Advertising is becoming not just about messaging but providing value to customers. Functionality has often not been the role of advertising.

- Trevor Kaufman, CEO of Schematic, an interactive advertising agency (link)

Essentially:

• Build a brand by building a product.
• “Market” by delivering valuable services to people that help their lives.
• Focus on delivering value exchanges rather than merely influencing value exchange decisions.

Simple idea, but hard to execute.

Luckily the web makes it easier to blur the lines between messaging and functionality, between influencing and delivering value exchanges.

Traditional web advertising, whether it is text, image, contextual, keyword-based, etc., is still based on the fundamental model of displaying advertising next to content, a notion simply transferred from traditional offline media into the online world. Web pages are just inventory.

But this notion is becoming increasingly outdated as marketers realize that they can create content and use their websites to drive engagement by delivering valuable services. Nike Plus is the oft-cited example, but another example is Johnson & Johnson’s BabyCenter, a website that provides deep content around, surprisingly, babies, but also a highly relevant community of users that use the site to engage with each other. The concept of “earned media” in PR can be adapted to “earned engagement”. Web pages are not inventory, but interactive services for people.

As entrepreneurs, re-think the potential revenue models for startups: interstitial, interruptive advertising is not the only way. In fact, basing a business on advertising revenue will soon be poor business strategy.

As I posted earlier today on my photography site:

In the near future, advertising will no longer be the default revenue model for web startups. To start:

• We will have realized that interruption-based “messaging” (e.g. corporate spam) is something nobody wants in our social networks, in our communication services, in our products and services, in our information sharing, in our transactions of value. We’ll be sharing too much value, too easily, too widely, too targeted: the transaction costs of advertising will simply be too high compared to other ways of extracting revenue from value creation.
• The interest will be in conscious consumption instead of conspicuous consumption. Attempting to convince consumers to “buy, use and discard more” simply won’t be good business strategy. Conscious consumption requires a different approach to influencing people’s decisions; existing traditional advertising is a square peg for that hole.

So what else is there? Chime in with your comments, and help start the conversation by voting for this SXSW panel idea, “Avoiding Advertising in Business Model Design”.

We’ve probably talked about this all before, but I thought it would be good to summarize the concepts, ideas and changes we’ve been discussing. And if you want to hear more, vote for the proposed “Venture Capital for Long Tail Entrepreneurs” panel using the SXSW 2009 Panel Picker. For more background on the idea check out the earlier “Venture Capital for the Long Tail” post, and for more information about SXSW read about SXSW 2009.

“Venture Capital for Long Tail Entrepreneurs” describes the need for a fundamentally different, economically viable model for creating and funding micro-businesses in the Long Tail of economy. A new model of business is emerging as the costs to start and scale businesses decline, the culture of Generation Y begins to impact the workplace and increased personal transparency forces companies to re-think how to compete in the marketplace for employees and customers.

The result is a shift towards a more personal, collaborative and distributed system of value creation, yet venture capital has yet to deliver a funding and economic model to fit the specific needs of the long tail of micro-businesses. The formation and success of micro-businesses will depend on how our culture and business support systems adapt to the new set of organizational challenges created by these trends.

Granted, this is an opportunity: an addition to the traditional venture capital model, not a replacement.

Creating an economic model that fits this niche will take a lot of work to change our notions of venture capital and entrepreneurship.

If everybody loved their jobs and enjoyed working for large companies, and if large companies were the most efficient and effective organizations for creating value, this wouldn’t be necessary.

Since that’s not the case, let’s start thinking.

Continuing the thought on testing ideas in the marketplace…

Startups and venture capital are all about creating change.

A startup typically creates or requires some fundamental change to succeed: change in technology, economics, marketplace, changing consumer behavior, changing management, or perhaps just a change in customer, supplier, vendor, manufacturer.

Sometimes it’s disruptive, sometimes it’s not: but by nature the value is created through change.

At the same time, since most change doesn’t happen in the way we think it will, most companies fail.

Given the difficulty in predicting the outcome of change it’s pretty obvious why venture capitalists diversify their investments and stage their investments. The basic hit-driven nature of venture capital and startups is the foundation of the economic model and entrepreneurial culture.

