure. Even better, once you arrive at the venue, you have a shared experience to share with 20-30 other people.

I think a lot about how to flip business models on their head to build something different. I’m beginning to think I’ve been going about things all wrong. I’m beginning to believe business models happen only when you create a compelling offering or experience. (I’ll blog more about that next.) I’m starting to think you that you have to start by to flipping the experience around, then figuring out what kind of business model could deliver that experience. I think building models for the sake of building models doesn’t get you to the right place.