Innovation Reactor

Revolutionary Road – Online business lessons from LOVEFiLM

LOVEFiLM is the largest online movie rental company in the UK. With over 1.2m active subscribers it generates approximately 50% of all UK DVD rentals. The business has been a remarkable online success story with 94% of subscriber’s recommending the service to friends and LOVEFiLM CEO Simon Calver expects to hit the £100m-turnover mark in 2009.

So how did this small start-up enter the market and beat established players like Blockbuster? This post highlights the most important lessons and best practice from the LOVEFiLM experience.

1. Understand what your customers care about the most then deliver a great value proposition

LOVEFiLM is built on a simple idea that consumers passionate about film want choice, convenience and value-for-money. Your business must create a unique customer-focused value proposition to compete and win.

• Choice: While the average rental store can hold a few thousand titles LOVEFiLM can provide over 65,000 from the latest releases to cinema classics.

• Convenience: Website where you can fine-tune your rental order list and DVD’s are sent by next day delivery service.

• Value for money: Lower cost per rental, free delivery and no late fees.

2. Minimize operations costs and quickly generate cash flow to support brand building and customer acquisition

Lower fixed overheads and rent: Rather than retail stores LOVEFiLM has one centralized distribution centre that services all of the UK, providing lower fixed overheads and rent.

Inventory efficiency: LOVEFiLM can fulfill customer rental orders on the same day to provide a speedy service that delivers on its brand promise.

Generate cash: Importantly many new online start-ups struggle to generate positive earnings because they offer their product for free to early adopters who then resist paying when companies try to monetize their product. From the start LOVEFiLM insisted on a business model with a monthly subscription fee because it provided a positive cash-conversion cycle that enabled growth. This business model is smart since upfront cash can be reinvested quickly in brand advertising and customer acquisition.

Pay-for-performance contracts: Signing performance-based affiliate marketing and channel partnerships for new customer acquisition ensured LOVEFiLM only paid for an active subscriber and not clicks or cold leads.

3. Design your website to make navigation easy, provide relevant content and make the purchase and billing system simple to use

LOVEFiLM is essentially a long-tail business with 80% of DVD rentals coming from the back catalog – movies over 3 months old – so the website is designed to make it easy to search for popular titles or browse films by genre.

Your company website and the customer service experience is such a key driver for building your brand. In the digital world it’s important to understand how your customers search for information and move through the buying process. Therefore use customer research to make your website navigation intuitive, place content where it's easy to find and keep the registration and billing process simple.

4. Allow customer personalization and community to deepen engagement with the brand

The LOVEFiLM website not only lets customers create their own personalized rental lists and watch movie trailers but also encourages them to add to their own film ratings, reviews and recommendations. By creating an online community where customers create the content, share information and interact, LOVEFiLM deepens customer engagement with the brand.

It’s a common misconception that user-generated content is hard to control, requires additional resources and the ROI difficult to measure. Because fast-growth companies like eBay, Amazon, Expedia and now LOVEFiLM are using online user-generated content to give their customers a voice and to differentiate their brands in a crowded online space.

5. Make continuous product and pricing innovations

Product innovation:  By using data to understand unique customer needs LOVEFiLM was able to introduce new product packages such as Unlimited, Capped and Pay-as-you-go monthly rental plans, catering to different segments. LOVEFiLM has recently added video games and is also developing a movie on-demand service to address behaviour shifts in customer entertainment and media.

Flexible pricing: LOVEFiLM started with one standard price but soon after the initial marketing push the customer rate growth slowed. Research indicated they were missing out on different audiences who didn’t want one-size-fits-all pricing so LOVEFiLM now provides different price points. New businesses are often reluctant to discount their core offering then feel surprised when new lower priced competitors steal market share. A good lesson here is to listen to customers, be flexible on pricing models to serve different segments, lower the entry point and don’t be afraid to cannibalize your brand or someone else will.

6. Blend digital and offline channels to monetize your marketing

With growth in new subscribers and increased website traffic LOVEFiLM now has 4.3m unique visits per month to the UK site and has been able to monetize their website and weekly email newsletter via ad sales.

Since DVD’s are sent by first class post, LOVEFiLM generates additional revenue in partnership with film studios and distributors by using envelopes and inserts to advertise the latest upcoming blockbusters and new releases.

