Respecting Followers

True leaders respect their followers. I have always been struck by celebrities that disdain their audience members.  "Followers" has an updated meaning now that we call the people that follow us on Twitter followers.  

Maybe David Letterman started it, but the number of celebrities that are plainly complaining about their fans really makes me scratch my head.  If fans or followers make the celebrity, wouldn't the celebrities customer be the fan?  Without customers...

Politicians are really the neediest of celebrities when it comes to followers because they need their followers to vote. Another thing that struck me about Game Change (see my review yesterday) was the way some of the candidates do not respect their constituents at all.  At times they plainly showed how little respect they had for them.  John Edwards really took the cake in the book when we went from saying "They love me!" to his staff after a good speech to "They looooove me!" with an eye roll.  

The idea with a brand is to build a relationship with a customer that is larger than a single transaction.  Brands have followers just like celebrities and politicians and just as strangely, some customers continue to buy from brands even when they are showed no respect at all.

Yesterday I was listening the Advertising Show podcast where Rose Cameron, Euro RSCG Strategy Chief, was asked about the difference between the US and British advertising markets.  Her answer?  In Great Britain advertisers have a "real respect for the intellect of their audience".  In America we continue to buy from companies that have little or no respect for us or our intelligence.  

When it comes to politicians, celebrities or brands there are plenty of strange things to marvel at, but for me the strangest is how people continue to follow those that clearly have no respect for them.

A Helping Hand for the Search Engines

I sometimes get so caught up in the wealth of information available on the web that I lose sight of how far we still have to go in search.  The other day I was helping someone unfamiliar with the web use a search engine to perform what should have been a simple task and it was a significant reminder of how undeveloped the search industry really is.  Having been in the technology industry for some time now, I have a natural tendency to defend our machines.  People new to using these tools have pretty lofty expectations -- "the computer can just do that, right?"  Invariably my role goes from apologist to apologizer as I find myself saying: "well it is really a very complicated thing we are asking the computer to do..."

The Task:  Use a Search Engine to Find a Restaurant

Not just any restaurant though, we wanted a place nearby, that served Latin American cuisine from a Spanish speaking country, from South (not Central) America.  So sure, since our quest was a school project, our restaurant search was a little different than most - but not that different.  And explaining to the uninitiated why any combination of: Seattle, Restaurant, Latin America, Spanish, Central America did not produce the desired results in any of the search engines was humbling.  Defending the most used command line interface of our day by saying: "when I was a kid we didn't even have the web." didn't add much to the conversation either.

Our Solution:  This is a "Short" cut?

After several attempts with results of either restaurants from other cities (in one case the third entry in the search results was for an establishment in New York) or an overwhelming list of Mexican eateries, or news about the earthquake in Chile, I developed a new strategy.  We would search for recipes for dishes from Argentina, find one with a really distinct name, and search for that!  Argentina because it had not just had a natural disaster, and distinct name so the search engines would not get too mixed up with unrelated results.  Presto!  Not really presto actually because this meandering route through 15 or 20 search queries took much longer than either of us wanted to spend.  First to cooking sites, then to ethnic cooking sights, then to Argentinian cooking sights, then look through the recipes before deciding that "empanada" was just the right mix of common and unique for the search engines, then enter "Seattle Restaurant Empanada" and what do you know -- half way down the second page of results we found one that was only 10 miles away!  At one point I had to wonder if there isn't a Latin American Restaurant section right in the Yellow Pages!  I would never know of course because for the last ten years I have taken the phone books straight from my front porch to the recycle bin.

So all of this is to say that as enamored as we are with the tools we have today -- the truth is that their capabilities are severely limited.  We are just getting started in search and someone could invent the next Google tomorrow. 

Same Words Different Meaning

One of the best parts of my job is meeting new people and throwing around ideas. Ideas are a big part of marketing and everyone has some they are working on.  During these situations, particularly with someone I have just met, it is not uncommon for me to get well into the conversation and wonder -- are we really talking about the same thing?  It is amazing.  Two people in the same industry with the same native language with the proactive intent to effectively communicate -- well into a conversation and possibly not actually communicating at all.

Use The Simplest Word Available (and get the job done)

My most often cited example of this comes from about ten years ago.  We were pitching a senior member of a medium sized technology firm on some ideas we had for making their channel partner program more effective.  These were not exotic ideas and were based on our core inside sales services.  In a nutshell we were proposing to use our call center capacity for hire to help them sell more stuff.  After 45 minutes of lively dialog about our ideas, processes, reporting, success measures, and all the rest our prospect stopped us and said:  "Thanks and I am sure you have a great system but we just spent a bunch of money on a new CRM system and we are not going to rip it out, so we are not interested."  POW.  We had not set the thing up right, he thought we were a software company, and all of our service speak just got translated in his head into that framework.  Oh was that humbling and I can think of at least a dozen things we learned the hard way that day -- like the dangers of describing simple things with big complex words.

