Marketing BS with Edward Nevraumont

I realize there has not been an essay or a briefing in a while. I am trying hard not to let this newsletter distract me from writing comedy. It’s coming along nicely, but at some point I will pivot back to writing more here. In the meantime, I hope you continue to enjoy these short conversations I am having with Peter and we are hitting the more interesting marketing news in any given week or two.

In other news, my 1960s comic book podcast is re-branding. “Super Serious 616” is becoming “WHAT IF… MARVEL was real?”. I wrote a little about why we are making the change here. The big impedes was a big advertising push we are doing later this week that should (if all goes well) blast us to the top of the Apple Podcast charts. The hope is that after an artificial boost or two to the top of the charts, we can use the momentum to maintain that position naturally. It will be an interesting experiment. In the meantime I think the quality of those podcasts have gotten better and better. If you are at all interested, now may be a good time to jump onboard. In the latest episode we discuss just how fast Thor would have to fly in order to cross the Atlantic Ocean in three minutes, and what that means for situations like saving someone from a speeding truck.

Now onto this newsletter’s podcast:

Full Transcript

Edward: Peter, when was the last time you saw a movie in the theater?

Peter: Oh, we go every couple of weeks. Every now and again, it's a very different experience now with, the big crazy seats and having to pick your seats in advance. And it's just, it's not like it used to be, but still it's a nice getaway.

Edward: Nice. So you paused during covid, but then you're back at it the same frequency there before.

Peter: Actually, even during Covid we'd go a couple of times. There was one time we went to tenant. Only people in the theater .

Edward: My crazy tenant story is, for a buddy of mine's birthday, I rented the entire theater so the two of us could go see it.

Peter: There you go. Well, we didn't have to rent the theater, we just bought regular tickets and you still got it. Don't think or so, but during Covid when no one was going to theaters, it was like the safest place you could be cuz no one else was there. So fair it out. So we'll still do it, every now and again. But it is funny how the industry has changed and maybe not funny, maybe sad how it's changed so much.

Edward: Yeah, I think it's interesting how little theaters have changed over the years, and it feels like they're changing quite a bit now. As you said they've made changes in terms of the seats are fancier and more comfortable and they're serving better food and so on. But in terms of like things like pricing, pricing has been, Hey, pay one price. Everyone pays the price to walk in and sees the theater. When you're dealing with a product that has an expiration date, like after 8:00 PM on Thursday, anyone who's not bought the ticket, those empty seats in the theater are going unsold. It's very much like an airplane, but theaters have never been priced like an airplane.

Peter: I have never understood that. Yeah, they should definitely be using different kinds of dynamic pricing. And of course it's not just them. It's gonna be the same thing with sports venues and concerts and yeah. It's funny in those domains, you keep hearing a lot about it. Sometimes controversial, but movie theaters seem to be just clinging to their kind of dinosaur ways. Although I guess just now starting to change.

Edward: And then even things like. Not just dynamic pricing, but even pricing by title. If you go and buy books, books vary in price. Every book you buy, I don't know what the price of the book is gonna be until I look at the price on it. And they're all over the map. Whereas when you go to see a movie, whether you're gonna see a 500 million avatar sequel, or are you gonna go see a nice little small new indie. They're all the same price.

Peter: That, and that's why it's so interesting. So there's that new, 80 for Brady movie just came out and there's all this headline news about it's going to have a different price as if this is a radical. Even in the articles, it's saying this bold move just cuz they're charging a different price for movie. Yeah, they're absolutely right. That should be the way it always works. Not, this kind of one time weird.

Edward: And apparently it has been done in Europe, so in Europe they have priced blockbusters at different prices than like smaller indie, lower budget movies. But in the US there's been a tendency not to do that. And I think the logic is like right or wrong, the logic has been if we price a movie at a lower amount, it will signal that the movie is flawed in some way and therefore it'll drive, even though it's almost like the idea of a luxury good. If I go and start discounting a luxury good, then maybe. Price elasticity is a negative elasticity. It might drive people away because it's considered bad because it's a lower price and it seems like that was the fear in the US if we reduce the price of the movie, people are gonna think it's a bad movie and no one's gonna go.

Peter: And that's why we shouldn't teach economics courses cause people jump to these ridiculous conclusions, you know? You know, it was the same thing with professional sports a lot of major League baseball teams were saying, oh, no, no, no, no. We can't change the prices. Same issue that we don't want to devalue the product. And now they're doing it all the time, not only charging different amounts for different games. But changing the pricing as the game gets closer and even based on weather and who's pitching and so on, that's just become the rule. Now. It's just a matter of how you do it. It's just weird that some sectors, like movies have just stayed behind and just haven't gotten with the times.

Edward: I went and saw, David Chappelle and Chris Rock were in town here in Seattle in December, and we went to get tickets. They like most of the seats in the house were at set prices now. Like the better seats were, better prices and so on. But the best seats in the house, it said this on the website, our top seats are dynamic pricing changing on a day by day basis based on demand.

Peter: That's kind of interesting cause like go to a restaurant where they have fixed prices for everything, but then there's that, special steak or fish market price, which implies that everything else charged isn't at. Prices, everything should be in a market price and people get used to it. That's The Thing a lot of these venues hesitate to do it because of some sense of fairness or something. It's like, oh no, we don't wanna go down the same path as the airlines, but people get used to it. People understand that, as long as they're not being gouged, the fact that they bought the tickets later or they're buying better seats they should be willing to pay a little bit more.

Edward: That's right. And, I think, maybe the airlines get us used to it, to a point where now it's not a big deal when it happens in the movie theaters. I remember it was probably 2003, 2004 was the first time I went to movie theater where I bought my ticket, like I bought my seat of where I was going to sit. Prior to that, I think every time I went to the movie theater you'd buy a ticket and then it was first come, first serve for where you were gonna be in the theater, of course. And it was around that time, 15 years ago or so where they said, Hey, no, you can actually buy your seat and now you can buy in advance. And now you can show. Just before the theater, just before the movie starts. And I think the concern at the time, at least what I heard prior to that was we don't want to do that because we want people to get to the theater early so we can serve them the ads. And if we start letting them buy their seat, they can show up at the last minute and they won't be able to advertise to them.

Peter: Wow, that's such bad logic given how much of a premium they can make for those better seats. It's a whole lot more than putting a couple of eyeballs in front of ads. And in some way the psychological weirdness of having to choose the seat, I think is actually less painful, less cognitively taxing than the idea of paying a little bit more money because, you're closest to the showtime. It's a different kind of process and people adapt to it and become second nature just as dozen these other domains.

Edward: And what's fascinating too, I think is who controls this pricing. When I was at Proctor and Gamble, we could go to the retailer and say, Hey, we want Swiffer to sell for nine 90 but we couldn't tell them that Walmart would, whatever price we told them, Walmart would put it lower and we'd be like, please don't put it lower. We're like, we want this be higher. We want this be high margin product. We want everyone else to charge more money for it. But they could do whatever they wanted. We couldn't force 'em to do anything. Now, we could rent ads on television saying, go to your local retailer and pick up your Swiffer for 9 99. But at the end of the day, the retailer decided, and it's that it's the same way with theaters. And so Paramount, you mentioned 80 for Brady. They can't set the price.

But what they did is they went and spent a whole ton of market research and then put together a research pack. Basically it was a sales pitch. So they went all the big theater change and said, we did some research and it shows that the price sensitivity for 80 for Brady is really, really high. And if you reduce your price, you can fill seats with older people who otherwise wouldn't even go to the theater at all. And they had to make a pitch. And apparently, I guess that pitch. .

Peter: That's great. And that's the way it should be, to get, whether it's the theater owners or again, any kind of venue, to run experiments that take chances, I think there's a real opportunity, whether it's the studio itself or some third party to come on in and start offering that, that kind of pricing expertise. Now, the next thing you gotta wonder about is will there start being a secondary market? For movie tickets. You know it's the idea is ludicrous right now, but anything's possible.

Edward: Yeah. It just, it feels like, at least right now, the supply of seats is so much higher than the demand for seats. And also you have a zero marginal cost electronic product that you can just put more showings, right? So if you don't go and see it at a certain time, they can run another showing at another time. Like unlike live shows like a Beyonce show or Taylor Swift show, like Beyonce can only be in so many places at once. It can only be so many shows. They can keep showing avatar forever and ever and ever. And you're gonna get this almo, if not the same experience. Pretty close to the identical experience. No, no matter when you. .

Peter: No, that's a good point. That there's not as much of a necessity for a secondary market as there is for sports or concerts. But on the other hand, there's a lot of people who are becoming accustomed to buying their tickets through the secondary market. You know, they'll start by going to StubHub or SeatGeek, and to see what's available. They, don't want to go to the primary market. Maybe it's cuz they don't trust the venues who are selling the tickets, or maybe they have a good experience with the secondary market. So I think it will emerge even if it's not quite as vital.

Edward: So we've talked about this, these companies that have been very reluctant to move into this direction. Right. So Airlines did this decades ago. Hotels did it decades ago. Cruise ships have done it decades ago, like movie theaters took a long time to do it, like athletic venues like baseball and stuff took a long time to move in this direction. Is there any example of a company that started moving this direction or an industry that started moving this direction where it was a mistake? We keep talking about, everyone's like afraid to do this. They're like, oh, I'm afraid to put them, buy their seats in advance cuz they'll will miss the ads. Or we're afraid to do this cause our customers will hate us. But is there an example where they were right, where like they should have moved more slowly or not moved?

Peter: Well, in terms of the overall movement, I don't think it's ever a mistake, but there's no doubt there's specific times, you know, specific games, specific sections of seats that are either gonna be priced too high or low. That's just the chance that these organizations take. I mean, let's face it, every game or movie or concert, they're never gonna get the pricing exactly right for every seat. So you just have to hope on average that works out in their favor. But, it's not an exact science, but it's a hell of an interesting science, no doubt about it.

Edward: But is there an example of where dynamic pricing wasn't the right choice? That like, Hey, we had fixed prices. Oh, everyone wants us to move to dynamic pricing. We think it's a bad idea. Every example that we're talking about. It was actually a really good idea. Theaters are slow. They should have done it earlier, but is there an example where someone moved too fast and they shouldn't have done

Peter: Oh, yeah. I'll tell you where the third rail is. Personalized pricing. Yeah. A lot of people mix that up with dynamic pricing. Of course, with dynamic pricing, as we get closer to the date or if it's a better seat or whatever, anybody would, would pay that higher price but personalized pricing to say, based on, given your characteristics, we're gonna charge you differently than me, even though we're coming in to buy tickets at the same time. Back around, right around the turn of the century Amazon experimented with that little bit and they got caught. They were charging two different people at the same time, different prices. And they, boy, oh boy, did they back down on that? They apologized, never again. It was just a little experiment. So yeah, that's a real danger zone. Not, to say it can never happen, but given our kind of how naive we are, even with just regular dynamic pricing. That's a step too far.

Edward: Well, it's interesting you say it's funny, I remember that when that happened at the time, I didn't make the connection, but you're right, they did that. Where they got nailed, I think, was personalized pricing where some people were paying higher prices than others. We do personalized pricing where some people pay lower prices than others all the time, and no one gets upset about it. Like if rather than charging $8 for this CD for most people, but $10, if you, we knew you're like a high level, like a adamant CD buyer and you're priced in sensitive. They could have just priced it at $10 and offered $2 off coupons to a whole bunch of people. Instead of pricing at $8 for everybody and 20% of people paid 10, they could just price it at 10 for everybody and 80% of people got $2 off, and everyone would've been fine with that.

Peter: That's a great point. As long as you separate out the list price from that discount from the coupon or whatever, then it's okay as long as people have to do something. But when it's just offered. And then when the face value is different for different people at the same time. And you're right, it might sound a little, hypocritical, but, that's the reality that we, haven't yet come to grips with.

Edward: One thing I see on Amazon all the time now, not all the time, but fairly consistently, is I'll go to buy a product and on the main pages listed at one price, after I click through and go onto the product page, there'll be a little box and it says, Hey, click 5% off coupon, click here. Yeah. And I see that regularly. I wonder. If I imagine that's probably personalized that I'm getting, I'm seeing that coupon and other people aren't

Peter: that's right. And that again that's fine. That's totally kosher and people are good with that. It'll be interesting to see it. At what point though, do we graduate from that to just showing different prices and calling a spade a spade?

 I still think we're a long ways away from that.

Edward: Fair enough. This has been fascinating, so think we're agreed that theaters are smart to do this. They should have done it a long time ago. The consumer backlash is going to be negligible. Theaters are just coming up with excuse, that's the word I'm looking for. It's an excuse rather than a reason.

Peter: That's right. They're not willing to do the hard work. They're not willing to figure it out. And given the state that they're in economically, man, they better do some homework. They better find these kinds of revenue opportunities if they're gonna stay afloat. Cuz the old rules do not apply anymore and they get a adapt or die.

Some quick updates:

* I have an essay in progress. Will hopefully get it to you in the next couple of weeks

* Stand up comedy is coming along. My first “big show” is on Tuesday. If you are in Seattle feel free to stop by at Club Comedy.

* If anyone is interested in learning how to edit these podcasts and is willing and able to do fast turn-arounds, just reply to the email and let me know. It’s not hard and it’s kind of fun with the software I am using, but it is something I am ready to get off my plate.

Quick Take aways:

* Here is the article we talk about in the podcast (free link): With New EVs Arriving, Brand Loyalty Goes Out the Window

* Here is the book Peter mentions: How Brands Grow

* Too long/didn’t listen: EVs have not changed the rules of loyalty

Full Transcript

Edward: Peter, now that electric vehicles are around brand loyalty doesn't matter anymore. It's all the Wild West. That's what the Wall Street Journal is selling.

Peter: Oh man, I've heard this song before . It's the same old tuned men whether it was gonna be the internet, oh, that's gonna change everything. Or social media or covid. It's gonna totally upset the rules of loyalty. Yeah, those rules are pretty locked in and I'm willing to say same story here.

Edward: So what are those rules of loyalty? What are the rules that the Wall Street Journals claiming are garbage now? Or are they just missing the entire.

Peter: It all depends on how we define the rules. Where I'm coming from it coming forward it is from the top down. If we just look at actual behavior and just look at the choices that people make over time and how often they switch around and what they switch around from in two, there's some very regular patterns to that.

And we could talk about it, but all if you go a level deeper and say, what are they thinking? How are they making these decisions? Sure. Maybe the psychology's a little bit different, but from a business standpoint, that's all cheap talk. All we really care about is what are people doing?

And in that regard it's no different than people rolling a dye to say, which, which of these different items am we gonna buy?

Edward: What they're, so let me quote from the actual article. It says that basically in the past, whenever someone bought a Ford vehicle, 58% of the time it was a Ford vehicle. Now, when they're buying the Ford Electric vehicle, 66% of the time, it's not a Ford vehicle. So there's significantly more people switching to Ford to buy the electric vehicle than we're switching to Ford to buy the non Ford vehicle.