But why do the vast majority of new businesses fail? Why do venture capital firms have to depend on hits to create the returns necessary to pay back the losses on the vast majority of their bets? Is it because the system forces entrepreneurs to decide and focus too early?

Think of starting a company as a way to test an idea in the marketplace. Testing an idea is a way of creating a real option; by making small investments (in money, time, passion, intellect) in hashing out ideas we are creating options for future, larger investments in the winning ideas. Real value is created in testing even if it does not see the marketplace, if for no other reason than it mitigates value at risk.

Of course traditional venture capital is based on this stage-gate approach, using the value of time and information to help them make decisions on investing further money and time in companies in follow-on investment rounds. But maybe the first gate requires too many decisions, too many lines drawn in the sand? Perhaps early-stage investors require entrepreneurs to decide on too much too early, restricting what is being tested and limiting the opportunities for adaptation and evolvement. Entrepreneurs can test ideas with self-funding (bootstrapping), but it’s a step few entrepreneurs really understand.

Can we create a system that allows entrepreneurs to test even more?

Can we increase the amount of ideas that get tested, but decrease the amount of businesses that fail?

The Board at BarCampRDU | Raleigh, NC, USA | Aug 2008

After going to RTP Startup Weekend a couple weeks ago, another Saturday in Raleigh, NC at BarCampRDU seemed like a great idea. In the end there was some interesting sessions on technical and business topics, but I had a better time meeting some really interesting people: enjoyed all the conversations and looking forward to more in the future.

Thanks to organizers Wayne Sutton and Dave Johnson…

More about BarCampRDU:

• What is a BarCamp?
• Details about BarCampRDU and the blog
• Photos: mine on Flickr, and everyone’s on Flickr
• The conversation on Twitter

(A temporary respite from venture capital and micro-entrepreneurship. We’ll return to the topic soon.)

How does traditional targeted direct marketing work?

(click on the drawing for a large, legible version) *

Traditional targeted direct marketing is based on the premise that marketers can control differentiated information and messaging presented to segmented groups of individuals.

• The traditional method works well in a business and social environment where information is obscured, where companies can control messaging to groups of people and where people cannot easily share information between groups.
• If the marketer is wrong in one part of the “person + product + marketing message” equation, the pitch fails. Companies optimize to the system to develop the best answers to this equation.
• Marketing creates the brand by “talking” and controlling the information flow between the company and people.

How is direct marketing changing?

(click on the drawing for a large, legible version)

In an environment where marketers’ ability to dictate the person + marketing message + product equation decreases, the marketing and product approach needs to shift to leverage shifting flows of information.

• In a business and social environment where information flows outside of the normal direct marketing firewalls and companies cannot control the messaging to segmented customer bases, the traditional approach begins to break down.
• The equation becomes a little more fluid and variable as the range of inputs and answers increase drastically.
• Traditional targeted direct marketing still exists; but to a lesser extent, focusing on specific segments or products as dictated by best practices, lessons from the marketplace and corporate initiatives.
• But since companies can no longer control the flow of information as consumers can talk between groups on the same scale as companies, controlling the message becomes an unrealistic goal.
• Therefore the desire to control the message leads to high customer acquisition costs as the traditional channels used to control the message become increasingly ineffective.
• What can still be controlled? Product becomes more important than marketing. Product builds the brand.
• Marketing shifts from positioning to reinforcing.

How can marketers adapt to this new environment?

• The opportunity of “alternative media”, social media, “alternative channels” et. al. is to integrate with traditional media, not replace.
• To understand how to adapt to the new environment, focus on the fundamental shifts in the flow of information; the shifts have rebalanced the efficiency and effectiveness between the various traditional and newer marketing strategies and tactics.
• Marketers still have to understand the intended customer base and the product value proposition to create great marketing strategies. Expose oneself to the new tactics and possibilities of alternative media, but remain focused on creating strategies that achieve the primary marketing goals and objectives. Choosing a particular tactic without first understanding the fit in the strategy and its goals neglects fundamental marketing best practices.
• It’s not an “either/or” decision between traditional and alternative media: the answer is “both”.
• But at the same time, get comfortable with spending less money, not more.**

Direct marketing is dead!

Long live direct marketing!

—

* I know my handwriting is chicken-scratch at best. I hope it’s legible…
** Insight by Ethan Bauley.