New films and Hollywood stars are always in the headlines. LOVEFiLM actively monitors the newswires and engages in proactive PR to connect with news stories drive awareness of the brand and traffic to the site. A quirky LOVEFiLM review of the latest Star Trek movie received national coverage on the BBC and YouTube promoting the back catalog of Star Trek DVD’s.

If your business has a customer database and regular communication channels you can explore ways to monetize and extract value through ad sales, PR and partnerships like LOVEFiLM.

Creating Integrated Marketing Communications

     

From my experience the best integrated marketing campaigns are driven by a process of discovery, problem solving and collaboration between the client-agency team. Because this process unlocks consumer insights and uses a detailed diagnosis of the marketing problem it invites the team to look at problems from different angles, challenge the status quo and inspires them to come up with breakthrough communications.

1. Consumer Data & Insights

The first step is to understand your target audience by using data and insights to develop pen-portraits of your best customers.

To create these pen-portraits review customer demographics, product usage rates, media consumption and research. Also, analyze your competitors and get Internet usage statistics for your products. These channel metrics should include – online click-through rates, keyword searches, direct mail response rates, email open rates, and phone conversion metrics – to assess how your best customers respond to various media formats.

This will assist the team answer these critical questions.

• Who are our best customers?
• How do we best communicate with them and attract more? 
• What are their attitudes towards the brand, product benefits, customer service, and content?
• What is driving their willingness to apply?
• What are their passions and motivations?
• What are the common characteristics that our top customers share?

2. Marketing Positioning & Customer Experience Mapping

Successful marketers understand how their product or brand is currently positioned in the market, because it allows them to reposition and differentiate their communications. To determine the dimensions supporting your product or brand positioning you may need to conduct focus groups with your target audience, and test different messages to uncover what resonates best.

If you are repositioning your communications it makes sense to also refresh your website and improve the online customer experience. By mapping the end-to-end online customer journey on your website, plus analyzing page traffic, links, online forms, content and functional design, you can start to streamline the customer experience. Use an expert like an agency Digital Planner or Information Architect to help you optimize your online content and media strategy.

How do your customers reach your website? This answer is to map the entire pre-purchase journey and buying process. For instance, a Hotel may find their customers view holiday photos from friends/family on Flickr, read the Sunday paper travel section for inspiration, then search on Tripadvisor or travel blogs to get recommendations, and finally compare prices on Priceline.com or Expedia before making a reservation. By understanding the purchase process you can now insert your media into the user experience, such as banners on Travel specific sites or cross-sell links on travel booking conformation pages.

3. Agency Brief

I believe the agency brief is a dynamic process and not just one-way communication from the client to the agency. Therefore I recommend using a workshop create the brief using the steps below.

• Create a vision for repositioning/refreshing the communications platform, put the strategy into context for the team plus outline targets and key milestones. Ask the team to present the latest consumer research and market trends

• You can task several members of the team with presenting best practice and a review of competitors and any previous communications. Collaborate with team and get them to contribute their ideas, share expertise, and learning’s to create the outline of the brief.

• Ensure you have the best talent and diversity in the workshop so include from the Agency – Account Manager, Planner, Art Director, Digital Planner, Media team, and from the client –  Marketing, Finance (yes the bean counters…and if you include them they’re more likely to approve your budget) and PR.

The workshop brings everyone up to speed quickly, generates new ideas and different perspectives, to develop solutions for your key marketing communications problems. You’ll find the agency-client team will work better, smarter and faster since people understand the strategy, customers, objectives and who to turn to for information.

The final brief should include the customer pen-portraits, a map of the online customer experience and buying process, competitor products, an overview of the marketing strategy, the communications problem to solve, product or brand positioning research, targets and metrics.

4. Creative Development & Testing

At this stage the agency has developed several different creative platform concepts and positioning statements. But many new communications fail to deliver results because marketers second-guess consumer reactions, or go with their gut instinct, rather than using a more robust process to evaluate the creative work.

An inexpensive and fast method of testing creative is online panels or forums. These show the creative concepts to your target segment – testing the appeal, excitement, consideration and intent to apply. For your website, customer labs can be a great way to test new navigation and the online customer experience.

5. Delivery

Your new integrated communications platform will contain online media and content – including banners, email newsletters, blogs, podcasts, whitepapers, e-books, webinars, and refreshed product pages – that will appeal to your targets audience and align with your marketing objectives.

Throughout the process, work with your media agency to enhance your prospect targeting strategy. It's also important to create search engine terms that integrate with your communications to drive awareness. Finally, ensure consistency across your communications by integrating the new creative in your offline channels like direct mail, press, radio and TV.