Peter: Yeah. First of all, we don't even know if it's significant or not, but second of all, it's cuz the set itself is changing. The number of electric vehicles out there is really different. It, no that's just nonsense. It's cherry picked, rubbish.

Yeah. The way it's interesting that we talk about cars cuz the people who first set out these rules that I'm referring to and I know you know it well. There was a guy in London called Andrew Berg and his heir Byron Sharp at the University of South Australia.

They basically say that it's you have your die. I have my die. And what drives our choices is, It's just as if random, and it's remarkable how well that story works. The do sleigh model as we call it. And there's no reason to believe it'll be any different here. Do you think So?

Edward: You say it's random, but that's not entirely true. It's weighted random, right? Because if I have, if I bought, if my last car was like a Subaru Forester I think when I go buy to buy my next car, I'm more likely to buy a Subaru Forester than amped. Whatever the average of all the other market shares are. I assume

Peter: you are so right about that.

It's, yeah. It's not that we're all rolling a six-sided equally way to die. In fact, it's not like we're all rolling the same dye that, that there's gonna be this distribution of dice and even that is gonna be well described by again, a. Jewish lay distribution. Look that word up. And yeah, you, but you have your die.

And the important point is that your die doesn't change very much over time. So whether it is covid or internet or EVs, you're rolling pretty much the same die. And there's just so much randomness around the choices that you make that it appears that there are some patterns, but there's really.

Much to it. The only thing that could be going on here is that we might sometimes. what these like guys like to call a structured submarket. So it could be that though that that just as gasoline split off into leaded and unleaded, then people would move into one corner of it. Maybe we'll see something like that.

But it's not some kind of fundamental change in the way that people make decisions.

Edward: So again, I go back to. We're talking about, there's no, like the brand loyalty is not a thing, but brand loyalty in that example is right. There's something to, even if it's not oh, I love my Subaru Forester.

It's the fact that. That I had a Subaru Forester before, I'm more comfortable. I'm the type of person who would buy a Subaru Forester the first time, which means I'm probably still the type of person who's gonna buy it a second time. Plus the fact that now that I'm used to using it, right? So I'm the, and I know it works and I know it.

Presumably it operated the way I wanted it to operate. And so when I go to buy my next car, my default choice is the same car I had before. Now it could change, but the default choice is there, and that's a form of brand loyalty.

Peter: But, so there, there's two pieces to brand loyalty and you described them really well.

One is just that you just have this natural propensity for whatever reason, to buy some things more than others. That part Absolutely. Positively. And that's why your die might be, a little bit weighted more towards the Subaru Forester. And mine might be weighed a little bit more towards, I don't know, a Tesla or something.

Edward: And is that the selection effect? The fact that I bought a Subaru Forester means that, I'm probably the type of person who buys Subaru forests.

Peter: Exactly. Yeah. Cuz then the second piece to it, which is the part I take issue with is this idea of lock in this idea that my propensities get shaped by my behavior over time.

There's not much evidence to that. Again, if you're a supervisor person Yeah. Then you're gonna lean towards it more than most people would. But your propensity to do it isn't gonna get higher over time. It's pretty. Maybe, but it's gonna pretty much stay at that same level no matter how many times you, you roll that die or buy a car, that's the big piece of it.

We don't see that kind of lock in. We don't see that kind of learning. We don't see all of that romantic stuff that we like to talk about where the customers learn to love us and we learn to serve them better. There's not much to that

Edward: really. But I feel like. Say I'm doing, let's switch to a new category.

Let's say I'm doing laundry. Let's say I moved to a new country, so now I have no brand loyalty at all. The first time I go in I, I look at the shelf and I pick one effectively at random, and I take that home and it works. I feel like the next time I go to the store to buy laundry, I'm gonna go and buy that same one.

Just cause I know No, it works. Rather than trying to gamble on something that I don't know that.

Peter: First of all, what you said effectively at random, there's gonna be a lot of influences on it. It could be the brand name. It could be where it's located on the shelf. It could be the colors, it could be stuff that you heard about, but you haven't even thought about, seeing ads for it on the subway or hearing people talk about it.

So there's a lot of influences there that. Things look random, but they're not. And those messages, one way or another got through to you. So it might be less about the actual experience you had with the product and more about the, some of that implicit prior exposure you had to it, that's gonna drive those choices that you make.

That's, that, that's the real important point.

Edward: Sure. And so I, so you say, Hey, the, whatever those influences were the first. They're gonna influence me the second time, but doesn't, the fact that I used it and it worked influenced me like I feel like it does. I feel like. Once I have a chocolate bar that I like, I'm more likely to buy that chocolate bar again.

Even if it was, let's say it was gifted to me. Let's say someone gave it to me rather than me choosing it. Once I have something that I know works, it feels like why wouldn't I stick with what works

Peter: well? Because of all, you might, you just might have a propensity to, to stay with that chocolate bar, but there's all kinds of reasons why it might be just variety seeking, that let's just try something different.

I like this thing, but, ,

Edward: that may, maybe that makes sense for chocolate bars, but I. For cleaning my clothes. You know what, let's just .

Peter: But, but it could be a situational thing that, oh, my mother-in-law is staying with us this week. And, and she only likes certain kinds of things.

And so there could be things that, that might be perfectly rational. Why you're switching around. But to, to me, as an outside observer, I'm just looking at that sequence of choices. And man, oh man, it looks an awful lot. , rolls of the dice. Now to be fair I mentioned all this work by Aaron Bergen Sharp, and they basically said, you have your dye, and it never changes.

Now, I myself have written a bunch of papers that show that, that model's a pretty good first pass. But every now and again, people. Do throw the old die away and do start with a new one. So I don't rule out the idea of changes, what we technically call non-stationary. But the times that you do that tend to be relatively infrequent and they tend to be dare I say, random.

It's not like necessary because of a pandemic or a or change in the macro economy. It's just, there's just something in your life that. Be related to anything anyone else is doing that just causes you to shift your preferences. And it doesn't happen that often.

Edward: What about sampling? So say I'm a I'm a loyal, I don't know, strawberry jam eater, and I'm doing it all the time. Not because I'm loyal, but because I have a propensity to eat Strawberry Jam. And then I go into the grocery store and they give me a sample of, I don't know, grape. , does that have no influence on the chance of me eating crypto jelly?

Peter: I did say that in, in fact, I'd say it's stuff like that. It's sampling, it's word of mouth. It's seeing a Super Bowl ad that sometimes we'll have people switch around a bit. It could be just a change in which things are on which shelf in this store. And and that's why to, again, to me as an outside observer, I see some switching around again there.

Perfectly good reason. It's cuz someone, forced that grape jelly on me. But it makes it seem like that you are rolling a die. And so yeah, a lot of these influences will will have some impact on it. But to the outside observers, it looks pretty random and it looks relatively steady over time.

Edward: But if, again, if I outside observer, if I'm the marketer who's running the sampling program, , I r I go and start sampling a bunch of these jams stuff. Can I expect that my jam sales are gonna increase and that the people who switch over to start buying that grape jelly are more likely to buy grape gel in the future? Like the impact is more than just the next purchase, but it might be like a series of purchases after that.

Peter: This starts where it gets really interesting. So again, a lot of this. Great. Work by Aaron Berg and Sharp. And Byron Sharp has this book that I'm sure some of your listeners would know called How Brands Grow. And they talk about a thing called Double Jeopardy, which again, I know you know Ed, which basically says if you can get more people to buy it, if you could increase the penetration, the footprint, just the overall number of people who tried The Thing at least once. That in and of itself is gonna be associated with higher degrees of loyalty. So yeah, your point is pretty good. You get more people to buy it, they're gonna tend to buy it more often. They're gonna appear to be slightly more locked in having a slightly higher propensity to buy it. It's really counterintuitive, this idea of. Double jeopardy. But it's really powerful. It's pretty much universal. And it's something you should expect to see instead of it being the exception.

Edward: Yeah. So then looping back to the wall Street Journal Electric car article sounds like they're doing the right thing by introducing the electric cars, they're getting people, so Ford introduces an electric car and it's getting people who didn't buy Ford before to be more likely to buy them now.

So it's a customer acquisition play it brings and it brings 'em into the Ford fold. And then once they're in there, Ford's market share increases because they now have more customers they acquired with a electric vehicle. And then once that happens, the double jeopardy kicks in and they should. Those people who have bought those four vehicles the first time, more likely to keep buying them in the future.

Peter: So you will see some of that. Absolutely. The big key is how to get that wonderful cycle going. And in other words, how do you do the acquisition? And again, going back to the great work of Aaron Bergen Sharp and others, you can't just lean on one attribute. You can't say, this is the coolest, newest electric vehicle. You gotta. Broadly appealing. You gotta really punch up a number of different attributes that, yeah, it's gonna save the environment. But you know what? It's all, it's also fun to drive and it's very safe and and your friends will like you better. So you don't lean too heavily. Don't nichey yourself.

You want to make yourself broadly appealing and that's gonna bring in more people and just, implicitly get them to do to. Or to roll your side of the die a little bit more often. It, it really is amazing how counterintuitive that he did. Double jeopardy is, but you just see it it's funny to see a lot of companies stumbling upon it as if it's something new and unexpected, it's been there all the time.

Edward: And what's neat about this is it does hint at that, the next paragraph in the article talks about how these people buying these $70,000 new electric vehicles it what says they're, I dunno if this is actually true, but this is what the journalist is saying. They're as likely to own a $30,000 Subaru Outback as they are to buy, as they are to have previously owned a $100,000 Porsche 9 1 1 sports car. And whether that's true or not, the idea that we should make these vehicles to appeal. Everyone rather than just some sub-segment. Sounds like a step in the right direction for the marketers anyway.

Peter: Yeah, it, and it goes against the grain of so much of what we've taught and learned in the marketing 1 0 1 s. We just figure out what your distinctive attribute is and hammer that and find people who care about that instead. We're trying to say, not so much be all things to all people, but a step more in that direction.

Edward: Great. Anything else to add, Peter?

Peter: We just want people to appreciate that this is the way the world works, whether it's electric vehicles, whether it's soup, whether it's hotels we expect to see these kinds of patterns.

Happy new year! Expect fewer posts this year. I will keep going with this podcast, but I am shifting my time commitment to (1) get the book over the line. No more excuses; and (2) Work on developing “business comedy”. I will write more about #2 at some point, but for now enjoy the podcast, and be happy if you weren’t flying Southwest the last few weeks!

Full Transcript

Edward: Peter, how were the holidays?

Peter: Wow. It seems like a million years ago, doesn't it? It's amazing. We had that kind of one day after New Year's adjusting and then boom. But it was great. I went down to Antarctica and it was amazing. Super fun, super interesting. What about yourself?

Edward: We tortured ourselves by taking our four little children to Guatemala and Belize.

Peter: Wow, that's bold. That's bold.

Edward: But I think the nice thing is both of us missed the travel meltdown that happened. I think we both got out before everything started falling apart across America.

Peter: It was amazing actually being down in Antarctica. where it's kind of warmer and more pleasant than it was in most parts of the us. What a mess that was

Edward: Go to Antarctica for the heat .

Peter: Well, it was summer and, I think unfortunately the repercussions of that are still rippling through and it's gonna be a while before that all settles down.

Edward: It's interesting. We were flying on Alaska and there's now a direct flight between Seattle and Belize City. and there were three flights before ours, and they're a limited number of flights now that go back and forth. Like they're only every couple of days. And the three flights before ours were all canceled, so we're on the edge of our seats and whether we were gonna get back on time.

Peter: And between all the cancellations that were happening earlier in the summer for different kinds of reasons, staffing, and now all of the kind of Southwest mess, which is more kind of operational issues, we have a very different feeling in the stomach when we pull up to the airport these days.

Edward: One of the news this week, southwest Airlines had a big, big mess up where every, all the airlines kind of had trouble, but I think Southwest had the most at one point, I think they'd canceled half their flights. It was like a huge, huge, huge.

Peter: Yeah. And I guess, if you read, some of the, articles and blogs about it, it seems like it was, it was inevitable, right? That they've been on a bit of a downward spiral in recent years and letting go of some of the operational aspects that would've never happened back in the old days. But, it's a shame it had to hit. Abruptly, and it's such an inconvenient time.

Edward: Well, that's what's gonna happen, right? When you run really lean, if everything's going well, it's not a problem. It's when things start to go wrong, all of a sudden they can go really, really wrong because that's when things break.

Peter: Exactly. And of course, the lessons to be learned are, How not to let them break, but also how to, how to recover from it. And I still think there's a lot of lingering questions about that.

Edward: I think the Wall Street Journal was just publishing earlier this week about how Southwest is now saying, sorry. They're admitting their failures. They're offering, they said 25,000 frequent flyer points so that passengers hit by the travel meltdown. What do you think of that? Like, what is the value. The passengers who are getting that treatment to get them to come back? Or is it the signaling to non passengers that, Hey, we really.

Peter: It's very interesting. My, initial reactions be really, really fun to, to talk through, was not a positive one. About that move. Couple of reasons. Number one, devalues the point. It's like, we're just gonna throw some stuff at you. You spent all this time trying to get people to value points and earn and get status and all the great things you can do. But just to use it as a way just throwing stuff at you, it kind of makes you wonder about the value of that currency and what it really means to Southwest. So there's one reaction. What, do you think about that?

Edward: I think they claimed in that same article they said, those 25,000 points is worth $300, which would, which you put each point at worth more than a penny, maybe it's $300 if you do it absolutely perfectly in how you use it. But I think most people value these points at less than a penny. But you're saying that the fact they're giving points at all rather than giving people the $300, in either future travel or $300 in cash, the fact they're doing it in points, what degrades the value of the point .

Peter: I think it does, maybe less from a fungibility standpoint, but from a psychological one, we try to associate these points with good things and aspirations and bonuses and like, wow, look at all things we can do with it. But here we're framing it or they're framing it as, this is a way that we're covering our ass and, and making up for a problem. And, I think it taints the idea of, of what these points are all about.

Edward: I'm just thinking, when I was traveling, I stayed at,, back before Marriott bought them. I was staying at Starwood Hotels and they offered points for all sorts of things, but that was their go-to for both good things for, Hey, do these things we want you to do and we'll give you bonus points., get our credit card, we'll give you bonus points, stay in our hotels, get more points. But they would also use them for when things went wrong. And I remember times where like, Hey, they messed up my hotel room. Or there was really loud noise at night. Or they had, the pool wasn't working. And in those cases when you said, Hey, you guys made a mistake, their go-to thing was, well, here's some points. And I don't think I felt bad about that. I felt, I think I felt good about that.

Peter: = I think it's different. I think it's a very different situation because, I've of course been in many of those situations myself, but, when it happens on an ad hoc basis like that, it's like, look at me, you know, I was a good negotiator. Look at what I got out of them. So at that point, it seems like a bonus. , I got something that other people might not have gotten. Whereas in this case it's a blanket offer, so it's not so no one's gonna feel like that they got something that they earned it, they're being treated all the same, and it's just sort of being thrown at them. It's not the outcome of some kind of, negotiation or something like that. So I think it's the points are framed very differently.

