Archive for March, 2010

In Pursuit of Reality

Posted: March 23, 2010 in Uncategorized

I’ve noticed staff in the most successful businesses have always got a strong grip on the realities of the business, its products and the market. The less successful ones either failed to discuss problems or are convinced of things which are not really true.

I’ve always watched this play out with interest and recently I’ve become convinced it’s one of the most important factors which influence a business’s success. I’ve seen people sit around meeting room tables for hours discussing the currently accepted reality without actually touching on anything remotely real.

Often when people tell me why something didn’t work they are describing a symptom, this lack of reality is often the root cause.

Jim Colins, Author of Good to Great researched 1,435 companies to find the factors that contributed to the success of the great ones. Based on this research, “Confront the Brutal Facts” is one of the first chapters.

One of the key factors in the success of the great companies was a series of good decisions. The good decisions flowed from the fact that they all made a consistent and thorough effort to confront reality, internalizing the facts relevant to their market. Having lofty goals can be good, but you can never lose sight of what the reality is on the ground, no matter how much you will it to be different.

To do this a management team must value honesty and encourage everyone to contribute their angle particularly if it doesn’t fit with the current view.

Here are some of the common examples:

Reality Fail 1. Setting strategy based on incorrect assumptions

This reality distortion happens when members of the management team come up with a direction for the company; they have drawn conclusions incorrectly and may have drawn on supporting evidence without fully understanding it. But the company is now convinced and the new reality is this plan will make the company successful.

Reality Fail 2. Failing to understand the company’s real problems

Companies that have executed on bad strategy will eventually come to a place where they have to discuss why things are not going to plan. This is the right time to really dig into the reality of why something is not working. This may take some proper analysis and will most likely dig up problems which may be embarrassing.
For many management teams this is not an option. There will be loose discussion which will surface the new idea of what will make the company successful. Then the company will go forward, the staff understanding the new direction as being reality.

Reality Fail 3. Failing to start bailing water

Later in the lifecycle this phenomenon can manifest itself in companies start to collapse, everyone accepts that everything is going well when what they should be doing is having heated meetings trying to get to the root cause of the companies problems.

The solution

Companies that fall into these traps generally flounder around changing direction till they fail. For businesses to set themselves up for success they need to make reality their common language. To do this they need to introduce a culture where staff and in particular the management team is encouraged to rigorously question and analyze what is accepted as reality. When decisions have to be made egos must be put aside, outside experts drawn into the discussions if necessary and everyone must be drawn on to present any evidence they have. No decision should be made till all the assumptions are verified.

John D Rockefeller is still the richest man in history (by a huge margin) and he did this by being an exceptional businessman. In the history he wrote of this life he found this concept important enough to write in the first page of chapter one.

We had discussed and argued and hammered away at questions until we came to agree, and it has always been a happiness to me to feel that we had been frank and aboveboard with each other. Without this, business associates cannot get the best out of their work.

It is not always the easiest of tasks to induce strong, forceful men to agree. It has always been our policy to hear patiently and discuss frankly until the last shred of evidence is on the table, before trying to reach a conclusion and to decide finally upon a course of action.

You can conclude that he put his ego aside, hired a brilliant team and put in place an environment which fostered good decision making and it worked. As Jim Clark wrote it’s not always pleasant to debate something rigorously but if the future of the business was involved the winning teams he identified did just that. They often had heated arguments which lasted for weeks, bringing more and more facts to the table until they reached a unanimous decision, then they all put aside their original differences and got on with it, comfortable in the knowledge that the direction was correct.

I think there is a lesson here for high tech companies where assumptions about markets with huge potential often go unchecked and direction is often set and accepted as right without analyzing reality. I would be interested to see how other people out there have observed and interpreted this.

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I spent some time recently helping companies determine if their ideas would succeed online. I’ve written this blog to document some of it. Hopefully it helps someone out.

Many web businesses start with a fantastic idea. We just know it’s going to work. I use the word ‘we’ because I’ve been there (more than once). We come up with a product then many reasons why the market will love our idea. We may be right that customers would buy our product, if and that’s a big IF we could find a way of telling our market about it.

Often the internet gets used as a magic bullet by people who have not tried to slug it out online. Using the net we can put our product in-front of millions of people right?

In my experience this is not a given. But what I do know is there are ways of testing how large the market is and how commercially viable it may be.

In terms of risk it is unlikely we will fail to build the software/site. It’s more likely we will fail to market the product successfully. So before you start spending money to develop your product or service here are some very simple tips on how to determine how it will fare online.

There are many ways to reach customers online but the most common are:
1. Search Engine Optimisation (SEO) – Get listed in search engines where millions of people are searching for your product
2. Search Engine Marketing (SEM) – Use Google Adwords or similar to advertise your product (paid)

If customers exist for your product or service they will be searching for it in Google. Therefore researching the potential for these two methods of marketing is invaluable.