You're now ready to launch your successful new integrated marketing communications, website and media plan.

The Long Tail and Financial Services Online Product Comparison Sites

In the book The Long Tail: Why the Future of Business is Selling Less of More (2006) by Chris Anderson, and in many subsequent articles about the long-tail, there has been much analysis on booksellers, DVD rental and music downloads companies, however little on financial services. My research, observations and experience in financial services suggest a different tail dynamic and performance.

For financial services - insurance, credit cards, loans, and mortgages – I have found three key areas that are vital for marketers to understand; 1) The Winners Curse – fear of the long tail, 2) The long-tail generates negative selection, 3) A self-reinforcing cycle of downward profitability.

Winners curse – fear of the long-tail

With more consumers using price comparison websites to shop for financial services, sites like Moneysupermarket.com in the UK, LowerMyBills.com in the US, or Redflagdeals.com in Canada, now rank and distribute hundreds products. My research found these sites create a long-tail and a “winner takes all” outcome with the highest ranking product in each category attracting the largest share of new customers. In his 1963 book Formal Theories of Mass Behaviour, William McPhee suggests the most popular product gets a disproportionate share of its audience creating a natural monopoly.

 

Source: MindShare ATG econometric models 2008

Most companies fear the long-tail because being number one on aggregator sites dramatically improves sales conversion rates. However hit products often produce a winner’s curse effect because the best product must deliver more value vis-à-vis the competition. To support these products companies offer reduced rates or premiums, expensive upfront incentives, free promotions or costly benefits to maintain the top spot.  In some cases they pay higher commissions to the comparison sites, since many of these sites claim to be consumer champions however require more money to favourably rank your product. Subsequently, the best product drives higher volume but at lower margins.

The long-tail generates negative selection

As success online is concentrated in a few best selling products, for financial services it’s these products that attract more affluent, well educated consumers with higher incomes and better jobs. Because these consumers tend to be heavy users of financial services, more financially astute, and better at distinguishing superior products from middle-of-the-road ones.  Consequently, products in the tail usually offer pricing or benefits of lesser value and attract more high-risk subprime consumers. The result is poor credit quality, higher delinquency or claim rates and larger charge-offs.

A self-reinforcing cycle of downward profitability 

McPhee (1963) suggested a phenomenon called "double jeopardy" whereby niche products typically have fewer buyers than popular ones. Moreover, these consumers generally appreciate them less than they do popular products. For firms with multi-product portfolios, the non-hit products in the tail attract fewer customers and become smaller portfolios in relation to other products. Since risk management, customer servicing, operations and marketing efforts naturally gravitate towards growing and protecting the stars in the portfolio. This underinvestment creates a self-reinforcing cycle of downward profitability as the best (often of the worst) customers soon seek other products that offer better value. Thus the initial subprime qualities are amplified and the portfolio experiences high attrition rates, mounting losses and negative return-on-invested-capital. Anita Elberse (2008) Harvard Business Review found products in the long-tail will struggle to recover their marketing and production costs.

Implications for marketers and financial services companies

The long-tail has significant implications for customer usage and loyalty, such as credit card spending, intent to renew an insurance policy or ability to make loan repayments. So what can you do if your product is stuck in the long-tail?

1. Prioritize product development. Conduct a thorough analysis of competitors and comparison site tables where your products will be distributed. Then customize elements of your value proposition or use special introductory offers to strengthen your product to ensure you rank at or near the top.

2. Develop new customer loyalty programs. Offering a wide selection of products helps retain more heavy-users, deepen customer engagement and grow revenue per customer. However, regain control by targeting niche products at your existing customers via cross-sell or up-sell programs rather than advertising externally to new prospects via comparison sites.

3. Refocus portfolio management. Clean up your old product portfolios, close down high-risk customer accounts and convert the best customers over to newer products offering stronger value. 

How Waitrose competes with a differentiated business model

 

I attended a great presentation from Mark Price, Managing Director of Waitrose Supermarkets and was fortunate to have a quick conversation with him afterwards.  The UK supermarket business is fiercely competitive and recent statistics by TNS show Waitrose has a 4% market share compared to their main rivals Tesco (31.5%), Asda (16.6%), Sainsburys (16.2%) and Morrisons (11.2%). In this competitive industry structure, how does Waitrose grow market share against such strong competition?