Edward: Should they have done it below the line? . So instead of announcing that the Wall Street Journal they were doing it, should they have just approached each individual independently and said, Hey, we felt really bad. What happened to you specifically? Here's 25,000 points to make up for.

Peter: And maybe vary the amount of points based on what people paid for the ticket or just how much inconvenience they were. Something like that. I think if they tried to make it a little bit more personal instead of just, again, sweeping it under the rug. Here you go, people, here's your points. Now shut up and let's keep going. I think that it might have just felt a little different.

Edward: Who's to say they're not doing that? Maybe, they led out with the top line saying, Hey, it's 25,000 points to everybody. Here's the Wall Street Journal article. But maybe below the line they're saying, Hey, we're giving 25,000 points to everybody. But for you, We're gonna give you 30 or we're gonna give you 40 because of what happened to you and we wanna make so special.

Peter: Or maybe it opens up that negotiation where people will go back to 'em and say, 25 isn't enough. I deserve more. In which case they would feel a little better about those incremental points that they were able to negotiate for. One of the other things that I find interesting about it, and this just kinda shows our age over here a little bit, is that Southwest, unlike the other airlines, hasn't been as, Has dependent on the loyalty program. They haven't called attention to it quite as much, and for years and years and years, they actively resisted having one. They always said that, look, we're just giving you a good deal. We're gonna treat you really well. We don't need to sweeten it in the way that some of these other big evil and personal airlines do. I kind of admired that about them, but then eventually they caved in. Everyone has to have it, but

Edward: now they're so much money and a credit card.

Peter: They have to do it, and that's fine. It's inevitable they would, but now they're calling even more attention to the program. And again, they're doing it in a way that has nothing to do with loyalty, that has nothing to do with that good feeling. It's just another currency. And it, takes, something special out of it and makes you start thinking about Southwest in a slightly more, I don't know, commoditized way .

Edward: Have you looked at cohorts like this? So, like either an airline or something similar where something really bad happens. The people who experience that really bad thing, do you see what happens to their lifetime value? Does it drop significantly?

Peter: I love that. I I love that. I can't believe that you raised that before I did. We do that all the time. In fact, the most obvious example being covid. But plenty of others, you know, we'll, we'll find cases where there's some kind of either competitive entry or the company engaging in some kind of other big strategic change. Not so much the first thing to do, but maybe the most telling thing to do is to say, , what's the nature of those customers, of the customers acquired during that time and how do they compare, you know, better or worse to, to others? I think that's a really great analysis to do and ends up being, I think, much more telling about the impact of that intervention than just a lot of the kind of day-to-day moment to moment. Nonsense on social media. So it's a great analysis. Now let's press pause on that and pick it up, a year from now and it would be great if Southwest would divulge some of that data.

Edward: To me there's, three effects. There's one which is Southwest did this big mess up. It's in the news. How is that gonna affect my future travel with Southwest? Like how many times was I going to travel with Southwest? I wasn't affected by it, but I heard about it. Is that gonna drive down my future likelihood to fly Southwest then? Then number two is the people who were actually affected by it. They were traveling on Southwest, they released somewhat loyal to Southwest and that they bought one ticket. How is that going to affect their future travel with Southwest and is it gonna be more so than how my, I'm affected? You can even break that down even further by. People who, people who that was their first flight with Southwest. That's their only experiences with those Southwest. Versus a frequent traveler. And then number three is what effect did the intervention have? And I think the problem with this is that, Number two and number three, we can't separate because they're giving it to everybody. Now, if they've done it below the line, they could have just given it to like 90% of the people and 10%, 10% get nothing. You're screwed, buddy. Just so they can measure the effect of whether their intervention paid out.

Peter: I love that. I love that. Or at least to communicate it differently to different people. Some people it could be a more positive message like, Hey, you get a free vacation on us. Or with other people it might be a, oops, we screwed up. You know, we feel bad. So that there still could be ways that they could try to get some insight from it. I suspect they're not, I suspect they're gonna try to make it as blanket and generic and, just get it out there and forget about this thing, which of course raises another problem which is they, giving points away isn't addressing the problem. all the operational issues that have been creeping up on them. The last thing they want is to throw a bunch of points at people and to see issues like this keep recurring, even if it's not quite as severe and public as what happened a couple of weeks ago. They're gonna still have operational concerns. And this whole points thing, the fact that weren't even talking about it, might call even more attention to future problems they have.

Edward: Have you seen any examples like that? Like what should Southwest expect? What should it do to propensity to fly for people like me that weren't, didn't experience it? What should it do to the propensity to fly to the, for the people who got hit?

Peter: Maybe The Thing to do, you gotta give some points or money or do something. But maybe it should be more communications around here's what we're doing to fix the problems. You know, here are the new people we're gonna hire and the new systems we're gonna integrate, and the new processes that we're gonna have to try to keep people alert. Again, I haven't stayed that close attention to this, but, I'd rather hear about the issues and how they're addressing them, rather than trying to just, throw points at people and pretend it's all better.

Edward: I imagine this what the investors would care about more than anything else.

Peter: Sure. And ultimately that might be what matters most, cuz there's no doubt they took a big hit here and I think people are gonna be looking at 'em skeptically for a while now. They need to earn people's trust back and again, it's not clear that 25 k points, closes the chapter here.

Edward: They need a new, what's their tagline? Like, flying the Friendly Skies. Is that Southwest?

Peter: No, that's, United.

Edward: Oh my gosh. What's Southwest tagline?

Peter: Oh, geez. , we should know our airlines better here. You're look, looking it up.

Edward: Lofas. Nothing to hides. That's transparency. That's their, oh my gosh. That's terrible. .

Peter: Yes, exactly. And, and here they're, they're trying to hide a lot, . And again, it's not very evil. It's not a conspiracy, but they're not being transparent. They're not addressing the issues. At least through this one tactic,

Edward: they can do the new tagline. We will try harder. We'll do better.

Peter: and we'll throw some points at you if it doesn't work.

Essay and Briefing production has been low the last few weeks as I have been spending more time on building a GPT-3 powered comedy writing tool (and writing “business comedy” with the tool). If you have not checked out ChatGPT in the last two weeks, you should really do so. It is much slower now than when it launched, but still mind blowing. If it is too slow you can just use the GPT Playground, which is powered by the same back-end. GPT itself moved from 3.0 to 3.5 right around when chat launched. 3.5 is very impressive (it can rhyme now!). Spend some time playing around! It’s not often that the most interesting, most advanced cutting edge technology can be in your hands this early (and practically free).

Marketing BS is on vacation the next two weeks. In early January I will be back with another podcast episode (moving to Fridays), and hopefully some more text. Have a great holiday!

Full Transcript

Edward: Were you a Westworld fan, Pete?

Peter: That first episode in the first season was one of the most awesome pieces of television I ever saw. I was hooked with the first season and maybe watched one or two more episodes. That was it. How about you?

Edward: One or two of the first season, or finished the first season and then one or two of the season?

Peter: Finished the first season, that was, must watch tv. And then in my view, it jumped the shark very quickly after that. In fact, when I saw that news that H B O is gonna give up on it I thought they were just killing the program, but I didn't realize they were actually killing the, getting rid of the catalog too. That, that's crazy.

Edward: Is this the first example of hbo? So HBO has pulled stuff from their catalog before, like they, they pulled some Sesame Street episodes people were upset with, but is this the first time they're pulling their own content from...

Peter: It's the first I know of and indeed, the Sesame Street thing is different because that's not their content, but for them to have stuff that, that should be uniquely associated with them and still does, and on catalog basis, we'll have some value for them to say, nah, we don't need this anymore. It does have me scratch in my head.

Edward: So there's no actual cost for them, whether they put it on the platform or not. There's no cost. But what there is an opportunity cost, and I think that opportunity cost has really been ignored in the past. And now they're saying, Hey, we can take this product that we have and instead of using it on our own platform, we can turn around and sell to some, sell to Netflix, sell to Amazon, have someone else owed it exclusively instead of...

Peter: But it does make you wonder, like sometimes you'll sell content outright and say, here, it's yours now. Or sometimes you'll just license content. Or access. You think about lots of examples where, I don't know where Verizon will let Comcast use Verizon's phone services as a private label kind of play. So they're not giving up on it, but they're saying, Hey, we can have other access points to it as well. I just wonder if, maybe providing broader access rather than giving up on their own access makes sense.

Edward: HBO has done that before, they kept Sopranos on their system, but they offered Sopranos to Amazon as well. So you can go on Amazon Prime and watch Old Seasons of the Sopranos. But what was happening there is it was non-exclusive. It was still available at hbo, but also available at Amazon. I think what's happening here is that there is a higher value in a piece of content that's exclusively available someplace else, and HBO's gonna try to realize that with Westworld.

Peter: So you think it's an opportunity play for them that they'll make more money by auctioning it off to the highest bid. you don't think a kind of a cost cutting move

Edward: No, I don't think there's any cost. The cost to have more video on your platform is as close to zero as it comes. The storage cost is you're storing it anyway. And I think this and the streaming cost, if they're not streaming, that they're streaming something else, or they're streaming a competitor and you don't want your customers to do that. That's how you churn your customers. And so there's no actual cost for them to have it on there. There's an opportunity cost where they can go to Amazon Prime and Amazon Prime may pay, I don't know, 10 million to stream Westworld or 30 million if they get the exclusive rights to it.

Peter: It's all about exclusivity. But again it's interesting how sometimes, people do put a premium on it and other times they say, nah, come on we don't care what door you come through.

Edward: I think what's interesting is that all these streaming services are effectively competing with each other, but they're finding ways that they need to cooperate at the same time. And so you can go on Amazon. Amazon Prime is competing against HBO and Disney Plus and so on, but you can also buy HBO and buy Disney Plus when you're on the Amazon Prime platform. If you go on Hulu that's owned by Disney, you can buy HBO on through Hulu and so they're both, what's that word? Where you're competing and your friends at the same time?

Peter: Frenemies.

Edward: Frenemies. They're frenemies.

Peter: Yeah. And that whole thing about the these kind of affiliate acquisition things that are going on just as you described that the companies getting some kickback from the content providers for selling subscriptions to it, that's something that we as consumers don't really understand a lot of money, a lot. Here it is company like, I dunno, Comcast will pay a bunch of money to get access to the HBO content, so get paid every time they bring subscribers in. It's weird how it goes both ways.

Edward: I've tried to dig into that and I don't know what they actually pay. So when you buy HBO through Amazon, you pay your $15 a month, Amazon gets paid for that. I don't know if Amazon's getting a lump sum for getting the new subscriber, or they're getting like $5 a month for one subscriber. As far as I can tell, that data has not been shared publicly anywhere.

Peter: The data's not shared. And again, I think very few consumers are aware that these things go on. So when a company starts calling attention to it, like Verizon is now doing, you want, maybe you want to elaborate on that a little.

Edward: So Verizon, that is they offered a new deal yesterday. I believe that if you go and use their marketplace, I didn't even know Verizon had a marketplace. Like it never would've occurred to me to go and buy my HBO through Verizon. I have a Verizon phone, but that's not how, if I wanted to buy hbo, I'd probably do it through. Go to hbo.com or maybe I'd pull up my Amazon fire television and buy it. I don't think I'd open my Verizon app on my Verizon phone to go and buy hbo, but that's what they want me to do. And if I go buy HBO through my Verizon app, the. Verizon's gonna give me Netflix for free for a year. So they must be making something from that .

Peter: Oh, clearly they are. And you gotta wonder what the play is there that maybe if they can be your gateway to more and more services, then you'll consider adding others and see them as a bonafide, app store in a way, even though we're, blissfully unaware of it. Maybe that's what they're thinking.

Edward: I assume that once I subscribe to HBO through the Verizon store, I'm not, I'm still using the HBO app to watch my shows. I'm not going through the Verizon app to get the HBO stuff, which I think is what happens on Hulu. I can buy HBO through Hulu and now all of my HBO stuff is available right inside my Hulu app.

Peter: So in a way they're trying to build a walled garden of sorts. But it's not so much financial considerations or even exclusive access, it's just that one, once you're seeing it through gateway, you're just not gonna switch. And then while you are using that gateway, you might access other things through it. Very different than, the traditional approach that apple's taking.

Edward: It's customer acquisition, right? So if Verizon can get me to go buy my HBO through the Verizon app, and now all of a sudden I'm getting Netflix through the Verizon app, I've, they've now acquired me as a customer and getting that second, the second or third purchase, when I decided to go buy Paramount, maybe instead of going to paramount.com. My natural inclination, at least my on the margin, I'm more likely to go buy that through the Verizon app now as well.

Peter: That's the bet they're placing. It'll be interesting to see if people feel any kind of loyalty to one Gateway or another. And what would drive that? Is it the brand? Is it the the interface that lets you access it? It's funny that we always talk about content being king, but now it's at least the presumption is that being the gateway to content might be the king. Not a lot of evidence for.

Edward: It feels like in the real world, we see this all the time, clearly, like I don't buy my tide from Proctor and Gamble. P and g might have a direct to consumer tide business, but it would never occur to me to go to p and g or tide.com to go buy Tide. Instead, I either buy it through Amazon or I. Go to my local grocery store, my local Walmart, and pick up the tide. And it feels like in the digital world, the competition is like a drive away versus in the digital world, competition is a click away and it seems a lot easier switch from one storefront to another.

Peter: Exactly. And what's interesting about it I don't know about you, but I have zero loyalty to any of them. I don't look at any of the, these interfaces and say, that's a good one. If anything, especially when you're doing it through the television, you're trying to spell out names of programs by using arrow buttons. Just horrible. So it's I don't think they've done a good job of, the customer experience of being content retailers in that regard.

Edward: But I think there's something to be... there is a friction for leaving somewhere. So if you are on your Amazon Prime TV or on your Roku tv and you decide, I wanna watch deadwood on hbo. One way you could do it is go to your phone or your computer, sign up for hbo and then go and link it to your Amazon Fire television. Or the other way is you go on Amazon Fire Television and say, hbo, click here, sign up. I'll bet there's a lot of people who do that ladder rather than the former.

Peter: And in the case of Verizon is that a presumption that people would be consuming the content on their mobile device because it's not clear that the Verizon gateway would help you with your home television?

Edward: No. I'm a bit of a loss for the Verizon model, although, yeah if the Verizon, if presumably Verizon has, I didn't even know Verizon had a store, but they had a store and you could buy other things through that store. You could imagine a lot of these guys have these discount stores. You can imagine that you go on Verizon and buy your, I dunno, your AirPods through Apple at a $10 discount if you buy it through the Verizon store. And so if you get, if you start getting used to doing that, the reason to go, the reason to buy through the Amazon Fire television is because it's convenient and it's right in front of you and you're already using it. The reason to buy through the Verizon store is there has to be something else. There has to be the convenience is not there, so they better compete on price or something else.