Most people planning an online business are not aware that selling products and services online is fairly predictable. It’s a funnel which has very predictable points. So you can calculate the end result of months of hard but successful work in a couple of minutes, de-risking your venture.

There are many factors which influence how well customers will flow down this pipe but let’s ignore that and assume you have succeeded in building a great site, have a good product and excellent SEO. Thise following exercise will demonstrate a simple way to determine how successfully you will sell your product online.

In this following example I’ve come up with a great idea. I’m going to sell NZ Bio Oil to a worldwide market I estimate to be a million customers per month. It’s a nice little niche which means I can be targeted in my marketing and I’m making a 30% margin. Sounds like a great idea right?

Step 1. Determining Search Volume

The first step is to determine the size of your online audience. You can do this by using Google Adwords. This tool is targeted at people using Google advertising and shows how many people are searching for specific terms. It also shows how many people are advertising for each keyword, which is a good indication of how difficult and expensive it’s going to be to target these people.

adwords.google.com/select/KeywordToolExternal

Adwords Screen Shot

Open Adwords then enter the exact phrase your customers will search for. You will see a list which includes the Local and Global Search Volumes. The Advertiser Competition bar shows you how many other companies are using Google to compete for your market. This is significant because it will drive the price of advertising up and also means these other companies will be competing against you in the search engine ranks. If you use the Show/hide columns you can also include the Estimated CPC column.

The Estimated CPC figure shows the amount of money you will pay every time someone clicks on a Google advertisement shown in a search for these keywords. Like the Advertiser Competition bar this gives you another view of how expensive this is going to get.

You will generally find a high volume keyword dominates the market but will have high competition. Best practice is to find several smaller keywords which are very specific to your product and use those instead.

So now you know the traffic volume either locally or globally. I now know that 327,000 people are searching for our example product per month. However we are not likely to get in the first page of Google for the broad search term of “Bio Oil” so lets plan around the more specific phrase “Bio Oil 200ml” which yields 27,000 visits monthly.

Step 2. The difficulty of getting on page 1 of Google.

Fighting your way on to page one of Google is not an easy thing. However that is a subject for another article completely. But take my word for it, if you’re not on page one you’re not going to get in the click stream. I’ve been on page two for keywords with massive volume and got at best a couple of clicks a day.

For the purposes of evaluating the market let’s assume the SEO works and you do get to the first page. When this happens you can conservatively assume you will get 10% of the clicks we saw in Adwords.

Step 3. Do the maths for the conversion pipe

So for our fictitious idea of selling NZ Bio Oil to a worldwide market we can work our way through the numbers like this….

Total search market 327,000 unique browsers (ub)
The keyword we think we can successfully target is 27,000 ub per month
If you’re on page one of Google you may get 10% of this traffic which is 2700 visitors
If your web site is well optimized you will convert around 2% of these visits which is 54 paid customers

Note : You may convert a larger number but at this early stage I wouldn’t bet on it. Better to be safe than sorry when considering investing a lot in this business.

Average purchase will be one product ($40) with a 30% margin ($12) 54 times a month = $648 Margin Per Month

Hmmmm $648 a month doesn’t sound too flash to me. As you can see the idea which sounded pretty good didn’t really pan out.

Paid Advertising

The second easy way to reach customers is Google Adwords. You select the keywords you want to target then your adverts are displayed beside the search results we talked about above. The advantage of this approach is you are instantly targeting the keywords from above with no time spent on SEO.

The process is an auction, with companies bidding on the keywords they want. However you only pay when someone clicks on your advertisement.

There are two major downsides. The first is that most keywords are so expensive you will never make money advertising like this. The second downside is that compared to the search results very few people click on these adverts. There are around five advertisements displayed on each search. Together they get around 3% of the clicks.

Also the costs, which are shown in Adwords, are often a lot lower than reality so it’s worth running a few adverts to find the real costs.

Lets run the figures for our Bio Oil example. With a much lower number of people clicking on our advertisement we will have to target the broad keyword “Bio Oil”. Otherwise we simply won’t get enough clicks. In some markets you can advertise using many smaller volume keywords to reduce the cost but we will focus on the main keywords in this example.

Each person who clicks on my advertisement is going to cost $1.35

At a 2% on-site conversion I need 50 visits before I sell something. So it will cost $67.50 to sell one item with a $12 margin. So every time we sell a product we lose $55.50.

It may seem hard to believe but I have seen companies spend a lot of money on Adwords without doing this calculation.

In Summary

So it looks like my idea for selling Bio Oil is a flop. I won’t invest the $15k on a shop and $25k on SEO. I will in fact go back to the drawing board and find something which does work. I might have to run a few ideas through the pipe but when I find one that looks good I have the confidence to take it to the next stage.

Understanding these simple tools allows you to test ideas and will save time and money. I find it also sways my thinking towards marketing based ideas or at very least product ideas which have a unique marketing avenue. These are the ideas you want.

When your research has identified there is a viable market for your product you can test the theory by doing a market test then proceed to invest in the technology with the confidence you have taken as much risk out as possible.