Waitrose have created a strategy focused on two specific market segments of affluent consumers

• Baby boomers looking to trade-up to better quality
• Pre-children Gen-Xs that want quality food and drink to match their lifestyle

Then utilizing a differentiated business model, focused on quality Products, Service and Store Environment, they have created a premium brand and differentiated customer experience. This makes it difficult for price-led competitors such as Tesco or Asda to replicate the Waitrose strategy.

Products: Waitrose maintains product quality by investing in the supply chain since they made a strategic decision to invest in organic farming (production) and take a long-term approach with supplier relationships. By paying dairy farmers above-market prices for milk they locked in exclusive relationships. These farmers could then invest in better technology and upgrade equipment, while other farmers struggled to reduce costs and lowered quality. Subsequently, Waitrose then repeated for pig farmers and organic growers.

Service: Waitrose isn’t owned by shareholders, but all employees are partners so profits that usually go to shareholders are paid in bonuses to employees. All employees receive a 20% annual bonus regardless of seniority; the company is open with information like sales data and store performance, publishing this every week; managers are empowered to make decisions to optimize sales and service in their store; while employee committees are elected to consult with the board on strategic decisions. By placing employees first in the value chain, Waitrose has generate higher levels of employee satisfaction, created better customer engagement and increased service levels, resulting in superior levels of customer satisfaction with profitability. 

Store Environment: Waitrose creates a unique customer experience through cleaner stores, wider isles, shelves setup to promote the products and not sales posters or promotions, and established store locations are convenient to the target market with easy car parking.

I asked Mark “how is Waitrose innovating to beat the competition?”

“Waitrose is investing over £10 million in product development each year. We do not outsource our product development to suppliers like other supermarkets rather we employ top master chefs to create new Waitrose-branded product lines. Because of our business model, our produce buyers are more tenured and experienced so they understand the product categories better. This has allowed us to shift from organic to new segments, such as locally grown fresh produce, which grew 170% last year, faster than our competitors. We’ve also invested in online supermarket Ocado acquiring a 25% stake in the company, that’s helping Waitrose expand coverage into new geographic regions and gain a 16% share in online food retailing in the UK.”

Like Waitrose, a challenger brand aiming to steal market share from strong competitors, can start by developing a strategy focused on niche customer segment, then use a differentiated business model to win.

Creating an environment for breakthrough innovation

You want to create a new direction for your company and make innovation a top priority. However to make this new strategy work it’s the people within an organization must first transform their communication, relationships, thinking and focus.

To achieve this I suggest 3 steps to generate “Innovation from the inside”

1. Improve communication and relationships to challenge existing ways of thinking

2. Develop a vision for the future and design breakthrough projects to achieve the vision

3. Create dynamic networks inside your organization that focus on driving results

1. Every team consists of a Coach and Players –with their actions on the field determining whether the game is won or lost. However many people become Journalists and Spectators –sitting in the stands giving opinions,  judgements, explanations, telling stories, writing reports or spreading rumours. Since Journalist and Spectator perceptions are rooted in the past they stifle innovation, creativity and change. If you have too many in your organization you cannot begin to realise your new strategy. To provide the catalyst for change try hosting town-hall style meetings focused on putting the new direction into context. Then smaller workshops that highlight Journalist and Spectator behaviours and the resulting low-performance it delivers. By challenging existing ways of thinking and improving communication people can then open up to new possibilities.

2. Work with your teams to develop a new vision for the future –then facilitate open communication to create alignment and shared understanding of this vision. Build momentum by developing a list of breakthrough sprint-projects. These short-term projects could be improving a process, adding a new partnership, building new technology or sales/marketing capabilities.  These action-orientated projects will help refocus everyone on the game and beating the competition.

3. After choosing your sprint-projects develop a rough plan, outline milestones, align resource networks and determine what learning is required to be effective. Remember keep it simple and remove complexity. While every team needs a structure and game plan, too much control limits innovation, restricts ideas and blocks creativity. Space with empowerment allows self-organization to flourish and employees to take action themselves and drive the new strategy forward.

When companies let employees contribute to the vision, facilitate open communication and challenge established norms, they will volunteer for projects and self-organize into dynamic networks. With employees championing new ideas, driving change, and spreading your new innovation culture across your organization imagine what you could achieve.

Technorati Profile

How to develop an integrated marketing communications strategy

Implementing an integrated marketing communications strategy can provide a competitive advantage for your business. However, many companies still employ a linear direct marketing process in which products are developed, messages created and incentives are added to the mix. The products are then pushed through various media or a salesforce to consumers. This methodology relies on behaviour assumptions that all consumers follow the same decision process: Awareness – Knowledge – Evaluation – Purchase.