Peter: I think it's Apple envy I think that folks just have this feeling if we build it, they will come. That we can build the same kind of walled garden that Apple has. If they could do it, why can't we? And just makes you wonder a, is it is it that easy to do? And b well, you look at what some of the pressures apple's facing, is that even the right way to go? If you can.

Edward: That's the other big news we've had this week is that, the EU is now gonna force Apple to have competing app stores. So up until now they've had a monopoly. If you wanna buy something through your phone, you have to buy it through. Apple. Now there's gonna be an, in theory, there can be other stores, but again, we're gonna have that same problem of why would you, as a consumer, why would you go to one of these other stores? Unless they're competing on price or they're not gonna, it's unlikely this other stores gonna have as better a better experience than Apple. So they better just offer things at lower prices.

Peter: It's another example where regulators are stepping in trying to do things that, in theory is in the consumer's best interest. But you go back to G D P R, the whole data protection thing. There, it's, great idea in theory, but now every time you're dealing with the European firm, just all the accept this, click on that. It's, it ends up being a worse experience. You know what just take my data, but leave me. And I think it's the same thing here that they'll have a million stores. You won't know which one is which, and in the end, you're just gonna end up just choosing to go to the regular Apple one and, and paying more and getting less. But it's the one you know and you're comfortable with.

Edward: The one thing the law is doing so I think that this, again, I'm with you, especially eu, they've made so many poor choices and there's some pretty terrible stuff in this recent law. But one thing that I think it's doing right is it's. Companies to basically circumvent Apple payment rules. So right now, like I can't buy a book through my Kindle app because Apple is gonna require 30% payment from Amazon. Amazon's not making 30% margin when they sell the book. And so the result is it's just lock out completely and I need to go. Into my browser, go into app Amazon, buy the book, and then push it to Kindle. And not only can I not buy through the Kindle app, Amazon can't even tell me in the Kindle app how to buy a book and use this new law is going to fix that. It's going to allow people to go and make in-app pur purchases by clicking off their app. They can tell people that they can go to their website to buy. They, it's still not gonna be a seamless solution, but at least the customer communication's gonna be a lot.

Peter: Here's one thing I'm curious to get your take on it. Where I think where the EU stepping in is gonna be a tremendous benefit for consumers, and that's the cables connections to your Apple devices. Pushing people to, u s, BBC or some kind of standard instead of having their own proprietary thing. I don't see any downsides to that. Curious to get your take.

Edward: Oh, really? So I think this is a huge mistake. We've come to, we've come to our point of disagreement. So USB cables have improved dramatically over the last 20 years. What EU is going to do is say, Hey, going forward, you have to use this technology this way. They're basically saying that we have now mastered the USB cable and there's no further technological advancements possible until we as bureaucrats decide to change the law.

Peter: Oh, I wasn't aware of that. I was just thinking of them telling Apple that they gotta get in line with everyone else, but they're telling everyone, everybody has to get in line.

Edward: This is the new, this is the new standard, and the new standard for USB cables is this, and it's not changing.

Peter: Oh, ah yeah. Okay. Yeah, that's that's thrown out the baby with the bathwater. That's a shame. . Yeah, because you can imagine if governments had stepped in, just how bad the technology would be today. If technology didn't decide that in a market-based way. Wow. Yeah.

Edward: All right. Hey. I think we've been all over the map today. I think just I think to wrap it up, to talk a little bit about traditional retail and how, if not just these, all these streaming stores, but actual physical retailer, they've always been in this place. The stores are selling Tide, whereas, HBO is selling movies. But you also have private label stuff that you're selling on your own. And so you are in constant competition with the person supplying all of your product. 90% of your products are being supplied somewhere and you're competing with all of them while you're selling them at the same time. And I think what we're seeing. The streaming world is as it's getting more developed, it's becoming more and more similar. To what we've seen in retail for the last a hundred years.

Peter: And it's great. It's great as long as we can let you know, market forces determine winners and losers. And you we're seeing quite a bit of that happening in the streaming space. It'll look different a year from now, but hopefully better both from a consumer standpoint and from a ability to make money standpoint.

Last week I published the first chapter of Peter’s new book. This week I interview Peter on the book, who should read it, what the conclusions are, how it is different from his last two books, and why he is like George Lucas.

If you are interested in buying the book, you can do that on Amazon, but this week it is 40% off if you buy direct from the University of Pennsylvania press. Use the code “HOLIDAY22-FM”

Full transcript below.

Main Takeaways:

I fed the full transcript into ChatGPT and asked it for the main take-aways from the podcast. I then probed it for more, but it could not come up with anything else. I THINK that it only “heard” the first part of the podcast and ignored the rest. But here is what the AI thinks are the take-aways:

Peter's third book, titled "The Customer Base Audit," is a prequel to his other books on customer centricity. The book focuses on providing insights into customer data and is considered a foundational work. Peter believes that if the book were released first, it would not have had the same impact as it does as a prequel to his other books. He believes that starting with the "sexy stuff" and then diving into the details is a better way to grab readers' attention and get them to care about the subject matter.

Full Transcript:

Edward: All right, Peter. We're back. We're back.

Peter: It's always good to talk to you. Ed. What are we gonna talk about this week?

Edward: We're gonna talk about your book.

Peter: We're talking about my book. Love it.

Edward: I know there's a heck of a lot going on in the world, but we're gonna take a break from fraud and we're gonna take a break from Elon Musk. We're gonna take a break from ai. We're gonna talk about your book.

Peter: We promise not to mention any of those things.

Edward: We told the audience that we're gonna do it. We did an excerpt from your book last week in the newsletter. So if you those listening who have not seen that, you should go back and check that out. And now we're gonna talk to the man himself. It's interesting, Peter, this is your third book, correct? I got the number right?

Peter: It's crazy, but true. Yes.

Edward: Okay. And so my concern always for like big thinkers when they're writing multiple books, is that the first book. The Thing that they've worked their whole career on. It's like the first Beatles album. They've worked on it for the last 20 years of their lives, and they get it down and now two years later, they have to get another album out and they just, okay, let's see what else we can get out. And the sophomore albums tend to be weaker than the first, I feel like with big thinkers like like Clay and Christensen when he releases innovators Dilemma. Earth Shattering book blows our minds on how to think about strategy. And then he proceeds to release four more books after that, that are frankly derivatives of innovators dilemma. Are you being derivative, Peter? What's going on?

Peter: Actually it's a great question. Cuz this book actually comes first, and I mean that literally and figuratively that, if you look at the, of course the book is called the Customer Base Audit, but the subtitle is the first step on the journey to customer centricity. And literally it goes back to a conversation that I had with one of my co-authors, Bruce Hardy, back in 2004 long before I had any inkling of the other work that I would then write on customer centricity. So this stuff is actually much closer to the work that I really do for a living day to day with customer data and so on. Those other books are more of the the so what, like what do we do with the these insights. But this is the book that gives the insights. This is the book that if you were to read the first two and say, wait a minute, how would I know that this stuff is true? Prove it to me. This book does that.

Edward: So is This is like George Lucas making Star Wars. So after he is made that then he can go back and make the movie he really cares about,

Peter: It is the prequel to the other stuff. And again, in some ways it is foundational. In some ways it's really quite different. But I don't think anybody, I'm not saying everyone will like the book, but no one's gonna read it and say it's.

Edward: Okay. And so which I guess if someone's coming to you for the first time, then do they read this book first as a prequel? Do they jump to the prequel? Or is it like, Hey, watch Star Wars first, enjoy that, and then read the next book to understand where that, where that song came from?

Peter: Know, That's beautiful metaphor. And I actually agree with that. See, here's The Thing. I've been doing this kind of work forever. Even since, you were an MBA student 20 years ago and, 20 years before that. And for the most part, with some exceptions, like you people would ignore me saying it's all just quanti and who cares? So what, so I wrote the other books to basically say, pay attention. This stuff matters. You should care your business depends on it. And that's a great way to grab people's attention and get them to lean in and say, oh whoa, how do we do this stuff? This is the book that begins that, how do we do this stuff if we release this one first? People would've read it and said I guess that's nice, but so what? So it's nice to lead with the so what to lead with the sexy stuff and then have people roll up their sleeves and want to dive into the details.

Edward: Got it. So the first book is customer centricity.

Peter: Focus on the right customers for strategic advantage.

Edward: And that, so that book is the why, right? This is how. Not. Not the how, but the why to do it. Why customer centric? So both the what and the how. Which is what and the why.

Peter: Yeah, exactly. What are we talking about and why do we care?

Edward: Cause people, I think back then, I remember talking to you and a lot of people think things like, oh, customer-centricity just means doing whatever all your customers want. Which is, that book says, no, that's not what it is. Let's redefine what customer centricity.

Peter: That's right. And again, it's gotten a lot of people to pay attention and say, wait a minute, we should be doing that. Or, wait a minute, we've been thinking along those lines, but we thought we were alone. So let's start at the C level to get people to really care and to, care about, everything from incentives and organizational structure and corporate culture and stuff that I know nothing about. And then it's gonna charge the the. Quine nerdy people to to do their thing at the service of customer centricity.

Edward: Got it. So number one is, Hey, yeah, buy in. We know what customer centricity is now and we think we want to do it.

Peter: Yep.

Edward: The second book is the Customer Centricity Playbook. Is that like the project plan to actually implement customer centricity?

Peter: Exactly. It's the how do we do it. Yep.

Edward: Got it. And so now we've gone full circle. Now we're back to the prequel, which is the customer based audit, which is the new book. And so that's about. I guess not. I was gonna say how, but it is it how

Peter: it's first steps? It's step one of the how, which is get your data in order. Okay. Don't take our word for it. Look at your data. Let's not even run any models or forecast or lifetime value or any of that stuff, just given the data that you. Look at it the right way. And you'll notice that not all customers are created equal. And you'll get all kinds of insights about how customers change over time. Stuff that you know, I, and you to a large extent take for granted. But for most companies it's sometimes news they don't know about and sometimes it's the polar opposite of what they think they'll see when they look at their customers.

Edward: Who should read which book first?

Peter: See, it depends who you are. That's right. So if, so again if you're c level, as much as I'd like them to dive right into the audit I recognize its place, it would be start with books one and two again, just to be motivated to wanna lean in further. If you are someone who plays around with data, you're a data scientist or maybe you're someone in the CFO's office where you're comfortable with numbers you're, you're interested in accountability and rigor marketing often lacks. Then maybe you start with the audit and maybe after you see the patterns, then you start to say, what does this mean? What do we do about it? And that leads to books one and two. So it really does vary about, who you are and where you are in the org chart.

Edward: Got it. So it, it feels like if you're the CMO and you have the authority to like make this happen, you should probably read the other two books. Probably read the first book. Read customer centricity. If you haven't been bought in on the whole thing, that's gonna get you bought, that's gonna get you bought in or you're gonna reject it, but at least you'll know what you're rejecting and so on. If you're not in the marketing department, so if you're not in the marketing department at all, if you're in the finance department, you could be as bought in as you are on customer centricity, but you're not gonna be. The marketing department to do what you want it to do instead, read the customer based audit. Now you can go and , it's right in the title. You can go and audit the marketing organization to to see what's going on with your customers. And you can provide that information just generally to the organization. And hopefully that causes things to move.

Peter: That is exactly right. And really. That's a really big part of our motivation for doing this. A lot of the work that I've been doing recently, as has been this idea of customer based corporate valuation. Let's basically show the finance people that we can be their friend. We can be their partner by basically projecting revenue and free cash flow accurately and diagnostically. And again, this would be the first. Towards that. Cuz doing that requires models, projections, forecasts and sometimes people will be skeptical about that. How do we know you can forecast it? If we can look at the raw data, simple, just simple data summaries as we say in the book, unashamedly descriptive and see some of these patterns. Daring us in the face about the differences across customers and all that then it just makes you more curious, more willing to start taking that next step and forecasting things out. So this is the starting point for all that.

Edward: It's more than just the numbers though. It's also how you interpret those numbers. Cause I feel like if you just come up like a chart and these are the numbers, that's one thing. But if you pull up the chart in the numbers and they look in a certain way, and you could, and you know what that means when they look that way? Then that's a lot more powerful than just having the chartered numbers.

Peter: So let's talk about that. It's a really great point because yeah, just charts and numbers, eh but on the other hand, if we over interpret, if we start, getting too colorful with the interpretations and start bringing in things like you, Demographics and personality, character no. For us that next level down would be instead of just looking at overall sales, let's break it down into, were you active or not? How often do you buy, how much did you spend when you did? So let's come up with a, simple but powerful decomposition of sales and start looking at those separate drivers.

And here we are, it's holiday season and every company is out there acquiring a bunch of really bad customers. Why are they bad? Is it cuz they're not gonna stick around or they're not gonna buy often or they're only gonna buy when things are on sale? It's really good to know that stuff. And then you could bring in the marketing messaging and all the targeting and all that stuff to basically, Either take advantage of or combat some of those next level patterns.

Edward: So I remember even back when I was a student of yours, we talked about, you talked about how you use this the, when you go and do these analyses, these datas you see the same patterns everywhere, whether it's a long before eCommerce came around and then eCommerce companies, church attendance going to on cruise ships. It just didn't seem to matter what you were doing. You kept seeing the same patterns. I assume that's still the case.

Peter: That's it and that's why doing it in this audit manner, that sounds so formal. And that's exactly the point that instead of just making it up as we go along, which is all too often what happens on marketing because we expect certain patterns to be relatively persistent, that we should be doing basically the same kinds of analyses on a persistent basis every quarter, every year, whether there's a crisis or not, whether there's a new product being launched or whatever. Let's look at things the same way, anticipating that those basically same patterns are gonna be there. And if there are differences, that's when it gets interesting. And that's when we get,

Edward: So let's talk about that. So if the patterns are gonna be the same all the time, you do the audit and you almost know what your answer's gonna be before you start, because hey, this is just, it's almost like a. Let's go and measure. I remember we do these science experiments when I was a physics major in undergrad, and you do the science experiments and at the end of the day, you knew what the answer was going to be before you started because physics is what it is. And if it was wrong, you were more likely that you did the experiment wrong. Then gravity is different than it was last week. And if that's the case here where it's, hey, these are almost laws of nature, that you're gonna see these same patterns over and over again. But what are the differences in the audit? What's the gravity's not changing? What are the variables that change from one audit to the next?

Peter: I love it. So we can take the, the two most obvious metaphors. One would be a financial audit. Again, you do your required financial audit from one quarter, one year to the next. And 99% of things haven't changed. But it's, the little bit of stuff that has changed is what makes the audit interesting and valuable. It's those discrepancies. Those variances, and then, Understand what happened and what we need to do about it. Same thing here. The basic patterns are gonna be the same but the, there's gonna be some nuanced differences for from one period to another. So just like we look for those variances in the financial order. The other great example would be your. Your annual medical checkup. just an audit of a sort and you want nothing to change. , you want it to be exactly the same from one year to the next. That's good. But there's always gonna be some kind of variance. And once again, we're gonna wanna understand what that means. I think it's a absolutely perfect analogy for why we do this and what we expect to see from it.

Edward: And so can we get specific, are there examples that you can be like, okay, here's an audit. Or even a specific company, whether it's disguised example or not, of we did this audit, here's. The second audit, here's the third audit, here's what changed, or here's what we saw. Here's what surprised us to the, even the first audit. Let's start there. You do a company, you do a first audit. What are the surprises that you saw in a specific example?

Peter: Yeah. One of them, as I alluded to before, and again, you and I have talked about endless times, is the holiday season is those customers who we acquire in q4. And again, I've gone on and on about this for years, about how those customers be acquired during that season aren't so good. And sure. Boom, we do this, you using real data set from a real company. And not only is it plain as day when you see it, but it's nice to then be able to go that next level down and say, again, as it purchased, frequency or spend or whatever. So we'll just see differences across, say, Cohorts of customers might be due to holidays, might be due to new product launch competition. Who knows what. You'll very often you will see those kinds of cross. They're slight, but they're persistent and they're important cuz it might be the case that you've overfished your waters. There are no new customers left to acquire. You're only getting crappy ones. So if you start seeing. These cohort level changes, it might tell you that your company is, your customer base is going over Cliff. So it's it's really good in that way. And the other part would be to tie it back to action, to tie it back to products. So let's, instead of just looking at which products we sell the most, let's look at our products through the lens of what's the quality of customers who buy. And to give us real guidance about what kinds of products we should be producing, developing, promoting and it's just, it's a whole different way of looking at product development, but through the appropriate lens.

Edward: Got it. So the customers that bought Product A tend to churn out fast product customers that with their first purchase of Product B tend to last a long time. Therefore, we can afford to lose money when we sell Product B, but we can't lose money when we sell product a.

Peter: Exactly. And I've been saying stuff like that and, General hand wavy terms for years. But it's really great to actually not only demonstrate that it's true, but to be a little bit more specific, a little bit more guided about it. Say, here's how you look at the data to see those differences and again, what they mean. And then of course, the back end is. Audit to action, what do we do about it? And that's where our third coauthor, Michael Ross comes in. Cause I'm like Hardy and me, he's a real world guy and he's been basically doing this kind of thing, again, not a formal audit like we're proposing but informal bits and pieces of it. And then talking about the, so what he's been doing that for years. And all we're trying to do is to make it a little bit more formal, make it a little bit more standardized. And I think the subsequent actions will be easier

Edward: great. Excellent. So that's the first audit. So now you've done that and you've found all those low hanging fruit and you've made the changes but now you recommend what an audit every year, every quarter. How often?

Peter: Yeah. It depends on the cadence of the company. For a lot of, I don't know, say a packaged goods company or a restaurant chain. Yeah. Quarterly would probably make sense. If you're selling mattresses, then probably yearly is more than enough. Really. It's not much different than how often you should be doing a financial audit. It just depends how how turbulent the company or the the ecosystem is. Could be a lot of different factors. You know what, I love that question cuz it implies we are gonna do it regularly. , you know how often I like that as opposed to should we do it at all?

Edward: That is my next question, which is, okay, so going to the specific examples, we've done the audit once we've cleared up all the low hanging fruit. Now is there an example of a company who's done that and then when they do their second or third audit, they find something new and different because of some sort of.

Peter: Oh yeah. Inevitably that's gonna happen. Again, it might be small. You of hope it's small, you kinda hope there's nothing. But the, but unlike physics, the world is constantly changing. There's all these forces on us, and in many cases we don't recognize the nature of the impact of that change until it's like too late and it's really showing up on the bottom line. The audit's kind of a, an early warning system about that. So again, it's fine if nothing's going on, that's good status quo, stay right on course. But when you see those little changes, then you're gonna wanna pursue them because those little things can become big.

Edward: You talked about this kind of like being at the same cadence as financial statements is there any company that's sharing, is any publicly traded company that's sharing these as a financial statements or even, I guess a private company that's sharing it in board meetings privately that are doing these on a regular basis and sharing them public?

Peter: We are starting to see it. And through my company, theta, there's been a couple of companies publicly traded, big, dry and publicly traded companies who have said that we want to start disclosing some of these metrics. We wanna know which ones we should disclose. We want to know what, caveats and guidance we can offer as a result of it. And then basically educate our investors and analysts to understand what that metric means and how it, it shines. A better light on just how healthy our company is. There, there's one that's about to start doing it I think in their next quarterly filings in in probably in February. And it's been really gratifying to see that again, though, I gotta admit, those companies are still exceptions and we want it to be more rural, that more companies will be doing this thing just on their own without needing us read the book and. Do it and that companies are doing it voluntarily just for, the right reasons instead of doing it because they're in trouble or they're defending against something.

Edward: It almost feels more and more like this book should be targeted at finance rather than marketing. I, what I was writing my figuring out who my target audience was for, even for the newsletter, for marketing bs. And I often thought, you know what? I'm saying marketers are doing stuff wrong and people don't like to be told they're doing it wrong. When I get brought in to help out companies, it's almost always the CEO who's bringing me in or the investor bringing me in, not the cmo. If the CMO either is you know what? I'm comfortable with what Ed's doing, I don't need his help, or he's, they're like, you know what? I don't like what he's doing. Please don't help me. And so it's usually the CEO or the CFO that's bringing me in. And so I almost thought about, hey, marketing BS and having a tagline of marketing for finance people. I don't quite go that far, but this almost feels like it's that far. It almost feels like you should be going on finance podcasts and telling them all, start doing this audit, your freaking marketing team.

Peter: Yeah, it's no doubt, and of course we're not doing out there to trash CMOs but you do have to acknowledge that the CEOs and CFOs do have more power and. In many cases are skeptical about, all what those customer experience campaigns or The Thing or the or, a lot of the other customer experience campaigns. What all that is buying them. This is a way to hold marketing accountable to basically say let's see, in the audit, can we see that we're getting a different mix of customers, that they're doing more stuff with us. So again, it's a very regular, accountable, rigorous way to demonstrate the impact of those marketing actions. We hope that the C'S will embrace it as well because they really are moving the needle. This would be the best way to demonstrate it, as opposed to, brand favorability, indices or customer satisfaction. Not that there's anything wrong with that stuff but the audit on these more financial metrics are kind of closer to the bottom line and therefore closer to the hearts and minds of the people who matter most.

Edward: You know what I think this would be great for is a new cmo. If I'm going into a new business one of my philosophies when I started a new company is the first most important thing is getting all your metrics in order and get all your reporting done and getting that all set up. And then, and only then do you create five or six initiatives that we go after this stuff for. And then figure out if you have the team to do it, and then go and figure out your team. But this feels it's like a standardized way to go in and be like, no matter what your company is, use this format to go and get all your metrics set up. Cuz chances are when you come in, they aren't gonna be set up this way. And you need the, if you get them set up this way, you'll understand the business a lot more and you'll be able to track whether your initiatives and your team are gonna be. Moving things in the right direction.

Peter: Amen. I like to give you a specific example of that. I know you like specifics. One of my favorite people who's been doing this, even if you haven't called it an audit for quite some time, is Zachary Anderson who runs all data analytics for NatWest Bank over in the uk, but in his previous gig in the same role at Electronic Arts, the gaming company, that's what he was tasked to do by the ceo, Andrew Wilson said, Zach, I want you to give me the four or five metrics that I should care. And I'm going to tie my compensation like for the next year or two to those metrics. And it was wonderful to see, first of all a CEO kind of going out on a loom like that and trusting marketing type metrics. Giving this kind of marching orders to not just one person but the entire organization and then saying some wonderful results emerge from it. So we wanna see that kind of thing happen. And once again, The metrics shouldn't be cherry picked by the CEO or any one person in the company. We should agree in advance should be a standard set of metrics, standard set of analyses that would apply to pretty much any company. And again, that's what the audit's all about.

Edward: That's great. And so I think what we should do is in February when this company you think is gonna release their financial statements with this format, we should definitely dedicate an episode just to walking through those statements.

Peter: I would love to do that. And of course, this is the kind of thing we're doing informally all the time. Big shout out to my former PhD student and co-founder, Dan McCarthy who really we talk about customer race, corporate evaluation. He's the man he invented as part of his dissertation and every time he sees companies talking about different kinds of customer metrics, like just last week he was talking about clear. Wonderful company and they put out some really interesting metrics and it was just really great to see Dan tear them apart in a positive way to say what it all means and what this, what light this sheds on the company that we wouldn't have known otherwise. And so then there's a lot of examples like that. And again, We just want that to become part of just the, a regular process and not this kind of one off thing that occasionally happens.

Edward: That's good. Hey let's start here. So instead of just talking about Elon's latest adventures, let's when companies release earnings that have this information, or Dan releases one of his deep dives, let's make sure we talk about it on here and we can be the the heart bringers of.

Peter: This is the right place to talk about Ed. Cuz not only do you appreciate and understand this stuff, but you do a great job of putting it in the right context to know where it all fits in. It's not just metrics for the fun of it. And I think it's important to get that full picture.

Edward: That's right. Come here for your marketing news and your Star Wars metaphors.

Today’s episode further explores topics discussed in this week’s essay. In the preamble to that essay I said that there would be no content next week. I am going to reverse that. Next week will be an excerpt from Peter Fader’s new book. Stay tuned!

Full Transcript:

Peter: Ed, I love your piece on strategy versus tactics at Disney, Twitter and Dominion Cards. I love the way that you're weaving together a narrative that's taking three of the super hot, interesting topics and a fourth one that most people don't know about.

Edward: It's funny, the whole Dominion Cards thing. I've been, I started playing this card game back in 2011. I went to the national Championships in 2012. And I just really enjoy it. It's like the only game I can think of where you actually need to figure out a strategy at the beginning of every game.

 I've been sitting on this idea of dominion cards as a way to talk about strategy versus tactics for many, many years now. And I've never felt really found the right kind of hook to put it in. And then when this thing happened at Disney on Sunday, I was like, aha, the hook is here. It's time to pull this out of the filing cabinet.

Peter: Love it. Well, as a, reader of the column and as someone who thinks about these issues, there's kind of two natural questions that just has to be asked. I wanna get your take on it. So, first. How do you define or where do you draw the line between strategy and tactics?

Edward: I think strategy is figuring out what you should be doing and it's trying to figure out what the end point is of where you're going for, and tactics is all the stuff that gets you there. Strategy can be done a bit in isolation. You can go back into your ivory tower and think about what the dynamics are coming out with your strategy and then tactics are going to be very much based on what's happening on the ground. What's happening at any given moment, how the competition is reacting, how economics is changing what type of people you have on your team and any given moment. Those are all tactical decisions like that a consultant is not going to be able to help you with unless he's actually there on the ground.

Peter: So I always have a hard time with it, to be honest. Maybe this is just me being narrow minded or something. It's not just the next move is it the next three or four moves. Be specific about strategy versus tactics in chess, and then let's branch out to these other real world stories.

Edward: I'm not an expert in chess. I'm actually teaching my kids how to play now, I'm learning along with them. But I think in chess there is a correct strategy. I think strategy in chess is things like control the center of the board would be a strategy. Be willing to sacrifice your piece in order to gain position in the board, or, move your pieces in such a way that you're able to castle fairly early in the game. Those would all be strategies, things that you're working towards over a longer period of time. Tactics are, given what my opponent has just done, what should I do next? And tactics can, you can look far into the future for tactics. There's nothing that stops you from looking nine moves ahead to the right tactic would be in that particular situation. But I think strategy stays in chess at least. I think strategy stays the same. There are correct strategies into chess and there are incorrect strategies in chess. Whereas tactics are gonna change every given game depending on what your opponent does.

Peter: So let's take that, and again, it's still little fuzzy. I mean, you're being more specific, but still, and I'm not gonna press you on exactly where one begins and ends, but Disney. Disney. Disney. Disney. It seems like the narrative as you said is Iger had the strategy. Chapek's job is to come in and execute on it. Few missteps here and there. Expand on that beyond what you've said in the piece about that trade offering strategy and tactics.

Edward: I think most people are agreed, even the disgruntled shareholders, is that Iger's strategy was the correct one or is the correct one, which is that the cable bundle is getting hammered and Disney in the past basically had a huge amount of leverage over the cable providers and was able to extract large amounts of money from the cable providers by the fact that they had this differentiated content both the traditional Disney content, but also the sports they had with ESPN. And that was a great place for Disney to be and it still is, frankly, they still extract a huge amount of money from the cable providers, but that is not the future. Clearly we see more and more people, especially young people cutting the cord, not going with cable television and moving into streaming. And it was really a question of when did Disney need to move in that direction and how long could they keep their pound of flesh from the cable companies and hold onto that as long as possible?

 So the strategy then becomes let's move on. Let's go direct to consumer and scale up our Disney Plus product. There's tactical problems in doing that because, Disney bought Fox, which came with 20th Century Fox, which allowed them to add a whole ton of more content to get like the breadth required to win in a streaming war. They got control over Hulu, but they didn't get full ownership of Hulu. And so Comcast still owns a chunk of Hulu in the US which makes all sorts of challenges for Disney on a tactical level on how to actually get to the place where they wanna be. But I think the strategy is clear. It's we wanna get to the point where we are owning that direct to consumer relationship. We are monetizing through a subscription product. We are monetizing through additional add-ons that people can do on top of that. And we are monetizing through our vast aray of merchandising, theme parks, cruise ships, and everything else to allow people to spend more and more and more with us. That strategy is still where they're going the last two big things Iger did before he left, were launching Disney Plus and buying Fox,

Peter: LEt's be clear that Chappek isn't against any of those things. Strategically as you've pointed it out, he's on the same page. It's all just tactics not being quite the same as what Iger might have done or might now do.

Edward: And even on tactics, I'm not sure, if you look at the things that have hurt the stock price and where Chap has taken ahead, like first of all, Disney Plus has grown faster than they ever thought they would. He over delivered on that. Whether that was his doing or the, the fact is the metric is much better than anyone expected, but there were mistakes along the way. He has fought. There's been lots of fights with the creative side of the organization. Chapek comes from the theme park side. He came into the CEO role and then immediately Covid hit and the theme parks all went to zero. So he was forced to figure out how to do Disney plus where all their revenues coming from for the foreseeable future. Now things have flipped and the theme parks are just minting money. They're doing really, really, really well. But he's pissed off a lot of people by raising prices dramatically. But again, I'm not sure what Iger would've done differently in that case because the demand for the theme parks has has gone way, way, way up. So in the short term, you can't go and build more theme parks. So supplies is what it is. And so you're left with two choices. Either you are raising prices or you are giving a poor consumer experience, either because the parks are just packed full, and they're just unpleasant, or you're turning away people at the door who have booked a vacation. And so none of those options seem great, and of those options, it feels like raising prices was probably the one that Iger would've done as well.

Peter: Exactly. So here's the big question. I agree completely with that. It might be that how things play out now tactically and strategically would be the same regardless of which Bob is at the helm, but just having Iger just seems to have this warm glow that will just make the same tactics, not only more palatable but downright genius because they're coming from Iger instead of Chapek. What do you think?