This strategy worked well a few years ago because targeting and smart advertising gave companies the edge over consumers with limited product knowledge. However, buying behaviour has become more sophisticated since consumers acquired access to technology such as the Internet, mobile phones, iPods, search engines and on-demand TV. This technology has made the traditional linear marketing and communications process (product/brand – channel – media – customer) redundant. Because consumers can now block out marketing messages using spam filters, pop-up blockers, remote controls, “do not mail” lists or the regular trash can.

• Why do consumers need to learn about your product/service now when they can just Google it?
• What are you going to tell consumers that they don’t already know or cannot find out for themselves via an online product comparison site?

A consumer-controlled communication landscape has emerged with a faster dynamic consumer learning process. The outcome is declining efficiency rates and increased costs from traditional direct marketing activity. Thus companies now need an integrated marketing communications approach that combines traditional media, online channels, PR, affiliate partnerships, products, people and social networks to be successful.

How can your organization develop an integrated marketing communications model?

Don Schultz, Professor of Integrated Marketing Communications at Northwestern University suggests companies can coordinate their marketing resources and supply customers value-added information to create engagement and build long-term relationships. Start by using what I call ABCD resources -Audience, Brand (Product/Service), Content, Delivery. You then need to find the optimal mix based on your industry and competitive position.

Audience – a key ingredient is to use extensive data and analytics to understand your target segment. Creating pen-portraits of your core customers including demographic and lifestyle information will help optimize your media targeting strategy.

Brand – your product or service must have a unique selling proposition to provide a competitive advantage. It must deliver superior value for the audience and be clearly differentiated on features, service or price.

Content – with most competitors using the same linear marketing strategies targeting the same consumer segments, content can now become a point of competitive differentiation. When you supply value-added content you provide consumers a reason to engage with your brand and connect your products or services.

Delivery - You then need to connect new digital media channels with traditional channels to create a push-pull system. Consumers must become engaged with the media employed or your content delivery will be unsuccessful. To achieve this ensure the content is linked to your brand positioning to make the emotional connection with your product or services.

Traditional measurements systems do not work well with integrated marketing, but most companies have all the data and just need to align it. Problematic areas can include breaking down internal silos and defining measures of success –site traffic, new sales, revenue per customer, return on capital, NPS (Net Promoter Score) etc. 

The customer experience now occurs during the interaction with your products, online channels, customer service and content. If companies can optimize the synergy between the ABCD resources and employ an integrated marketing communications strategy they can drive improved returns from their marketing investment.

Developing a strategy to attack a strong or entrenched competitor

Recently I attended a marketing training course, this time on Developing Innovative Products and Solutions with Dean Dipak C. Jain, of Kellogg School of Management at Northwestern University.

You start designing effective new product strategies by anticipating customer needs, understanding customer value perceptions and preferences, to then develop your marketing plan with a focus on segmentation, targeting and positioning. However, one critical area many companies encounter is how do you develop a strategy to attack a strong or entrenched competitor to capture market share and profits? One approach is to use these four key steps;

1. Redefine the market
2. Resegment the market
3. Utilize a sandwich strategy
4. Develop new products for these segments

To develop your sandwich strategy you further segment the market into premium and non-premium customer segments. Next, develop new products to meet these segments needs. The objective is to make these new products ‘customer centric’ so the value perceived by the consumer is ≥ price paid for the product, because this equation creates desire and aspirations for your product at the right price.

Three parameters you need to factor into your strategy are (M) market definition, (Q) Quality Perception, (P) Pricing Policy.

When US Post entered the market for express overnight delivery their $8.95 service was designed to directly compete and steal share from the FedEx $12 overnight service. In response FedEx resegmented the market and created a premium product –Guaranteed Overnight Delivery by 10am –pricing this service at $13. FedEx then created a Standard 3pm –Next Day Service –for $9. FedEx nullified the new entrant and improved margins since legal firms or financial services companies traded up to the new service since they required urgent client paperwork before the courts and markets opened respectively. Thus the FedEx strategy and new products got the customer value equation right and achieved all the three essential parameters –next day delivery service (M), reliability (Q), and premium pricing (P).

I’ve seen examples of this strategy work in many different industries such as automobiles, electronics, pharmaceuticals and consumer goods. Sometimes you need a strong competitor to drive innovation and make you think different about your marketing strategy.