Edward: I think that's absolutely right. They're in such a tough spot right now. There's so much going on and it's super, super, super risky what they're trying to do. I think everyone knows that there's really no choice but to go down this path. But also everyone knows that it's a really hard path to go down. And so not only do you need to have the right strategy, which I think people think that is true. You need to have the right tactics, which frankly I don't think Chapek, if he messed up on tactics, it was on a marginal basis. But where there was a bigger mess up was a bunch of execution of those tactics. And so things like the Black Widow movie early on in the pandemic, they decided to take that out of the theaters and put it onto Disney plus. And I think that was a very rational tactical thing to do given the situation they're in. But in execution, Chapek got into a big fight with Scarlette Johansen, who really came down hard, sued Disney. They hurt their relationship with her. Now. Disney ends up hurting their reputation as a good place to go and work if you're a top tier creative. In the short term, maybe they make a little bit more money on the movie, but in the long run they damage the relationship with the very people that are creating the product that they need to excel with.

Peter: Fair point. All right, let's pivot from DS to SBF and FTX. There you say that, or at least you're quoting SBF saying strategy was fine. The tactics were at fault. You don't really mean that, you're just saying that's what he said, but you think otherwise.

Edward: I'm no financial expert, but I've been following it as closely as I can and it sure looks to me like there was all sorts of... So Fbf owned two companies. He had ftx, but he also had the trading arm, Alameda Research. And there was money traded back and forth between those two organizations. And what I understand is. So imagine if FTX had, I'm making up a number, 10 million tokens and they're sitting on them and those things are worth whatever someone's willing to pay for them and Alameda comes on and says, Hey, I'll buy one of your tokens for a thousand dollars. So now all of a sudden the stock value of those tokens is a thousand dollars times 10 million, which is a huge amount of money they're sitting on. And then they basically end up using that valuation as collateral to do all sorts of loans and leverage to go and do other things with their money. FTX then takes in a bunch of customer deposits and then loans those customer deposits over to Alameda. Alameda then is then sitting on a bunch of these tokens that they're using as collateral against the borrowing of that real money that people put into ftx. Alameda then loses a bunch of that money and it all comes tumbling down when they realize that their collateral is not worth anything. It's all made up collateral. That's my understanding of what happened. Nothing like that has happened exactly before, but things like that have happened before. It's effectively fraud. It's fraud and theft. SBF, however, went on and interviewed Kelsey Piper over at Vox, and his argument was hey, we were doing was great. We were doing all sorts of awesome things, but our record keeping was terrible. We just made a bunch of like rookie terrible, incompetent mistakes. The new CEO who came in to run the company, Is backing SPF up in that yeah, this whole thing is a mess. That everything here is. What was his quote? I quote, I quoted him on my piece. He said, never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. And this is from the guy who also oversaw the bankruptcy of Enron.

So it was a mess. They clearly, clearly, clearly were tactically incompetent and SBF is claiming that they didn't know they were stealing all these funds. It's entirely possible that he's right because they seemed like they didn't really know anything that was going on. And there was no financial backups and no guardrails for anything. But generally the overall strategy was built on a house of cards to begin with. So whether their tactics were correct or not maybe it wouldn't have collapsed as badly if they had great tactics, but it was gonna collapse one way or other.

Peter: In this case, it's not strategy versus tactics, as you say in the title of the piece, it's and. They're doing bad and both, and it's hard to, pin the blame on one type of decision or another.

Edward: The hard part of writing this piece was that given the fact that their strategy was so unethical and terrible and their tactics were so incompetent, how did they manage to get as big as they did so that they caused this disaster to happen.

Peter: It's crazy. But but then speaking of which, it takes us to our third character of the week, Elon Musk. Now, you and I had a conversation a couple weeks back. We were saying generally positive things about verification, badges and just the possibilities of getting the business model right. And of course it's too early to tell for sure. But, these couple of weeks since that conversation, well, things have gone differently.

Edward: Specifically the thing that we talked about, which was the Twitter blue, $8 a month to get certified.

Peter: Verified.

Edward: Verified. Verified. And what happened was that the verification process was effectively just having a credit card. So it wasn't like they matched. Your name that you put on Twitter with the name on your credit card or check the address, or had you send a a driver's license with the verification, it was a matter of pay the $8 and you can name yourself whatever you want.

 In terms of. Strategic idea, allowing people to pay $8 to get certified seems like a very valid idea and a very, I don't know if it's, it is the right strategy, but arguably, at least we argued a couple of podcasts ago, is that it was a good strategy. In execution what that allowed them to do because they didn't create any of those guardrails, they didn't have any verification process beyond paying the $8 is people impersonated all sorts of companies. They impersonated Elon Musk, they impersonated giant companies and had them say ridiculous things with a certification check next to them, and it became a big joke. And so an example of potentially a good strategy with very weak tactical execution.

Peter: And what about the broader issues? The way he's running the company, day to day tactics, strategy, whatever it is, it's not good, but what, which basket would you put it in?

Edward: I think there's an overlap. First of all, part of it seems like he's kind of changing his strategy on the fly. He's going back and forth and changing what his strategy is, but I think in general, his thesis going into the company was that this company was mismanaged. We need to eliminate a large number of people at the company and replace them with other people. We need to change the culture of this place from one of working from 10:00 AM until 3:00 PM to one where you're working from 7:00 AM until midnight and coming in on the weekends and turning into a hard driving startup type culture with a much smaller team that's much more dedicated and highly compensated. And it feels like that's his strategy. And he wants to go to create a company that ships product really quickly, makes mistakes, fixes them, and keeps going. That is something that I think most owners of most businesses would want for their companies. The challenge becomes how do you get there from here? And that's where there's been lots of flailing and failing. That doesn't mean the whole process is gonna fail, but there's been lots of mistakes made in that process of getting from A to B. In a situation we're getting from A to A to B is gonna be hard no matter what, even if you did it perfect.

Peter: So what's your longer term prognosis? Do you think that he'll get this strategy right and line up the tactics appropriately?

Edward: I don't know. It's so hard to know. I think the strategy is right. The question is whether the company will survive the process of getting them there. They're burning through cash. As an example, they laid off a bunch of people via email that work in Europe, and you can't actually do that. It's illegal to do that in Europe, so all those people that they fired in Europe actually aren't fired, they turned off their salaries. They're not making any money anymore, but all those people have a class action lawsuit that's going to go against Twitter and there's going to be a huge fine. That type of stuff matters in a situation where it, if they succeed, it's gonna be by the skin of their teeth. They're the Amazon in 2001 where we need to keep doing everything right and working our butts off to keep this plane flying over the treetops so that we can take off and circle the planet. But before we can circle the planet, we need to get over these trees. If they get over the trees, I think there's a good argument. Twitter's a fantastic, unique product that can do all sorts of incredible things and far more than the old team was doing. But he still has to get over the trees and that's where it's a lot unclear.

Peter: Yeah. So it takes us to kind of the bottom line, as you say, and I don't think anyone would disagree. Strategy becomes far more urgent in rapidly changing environments. Who could argue with that yet at the same time, in rapidly changing environments. We start rearranging deck chairs, which is far more tactical.

Edward: I think when things are going smoothly, when things are not changing, strategy frankly doesn't matter very much. Tactics matter a little bit, and execution matters a lot. When you're in a place where things are changing rapidly and you need to get to someplace new, all of a sudden strategy matters a lot. But that doesn't mean that tactics and execution matter less. They still matter a lot too. It just becomes like everything matters. It's becomes so easy to fail. You only need one chin in the chain to break and you're not gonna get there.

Peter: And I think all three of these cases show that interplay. So again, it's not strategy versus tactics, but focusing on the and, getting to sync up properly and, easier said than done.

I have been exploring a new AI tool that is allowing transcript creation while I edit the episodes. It’s not perfect, but it’s pretty great for those who prefer reading to listening. I plan on including transcripts of all episodes going forward.

Also: Apologizes that yesterday’s essay did NOT have more than 1-second of audio. I am still working through these tools. The audio should be live on that post now (I chose not to re-send it to your email)

In This Episode

Fader and Nevraumont discuss Elon Musk’s plan for charging $8/month for a blue checkmark (plus other benefits). What metrics should they use to know if it’s working? Can subscription revenue compete with advertising revenue? What are the different types of Twitter users?

Keep it Simple,

Edward

Full Transcript

Edward: So, Peter, do you have a blue check mark?

Peter: I do. I'm so fortunate. Of course the question is how long will I keep it and what will I have to pay to do so, and what benefits will I get associated with it?

Edward: How did you get it? Was there a process you went through? Did the school help you do it?

Peter: No, it was actually through my previous company, Zodiac the one, we sold to Nike. That at that point the CEO said, You know, we ought to get blue check marks just to give us more credibility. It was a pretty simple application process, but you know, a lot of people who have been trying to go through it, who are at least as qualified as I am. It seems like there is, or at least was, something pretty arbitrary about it, but hey, I'm one of the lucky ones. ,

Edward: You're part of the in group. When I was at General Assembly, the, my head of PR came to me like basically on day one on the job, and she's like, We need to get you a blue check mark.

And I had to go and change my Twitter account was linked to my Gmail address and I had to switch it to my general assembly email address, and then she went to town and did her PR stuff to try. Get the blue check mark, but it never happened. Two years of trying it and never got the check, I even as a CMO of general assembly I was not renowned enough to get the check.

Peter: That's exactly my experience cuz I think you honestly, in a position like that, deserved it more than me. I think maybe the professor thing helps, but there's plenty of professors with the big followings and great content who don't have it either.

So maybe that's what the, All the musk nonsense will actually bring some order, some predictability to who gets a check or who gets which kind of check cuz there really should be more than one of them.

Edward: There kind of is. So I guess for those who... I imagine all of our listeners know what's going on right now, but just a really quick summary is that Elon, there was a rumor that went out. Was it Vanity Fair or The Verge? It was the Verge last weekend that talked about how all the blue check marks are gonna have to pay 20 bucks a month just to keep it. And then yesterday we're recording this on Wednesday, yesterday, on Tuesday, Elon came out and said, No, it's gonna be $8 a month.

And it includes not just the blue check mark, but a bunch of other kind of benefits, if you will. And then on top of that, really red down people like Joe Biden for example, will get a, not a blue check mark, but like an. A descriptor underneath them that says that they're authentic and real. Which was the original purpose of the blue check mark to begin.

Peter: Right, right, right. Yeah. Really a validation, not just a status symbol. But if you look at some of the benefits that they're talking about, some of those benefits make sense for creators. Some of the benefits make sense for readers, and I think it's important not to mash the two together.

That's why they really should be a different kind of subscription based on what you're using. Twitter.

Edward: I guess so, so big part of this, it's interesting. The last essay I wrote for for marketing BS couple of weeks ago was all about paying for status. And this, it feels initially like this is paying for status and a lot of that's what it is, right?

So you pay to get the blue check marks right now are primarily a status tool, although I know you have some features that us non-black marks don't have. But going forward this is going to replace that blue check mark you are paying for the status. But the benefits you get seem to be around production.

So if you, the tweets that you produce are more likely to be seen by other people you're, you get listed first in the mentions. You get move to the top of the replies. And so there's a bunch of features like that. So you, the stuff that you produce is more likely to be seen, I don't think.

And that makes sense. Yeah. And that's good for everybody in some ways too because it kills the spambots or if you're a spambot, you're not going. Verified, you're not gonna get the blue check. And so all the spam bot stuff gets pushed to the bottom. But so does everybody. So do all the non blue check mark.

People get pushed to the.

Peter: Now for me personally I, yeah, I'd pay something to keep the blue check, but I'd also pay something to improve my reading experience. I would love to have more control over the timeline. I'd like to get inside some of the curation algorithms and, tweak them to, to, to my benefit.

To me that that's more important as a Twitter consumer than a Twitter.

Edward: And, but now, so those benefits though, should, are those benefits that they should be charging for, because every social media platform has that, which is, hey, we want to show people the content that engages them, that they would enjoy.

Why if you're able to do that, if you're able to show people better content, they're gonna use your platform more, and you're gonna make more money on ads, at what point would you be like, Hey, you know what? We could make this person's experience better, but we're gonna put that behind a paywall and we're gonna give them a worst experience.

That just, it feels like that's not The Thing you want to be charging for.

Peter: That's a big philosophical question, but you're right. That, that this is how everybody does it. So presuming that a Twitter's gonna follow that mold, the most obvious one of all is if I pay a reader subscription.

Don't show me any ads, right? Just like with Spotify, give me, gimme the ad free version or maybe have, a new Netflix one where it's a lower price with some reader control but some minimal number of ads. So there should be something about that. But also if I'm gonna pay that I wanna have complete control over whether things are in chronological order or whether I want to trust their recommendations I'd.

Do my own curation like that.

Edward: That's fair. But you can do that now. It's Twitter's ability to produce things and new product features have been very slow. But right now I think your default is a algorithmic feed. But it's fairly simple to change that to a chronological feat if you want to. I don't think many people do but it, but the ability is,

Peter: I find that it still does chronology in a weird way and sometimes then jumps back a few hours in time and maybe it's just me, I don't know.

But they, they definitely can and should clean that up. But like I said, there, there should be different kinds of features for different kinds of users that would involve different kinds of subscriptions. And of course there'd be the grand subscription that would give. Everything for a super power user who's creating and consuming, get all those features.

Some, bundled price.

Edward: Nice. And so right now, I was I guess the question on everyone's mind right now are the screaming and shouting people on Twitter are talking about the fact that hey, the, like Steven King for example the writer. Went and posted something about how he's, there's no way he's gonna pay for this because Twitter should be paying him.

And in some ways he's right. Because if you look at right now the new Blue Check mark program is gonna be, the benefits are not for the readers. I guess the little bit they think he said something about half the normal ads that you would normally see, but majority of the benefits are, hey, the status benefit and a bunch of production benefits, like your content gets seen more often.

So it's producers that are gonna be charged for this, but at the same time, isn't it the producers that create the value for everybody else?

Peter: Of course that's true with all social media platforms. I don't think Twitter's any different in this regard. And I think a lot of people are making noise about it.

Because of who is in charge now. I think it's just a visceral reaction. Oh, it's Elon Musk. I think if Twitter had announced changes like this at another time, a lot of folks, I'm not gonna speak for Stephen King or some of the other celebrities would say yeah, it's about time that, that I get those extra boosts that I deserve.

And you know, what, eight bucks a month I'm paying more money than that for a lot of other content subscriptions that are used far less.

Edward: Fair enough. How what do you think, how, what percentage of Twitter's revenue then, if this, assuming this thing works and it's successful at all, like, how much revenue can you get from this subscription product versus the advertising model?

Peter: It's a great question. It goes right into my strike zone, which is we could look at the next year o over the short run. They're so reliant on advertising that there's no way that they could come close to matching it with subscription revenue. But in terms of long run customer lifetime value, if they start to ratchet down the ads and focus on bonafide benefits to creators and readers through a different well calibrated subscription services. You give 'em a couple years and they could completely flip it and make it almost entirely subscription based. And that's the direction they should be moving in. Not only would that be steadier income, you'd have a better sense of who's doing what you'd have much better metrics to use for internal and external guidance. Right now, everything they're doing with monthly active users and daily active users doesn't make a whole lot of sense. It's not easily tied to, to revenue so that they can really improve the stream of revenue, but also the predictability the understanding of it. And that's great.

Edward: So your prediction is, call it in three years, the majority, more than 50% of the revenue comes from subscriptions

Peter: If they play their cards right, and it's real hard. To be pro Elon. It's just unpopular position to take, but it's...

Edward: low status. It's low status these days,

Peter: ...and so I'm gonna avoid the personalities and I'm gonna avoid endorsing or critiquing some of the statements you've made. But just if you just look purely at the business decisions and the urgency that he's bringing to it, it's about.

Edward: The only other social network I can think of that has this both model where you can use the network for free or you can pay to get effectively a blue check is LinkedIn. Like LinkedIn, you can become an in member or something like that.

Peter: Yep, yep.

Edward: But I don't think LinkedIn makes much money off the in members, do they? It's not significant, is it?

Peter: I don't know. I don't know if they break that out, but I know I'm paying my $300 a year to, to get some of those benefits and so on. I don't use them all that much.

But but sometimes it's really really valuable whether it's for some of the companies I'm running or the books I'm writing. I do it without batting an eye. Now granted, it is covered under my university, research and teaching budget. But I do it with without even thinking. And that's, I'm paying I think a good bit more money than I'd be paying for Twitter, which I use a lot more than LinkedIn.

Edward: Yeah, fair enough. What, so what do you use the LinkedIn one for? So you're paying for the premium, like I've paid for it from time to time, mainly for recruiting purposes. What are you using it for?

Peter: So a part of it is to have a little bit more control to both the get a better sense of who's looking at my profile. To have more control about being the block who sees mine being able to send, not that I do a ton of these InMail messages, but again, just sometimes I do want to do a bunch of that.

I run a separate group and to have a little bit more control over there as well. So it's a bunch of little things. Again, any one of the things, the most important things I get out of LinkedIn would be far less significant than the benefits that I'd seek from Twitter. But I still do it anyway. I don't have a problem doing, so it's just matter of finding the right price point.

In LinkedIn's case, they have a bunch of different tiers. I'm not even sure which what I have, and that's the direction Twitter will go as well.

Edward: That's interesting. You're gonna pay for the Twitter check, and you're gonna expense it through your department?

Peter: That's a good question. Whether I, I could do that or I guess so. I mean it's in some sense no different than LinkedIn and I certainly spent a lot of time talking about my research, my teaching, the books that I'm writing on behalf of Wharton, including a new one that just came out this week, The Customer Base Audit.

Edward: So we should talk about That should be our topic next week. Next week our discussion gonna be your book.

Peter: I'd love to do that, but right now it's Blue Checks instead of Blue books. So yeah I think I would do that and I would encourage others to do the same.

Edward: That's an interesting point too. You got your blue check because of your work with your last company, you're gonna be able to pay for this next check with the expense it, I imagine the CEO of every company in America is gonna expense this and then the executive team and all the PR people.

 Right now it feels like the blue check marks are disproportionately journalists and authors, but is in the new blue check mark world become people that can expense it will just take over.

Peter: And of course then there'll be a hierarchy of checks and there'll be clear criteria beyond money about what it takes to achieve one. You can't just purely pay for blue check. You have tweet enough. You have to show some credibility that there was. That application that you and I have both tried to fill out. And so if you start making it aspirational that in order to move up to, the next check you have to tweet a certain number of times, you have to engage and, do other things that are beneficial to the Twitter community. If we make it incentive compatible for people to, to lean in and participate, that's great. It's good for everyone.

Edward: That's interesting. So you're saying $8 a month is not gonna be enough, $8 is what it costs, but you still have to, You have to jump through some hoops in order to be allowed to pay the money.

Peter: That's right. Exactly. You have to, again, establish your credentials and you have to participate enough to really earn it.

Edward: It goes back to the, what I talked about a few weeks ago, which is here you're paying for status, but if it's only dollars, then there's no actual status involved.

So it has to be, you have to do a bunch of stuff. You have to be legitimate, and then you can pay for the status levels. It's, I did some math this morning. So right now if every single blue check mark on Twitter starts paying for it. And no, no one else does. Only the blue check marks pay for it, it's pretty minimal revenue. It's something like 50 million per year on a business right now is doing what, 4.5 billion? And so if that's all it does is he ends up milking the blue check marks. It feels like this is a bunch of noise for nothing. And so it only really works if he gets a significant percentage of the base.

I think it was something like, If 10% of the base start doing it, it gets can't remember what the exact number was, like half a million dollars or something like that. He has to get a pretty high number in order for it to be significant against his advertising, at least at this price point.

Peter: And that's exactly why it's a multi-year initiative. It, it's not gonna happen overnight. And again, with all these haters out there, whatever he tries to do, people are gonna declare it to be a failure a few months from now. But it is a behavioral change on the part of people to actually not only seek out the status and pay for it, but to change their Twitter habits to.

Be a better member of the community. So I think as he changes, not just check marks and basic functions, but as he changes the nature of the way that, that people use Twitter I think people will start to see more and more value, more and more urgency to start doing it. Instead of feeling that that he's holding a gun to their head.

Edward: What metrics should he be looking at? So he goes and pulls the trigger on this and some people sign up for it and some people stop using Twitter. What numbers should he be looking at to know whether or not this is going in the right direction of whether this is trending to the place where three years from now it's gonna be the majority of his?

Peter: It starts to become the things that we really can measure and manage effectively, customer retention. So we can say, how many new people have signed up for a particular status? Of all the people who signed up last year how many of them have retained it? Things that are very easy to measure.

You think about all these lawsuits, obviously the big one that more or less forced them to buy the company. There was another one last year that I was actually an expert witness on Twitter's behalf about measuring daily active users and monthly active users. It'll be great to move away from that to metrics that are harder to argue about and are more directly related to the health of the business.

Edward: And measuring the growth of this thing is easy, right? So you can, How many people signed up and are paying $8 a month? What's your arr? How much revenue are you making on this new product? How many people are signing up per month? How many are churning out and canceling after one month? That feels like the upside, the revenue side is easy to measure. The downside of "Hey, because this is there, I'm Steven King and I'm gonna stop producing content on Twitter'" how does he know how much damage he's causing because of this?

Peter: That's a great question, and of course we'll never know for sure from what people are saying. You have to run the experiment. You have to try it. Again, maybe with multiple tiers. I think Musk, I think to his credit, look, the fact that the rumor started at 20 and now he's saying eight. I think he's finding out what the market will bear. Both in terms of price and in terms of what features and functionality needs to offer.

I think they're gonna find a pretty comfortable middle ground where serious producers will be compelled to stay with it, but will feel that it's worth their while.

Edward: But what's, the metric? does he take number of tweets written by non-paying customers and track that on a day to day basis. Is he doing like an individual customer level model where he takes all his producers, everyone who's producing tweets and tracks them over time and. Use, almost like almost treats like a tweet, like a transaction to try to measure if someone's, if a transactor, a transactor, a producer is churning off rather than buying a product.

Peter: I would love to see that. And if we think about that kind of behavior we see very commonly in, in different kinds of settings, like even for a lot of different non-profits. A museum will look to see how many people are going to the museum and how that relates to whether they renew their their membership. Companies are doing that kind of thing all the time. Again I've seen some of the insides at Twitter and they have not managed that well. They've had a lot of really ad hoc measures, some of which have been around spent, time spent on the timeline tweets post and so on. But they haven't come to agreement on it and partially cuz these measures they've looked at haven't been directly tied to revenue, which is engaging with.

Edward: But it's interesting though, cause there's two parts of it. There's the producers and for them, whether they look at ads or not is almost not relevant. It's whether not they creating compelling enough content that's keeping other people engaged on Twitter? Because where the revenue's coming from is all those people who are just reading the tweets and seeing the ad spending to me it's being a daily active user and a monthly active user and time spent on site. That's the metric that's determining how well they can monetize is not?

Peter: And, but I love the way a company like Spotify is doing this sort of thing. And now again, we can't call them necessarily a paragon of business success just in terms of raw profitability, but I think there's a lot of respect for what they do and how they do it in these terms, having the advertising based model, the subscription based model.

And they know that when they're bringing a new artist on board they will look to see. Not only how often that music is listened to or downloaded, but the value of the customers who engage with it. And so they can actually start to put a price tag on an artist based on the value they're bringing to the platform. Of course, that's something that, that's negotiated, but they're doing it in a data driven way. No reason why Twitter can't be doing very similar kind of thing.

Edward: Got it. So yeah, so they can put up like, Hey what, how much value is is Donald Trump bringing to our platform? How much value is Taylor Swift bringing to the platform in terms of driving other people to engage in that content and keep them on the site longer so that they can sell the ads?

Peter: And staying with the Spotify or even Sirius XM model, there might be cases where it makes sense to pay someone, especially as other micro blogging platforms arise. And we hear a lot of talk about them, usually for political reasons. Sure. We might have bidding wars about about content creators. That would be a very healthy ecosystem, and at that point, they really have to deliver meaningful value to the creators and the consumers.

Edward: It's interesting. Spotify is doing the reverse right now, and so everyone's getting paid to be like all the music, all the musicians, all the, every time a song is played, the musicians are paid, but they're allowing musicians to basically bid to have their songs played more often on playlists and so on. And effectively the musicians don't have to pay themselves, but they're basically bidding in lower. Lower royalties. "Hey I'll take a lower royalty in exchange for being played more often". And I think it's almost like Twitter's doing the reverse of that. If everyone's gonna need, everyone's gonna need to pay. But now, once I know the lifetime value, once I know that Taylor Swift is worth a lot, I can go and take that $8 that she's paying and I can discount that to her.

Peter: Love it. I love it. Now, of course, Spotify has it much, much tougher. It's a much more competitive market and dealing with all those royalty issues dealing with the music industry. Oh the cost, the complexities, the limitations. Twitter has it easy. They really do, at least right now. And yet they still can't, punch their way out of a paper bag. I think if they really start to look at some of these other business models and practices and emulate the good ones, the ones that they can really capitalize effectively, I think the skies might be very blue for Twitter.

Hi everyone,

Post-send note: In the original post the audio was only 1-second long. That has been fixed now.

As mentioned in yesterday’s email, I will now begin including an audio version of these essays. The audio is created in my voice with an AI. For those who listen please provide feedback on the quality and whether it is worth continuing.

Between Meta’s stock collapse and Musk’s takeover of Twitter, the future of social platforms dominated headlines last week.

On that note, today’s essay looks at VR/AR and Meta’s new headset.

—Edward

Real Fidelity

In January 2020 — before most North Americans had heard of COVID-19, let alone started processing its impact — I wrote a Marketing BS essay that connected the science of music technology (CD vs vinyl vs live concerts) to videoconferencing and office productivity. Specifically, I coined the term “real fidelity” to explain why our enjoyment of an experience — music or sports or work or anything, really — is significantly shaped by our perception of its “realness.”

Eight months later — with many people using technology to connect with colleagues, classes, and friends — I wrote a follow-up post that expanded upon the idea:

The term fidelity refers to the formats we use to communicate sounds, images, or experiences. Fidelity plays a fundamental role in the effectiveness of a marketing strategy. For instance, video can deliver a message more effectively than audio. And a video played on a large, high-definition screen is more impactful than one played on a small, low-quality screen. The most powerful fidelity is real life. A live presentation in an auditorium (usually) holds people’s interest better than a YouTube video of the event — a phenomenon that many parents discovered [in 2020], while watching children struggle with Zoom-style classes.

In that second essay about real fidelity, I used the concept to explain why companies like Netflix, Meta (then Facebook), Google, and Amazon were betting on a post-pandemic return to the office. The reason? Co-workers felt like something was missing from their collaborations. Despite the improvements in technology, videoconferencing didn’t feel as “real” as face-to-face interactions.

Humans crave that sense of “realness” — so much so that it drives many of our decisions. As I wrote in my first essay about real fidelity:

At times, our compulsion to attend live events seems to defy logic. I would never pull up YouTube and watch an hour-long lecture, but I was drawn to go see Bill Clinton during one of his “live in conversation” tours. For an $80 ticket, I sat at the back of an enormous theater, with a view far worse than the one I could have watched on my laptop. 

That is the power of real fidelity.

Better Fidelity

On October 11, Meta announced that their new virtual reality headset, called “Quest Pro,” would ship by the end of the month — at a cost of $1500. Unlike their earlier Quest headsets (cost ~$400), the new device is aimed at the enterprise market. The Pro model offers multiple technical upgrades that support AR (augmented reality), like higher resolution, wider peripheral vision, automatic eye tracking, and the ability to see full color in both the virtual and physical environments. Plus, the device’s improved processors allow people to engage in more seamlessly immersive (and therefore “more real”) business meetings, brainstorming sessions, and more.

Most pundits from the mainstream media, as well as many of the smart analysts I respect (Ben Thompson, Benedict Evans, John Gruber, Kevin Roose, John Carmack, etc.) reacted to the Quest Pro announcement with skepticism. There seems to be a critical consensus about two key points:

* Meta is too early: Useful VR is still ten years away — especially the social aspects. Plus, there are limited barriers to entry; when VR tech finally matures, another company can just come along and leapfrog Meta.

* Customers don’t want full immersion: Meta believes that VR is the future for both office productivity and personal recreation. This strategic bet assumes that immersiveness is a defining characteristic in the tech continuum from desktop computers to laptops to mobile devices to VR. But smartphones are actually LESS IMMERSIVE than desktop computers. The shift from desktops to laptops — followed by the mobile revolution — was the result of consumer demand for convenience, not immersion. Where’s the evidence that customers are clamoring for VR experiences?

Point 1 could easily turn out to be true: Meta might be too early for VR, just like many mobile-focused companies in the mid-90s were too early.

For Point 2, though, we still don’t know how consumers will feel about immersive tech (it’s hard for any of us to have a strong opinion until developers refine the VR gear and platforms). Instead of focusing on immersion, then, I might suggest an alternative way to frame Point 2: “convenience is the most important element for bringing a new product to scale.” Getting someone to try something new is HARD — just ask P&G about the challenges with teaching people to use fabric softener. As such, I agree with critics who think Meta faces an uphill battle convincing consumers to make “putting on a headset” part of their everyday routine — especially at a cost of $1500. (The early research isn’t encouraging. Only 28% of current VR set owners use their devices daily.)

And yet…

VR has a “killer app” — presence. And, as I wrote in my first real fidelity essay almost three years ago, presence really matters. There are many types of experiences that work much better (or only work at all) when humans are physically together in the same space.

By definition, VR cannot achieve 100% real fidelity, but the technology is definitely approaching interactions that “feel” real. Nothing on a two-dimensional screen comes close. Could VR attain a level of sophistication that replicates the feeling of collective presence? Meta seems to think so.

And if VR does, in fact, ever manage to offer a reasonable facsimile for physical presence, here are some likely applications for VR (in order of “corporate-ness”):

* Meetings

* Conferences

* Sales

* Learning

* Comedy

* “Hanging out”

* Tabletop gaming

I’m probably overlooking some other important use cases, but that list of seven is a good place to start discussions about how things might play out in VR.

Meetings

Clearly, Meta understands that workplace meetings will be a core piece of their VR business.

The company has already launched Horizon Workrooms — “a virtual space that brings teams together in the metaverse.” There is a web app version of Workrooms that anyone can use on their computer, just like a regular video call. But to access the VR features, you need a (base model) Quest headset. And with a Quest Pro, you can unlock AR functionality, which allows you to build a virtual model of your physical office; that way, you can interact with other people’s avatars in your familiar office environment (with the same placement of your monitors, keyboards, etc.). With Workrooms, you can also bring your computer into the space, so you don’t have to give up multi-tasking in big meetings (or if you want to pull up a slide or a spreadsheet, you don’t need to leave “the room”). You can collaborate with colleagues on whiteboards. You can throw around ideas.

Plus, Quest Pro can replicate elements of human communication. If you smile in real life, your avatar smiles. If you look away, your avatar looks away. If you put up four fingers to drive home a point, so does your avatar.

Workrooms is more than just a novelty — Meta is developing a business tool that evokes the “presence effect” of collaboration. If you have not tried a headset yet, I highly recommend it, if only for 15 minutes: The experience really does feel like you are “there” — as long as you can get over the cartoon-like graphics. It is nothing like the rows of video screens you experience on Zoom or other video platforms.

Moreover, the virtual space offers some advantages over real life (beyond the obvious convenience of working in different parts of the world regardless of time or distance). In addition to Workrooms, there are third-party software programs that allow you to build and manipulate three-dimensional designs, create and shape chemical molecules, and generate housing and infrastructure projects. Given that most people haven’t even put on a modern VR headset, it’s incredible how many high-quality third-party applications are being developed — and most are free or very inexpensive.

Last week, I was working with some clients; they are debating whether to remain a remote-first company or to establish a physical office. They see the benefits of building a company culture with in-person collaboration, but they also recognize the challenges (real estate costs, recruiting talent, and office distractions). I suggested they pause their decision — until they purchase three Quest Pro headsets ($4500) and experiment with some team meetings in Horizon Workrooms. When I receive their feedback, I will report back.

Ultimately, I expect virtual meetings will be THE feature that eventually convinces users to adopt Meta (or whatever company leapfrogs them). For the rest of today’s essay, I’ll describe how other activities might develop viable use cases for this nascent technology.

Conferences

Let’s be clear: no one decides to attend a conference because of the keynote speakers (no matter how prestigious they might be). The profile of the speakers is a way to signal the conference’s quality, so that potential attendees know the event (and its networking opportunities) will be worth their time.

For many people, the value of a conference comes down to these things:

* Sales

* Account management (i.e., meeting with existing clients all in one place)

* Job search (subsidized by your company)

* Vacation (subsidized by your company)

* Love (or sex, for the cynical — subsidized by your company)

* Serendipity (The most productive time I ever spent at any conference was sharing a taxi back to the airport with a random stranger who eventually became a lifelong friend)

As everyone realized over the last few years, online conferences can’t really accomplish any of those things. In turn, many people have opted to give up on online conferences altogether.

But what if you could attend a virtual conference experience that still managed to check off several of the above points? A virtual event won’t get you a vacation, but there might be ways that new tech innovations could provide suitable alternatives for the other conference goals (with a big asterisk on point 5…).

Sales

Part of the reason salespeople travel to the client is signaling. They are showing you just how much they care. Taking a client to dinner or lunch or a live sporting event can be a great way to build relationships. Duplicating those experiences in a virtual space might not be possible. But there are also millions of sales calls that have been enhanced by moving from the telephone to Zoom. And I expect that shifting those Zoom meetings into the virtual space will enhance things one step further — with a more interactive way to get to know each other, to understand the client’s business, to identify pain points and solutions, etc.

The hard part will be getting the client to put on the headset.

To reduce that hesitation, here’s an idea: for big enterprise sales with a very high potential contract value, what if you sent the CMO (or CFO or CEO) a Quest headset, along with an invitation for a meeting in virtual space? That approach is obviously expensive, but so is any tactic that tries to interrupt the workflow of a senior executive. If the take rate for the meeting is high enough, a $1500 (or even $400) headset might deliver a better ROI than sending another branded paperweight.

Learning

There’s a cringeworthy Meta ad that shows students visiting Ancient Rome and watching debates with Mark Antony. The problem isn’t the lack of possibility — exploring virtual 3D worlds is possible now, and the fidelity will only increase over time. The issue is Meta’s misunderstanding about how people learn history. Watching an experience in VR isn’t much better than watching a documentary on those old rickety TV/VCR carts (while your teacher sits at their desk, grading papers). We also know that sitting down to watch a lecture — either on a Zoom screen or in a physical classroom — is a pretty terrible way to learn anything.

There aren’t currently any large-scale education platforms for VR, but there are signs that learning may be another killer app. Motive is a Canadian tech company that’s been creating immersive video games since 2008. They’ve partnered with companies in the mining industry to develop VR-based safety training modules. In the computer simulation, workers move through an interactive mining environment that requires them to recognize hazards and operate machinery. Sitting at a computer station is obviously much safer than conventional workplace orientation methods, but what are the results like? Early studies suggest that learner retention is significantly higher than other modalities. In another example, the University of Maryland ran a test/control study of AR training versus desktop training — they found 90%+ higher retention with the AR approach.

I believe the two most important training use cases are situations where training in “real fidelity” is either very expensive, very dangerous or both. Even if VR is not as good as training on site, if it can reduce the time required working with expensive equipment (i.e., in a mine), or save lives (i.e., allow a junior surgeon to practice without the risk to a real human being), then it seems like mass adoption for those situations is not unreasonable.

Consumer-aimed educational products are also emerging. PianoVision is a VR tool to help people learn to play piano. You can imagine how effectively the right software could help someone develop muscle memory for a stationary task like that. I expect similar possibilities for activities like golf or table tennis. (In fact, there’s already a free table tennis app where you can play against another user or a “perfect AI” that feels shockingly like the real thing — without the dirty work of picking up the ball when you drop it).

Comedy

Comedy is much funnier when you are in a social setting. (This phenomenon might explain why comedies are on a downswing in Hollywood — fewer and fewer people are seeing movies in theaters, compared to solo viewing at home).

During the COVID era, there was a rise of online comedy shows. Many of the shows resembled Zoom videocalls, while others had comedians standing on stage, performing in front of a wall of screens (like this one). Many of the shows experienced tech hitches and logistic limitations — the same types of issues that companies discovered when they shifted meetings online.

For comedy, getting the right mix of audio is particularly tricky. Muting the audience makes the show feel dead, but turning on everyone’s mics to allow laughter can overpower the comedian (especially if they have to compete with random babies and dogs).

Improvements to VR could make an online comedy show feel like a social situation, with the “presence” of other people laughing around you. There would definitely be market demand for live comedy shows that people could watch from the comfort of their home.

The industry would quickly change. Stand-up comedians spend a lot of their life on the road (which is a lonely experience for many of them). With a more immersive tech platform, comics could put on a headset at 7:00 pm, deliver their 40-minute set, and take the headset off — and already be home to tuck their kids into bed or spend the night with their partner.

For producers, the cost to book a higher-profile comedian would decrease (no need to book large venues, etc.); as such, stars would have more opportunities to reach audiences around the world. Bookings might be harder to come by for emerging comedians, who would now be competing in a global market (which isn’t that different from the story of the last 20 years, as technology has reduced friction in everything).

The biggest technical challenge here is supporting large groups of people simultaneously in the same space. Right now the cap for the number of people who can be live in a single venue is only 20. That makes for a pretty poor live comedy show.

Hanging Out

VR platforms offer lots of ways for people to connect socially. Internet chat forums evolved into social media platforms; the next iteration might include having people’s avatars interact in a virtual space. Groups of friends could “gather” to watch a football game or awards show on TV — with everyone in their own individual houses. You can’t really go on a (physical) walk with someone, but you could play games like mini-golf together.

The business opportunity in “hanging out” might not be immediately obvious, but a lot of value in companies comes from lunchtime conversations, post-work drinks, bowling nights, etc.

Remote employees miss out on those types of social connections and outings. Company off-sites and retreats can help bring everyone together, but those events, by definition, will happen infrequently. VR could provide alternative ways to build a close-knit team.

Tabletop Gaming

Demeo is a VR game that allows friends to play a Dungeons & Dragons-type adventure together — controlling characters, solving puzzles, and defeating monsters. When you play, you can opt for a view that looks like a digital version of an in-person roleplaying game (people sitting around a board, moving pieces, and rolling dice). But the VR functionality also allows you to change your relative size and position, so you can zoom in and become part of the action.

Many tabletop games have already been ported into electronic form (I’ve seen families playing Carcassonne on their tablets, online chess is growing dramatically, and anyone who owned a Windows device in the 1990s knows the rules to Solitaire).

Imagine a VR environment with virtual dice, cards, and tables. People could gather and play countless games, without the need to program any “rules.” Of course, this would require players who know the rules, but no more so than playing a game in real life – only now you can do it with someone on the other side of the continent. And if you did want to learn the rules for a new game, current VR headsets aren’t good enough to let you read text from a book, but linking to a computer is an easy way to bring in written material from outside the virtual setting.

Will Meta even be around to see this?

On October 27, Meta announced their latest earnings (or lack thereof). In response, their stock quickly dropped 28%. The company is now worth $266 billion, down from over a trillion dollars last September (just before announcing the rebrand to Meta). They have fallen a long way. If they continue along this trend, will there even be a company to realize their vision of the Metaverse?

One thing VR-believers have going for them is that Mark Zuckerberg has maintained control over the business. While he only owns 14.6% of Facebook stock, his “founder shares” give him 58% of the voting rights. There is nothing stopping him from continuing to spend $10 billion per year on VR and AR R&D. While Facebook’s net earnings and cash flow have dropped dramatically from 2021 (when they were bringing in $10 billion or more of both per quarter), they still made $4.6 billion in net revenue and almost $200 million in positive free cash flow in Q3 2022. If the company ever found themselves in serious trouble, Zuckerberg could just reduce VR investments by a billion or more dollars to keep the company liquid. Meta is in no danger of folding.

The real risk to Meta is holding onto their talent. Employee compensation at Meta is a roughly 50/50 mix of cash and stock options. When the stock price drops by 70%, that means a 35% pay cut for everyone who works there. If you are smart and talented, why not leave to build products somewhere where you will be better rewarded? The silver lining right now is that there are hiring freezes at most of the big tech companies these people would consider jumping to. But that situation won’t last forever; sooner or later, Meta is going to have to address compensation. And beyond compensation, Meta will need to ensure that a very large workforce (now almost 72,000 employees), still believes in the company, their mission, and their chances of success. Zuckerberg may be a true believer in VR, but how do the marginal employees feel?

If Zuckerberg can somehow keep his employees happy and engaged, then there is nothing stopping him from going all-in on virtual reality. As a clue, here’s what one of Zuckerberg’s friends and former professors wrote about the CEO back in 2012 (in response to a Quora question about Zuckerberg’s attitude to money):

Mark's main motivations were pretty clearly based around materially changing the world and building technology that was used by everyone on the planet. It's not like he didn't know that if he was successful, he'd become incredibly wealthy - and I wouldn't go as far to say that he would've done everything he's done if there wasn't a big financial payout from it all. But that always seemed like a happy side-effect of his true goals. My impression back then was that if he had to choose, he'd rather be the most important/influential person in the world rather than the richest. And I think that's visible in how he directed the company to focus on user growth and product impact rather than revenue or business considerations. Even today, while Facebook makes a ton of money, it could probably make magnitudes more if that were its primary goal.

The post continues to explain that Zuckerberg was happy living in a small apartment and sleeping on a mattress on the floor, before his security team dragged him into a more protective environment.

It’s entirely possible that Zuckerberg is not focused on maximizing shareholder value of Meta in either the short or the long term. It’s possible, even likely, that he is spinning the story enough so that he has the flexibility to spend Meta’s billions of free cash flow towards building what he sees as the future.

If effective VR is only possible by spending $10 billion per year with a negative ROI, then without Meta’s investment it might not otherwise happen — or only far into the future when the related costs have been reduced by tangential technologies. Zuckerberg may be okay with that. He owns the wealth to make that investment. But, since his company is public and employs tens of thousands of people, even if he believed that, he could not say it. Zuckerberg has to build the narrative that the investment will eventually pay off (and that shareholders and employees are smart to invest their time and dollars with him).

It remains to be seen if Meta will be the one to make VR happen, if VR will go into another long winter, or if Meta will kick things off before another company takes it over the finish line. But it sure looks like Zuckerberg is ready to either swing for the fences or go down swinging.

Keep it simple,

Edward

Edward Nevraumont is a Senior Advisor with Warburg Pincus. The former CMO of General Assembly and A Place for Mom, Edward previously worked at Expedia and McKinsey & Company. For more information, check out Marketing BS.

I have been playing around with some AI audio tools. This should allow all podcasts going forward to have full transcripts. It has also allowed for pretty fantastic text-to-voice applications. I spent an hour recording my voice to have it analyzed by the AI. This allows text editing of podcasts (i.e., In the live recording I say “price insensitive” when I should have said “price sensitive”. I can use a text editor to just delete and replace and the AI will put the new words in seamlessly - in my own voice. It’s like a personal deepfake).

But the tool can do more than just find and replace words. Attached to this post is the full text of last week’s essay “Paying for Status” in audio form, read in my voice from an AI. It is also available via the Substack player, and all major podcast apps. If there is any interest at all, going forward I will include audio like this in all essays (and transcripts for all audio).

The AI audio is not perfect, but, to me, it sounds a LOT better than most of the “robot” customer service voices one has to deal with in every day life. I would love your feedback on what you think of it. Just reply to this email.

What else to expect this week:

* This week’s essay is coming (Hopefully tomorrow. It was delayed due to Halloween). Topic is VR/AR and Meta’s new headset

* Weekly marketing take with Peter Fader is on schedule for Thursday morning (now with a transcript!)

* For those that are interested in our analytical exploratory take on the early Marvel Universe, a new Super Serious episode will also drop tomorrow - also now with a transcript for those who prefer to read rather than listen

Keep it simple,

Edward

The experiment continues. Fader and Nevraumont explore the latest earnings results where brand spend seems to be up, while direct response spend is down. This is very different than any other downturn we have seen in the past. What is going on? We explore at least three theories.

Thank you for the feedback on last week’s episode. I WILL work on getting some sort of “instant transcript” for these so they can be read as well as heard, but it may take me a while as it does not land on the top of my priority list. In the meantime know that these are very short and only once a week, so hopefully their value per minute of your time is high.

Keep it simple,

Edward