Here is a quote from Hemingway on the subject:  "...He thinks I don't know the ten-dollar words. I know them all right. But there are older and simpler and better words, and those are the ones I use."  We should always use the simplest words available. 

Since then we have actually added software to our call center services -- so the job of describing what we do has gotten even harder.  Like everyone in our business we need to work hard to speak plainly and directly.  I struggle to find a good reason to  talk about the Pareto Principal instead of the 80/20 rule.  Sure you sound fancier, but isn't the goal to make your point?  If the other person can't remember the difference between that and Parkinson's Law you may have lost them from the conversation for good.

One Example of Irrational Exuberance Meets the Cloud

Disclosure:  My company competes with Salesforce.com from time to time, but our product is a niche extension of what SFDC does and we have never claimed to be a replacement for their product.  I doubt Mark Benioff has ever even heard of our 150 person company.  This post can be read as negative on Salesforce.com -- buy my point is on the irrationality of the stock market more than on the performance of the company.  Salesforce.com has done a great job blazing a trail in our industry.  

Salesforce.com recently released their earnings and the trends I pointed out in my posting: Sales vs Engineering continue.  In short it is another impressive performance.  Growth, profits, and one amazing P/E!  At Friday's close the stock was trading at a price earnings ratio of 114.5!  Yow!  The industry is listed at 21.8 and the S&P 500 at 20.5.  I know there are some irrational investors out there but I just don't get this -- Salesforce.com trades at five times the P/E of the rest of the industry.  No less than 14 analysis have the stock at a strong buy, 4 at moderate, and 14 at hold.  Not a single analyst in the sell column.  

I suppose the logic must be to pay in advance for growth.  A quick look at the articles referencing Salesforce.com from this last week alone and you would think CRM was just getting started and the buy ratings are based on the incredible growth.  I just don't see that either.  It is true that salesforce.com is highly scalable because it offers hosted software and adding a new customer does not cost them much in terms of manufacturing cost.  However, the thought that this cost is lower than other software companies is not true.  Sure they don't have to ship anything -- but neither do any other software companies.  The cost in added bandwidth required for a new customer of a hosted solution like Salesforce.com probably exceeds the cost of delivering an executable over the web as typical software companies do now.  The whole industry operates on a very low marginal cost for adding another customer.  Once the software is developed all software companies (yes Salesforce.com is a software company) keep 90%+ of each additional dollar.

What matters then is the cost of selling.  When your product is nearly free to produce, the biggest expense is either R&D or Sales.  And Salesforce.com takes the cake in high sales cost.  Salesforce.com spends 50 cents of every dollar it takes in on selling costs.  This has been the case from the very beginning.  The fans must argue that awesome growth costs money and when Salesforce.com decides to slow growth, they will be able to radically reduce sales spending and the profits will skyrocket.  So let's dig into that thought a bit.  Over the past three years the company has had an impressive growth rate.  Even now, growing at over 20% per year is impressive.  But 2008 was 50% over 2007 and the deceleration is steady however you run the numbers.  All the while the sales spending is keeping pace with the growth -- last quarter it was 48%. 

Here are some other interesting ratios:

• Salesforce.com spends 5 times as much on sales as it does on research and development.
• Salesforce.com spends $2.50 on sales for every $1 increase in revenue.
• Salesforce.com spends $170,000 on sales per employee per year -- that is every single employee in the whole company.

In the last earnings release conference call Salesforce.com indicated that growth will be declining further to 17% and they are continuing to hire more salespeople.  So the cost of new business acquisition is going up even further.

So here is what I conclude.  High sales cost is heroin.  If you stop doing it there will be serious consequences.  The only logical explanation for the steady investment of 50% of revenue on sales is that no economies of scale in selling have emerged.  This company sells to the enterprise and enterprise selling is hard and expensive work.  It is not like consumer companies that go viral and all of the sudden the product starts selling itself.  They spent $600M last year to produce 20% growth and in 2008 they spent $375M to grow 50%.

So while it is possible that no new competitors will come on the market, no setbacks to cloud computing in general will occur, and Oracle and Microsoft will continue to give up marketshare, I have to think that this valuation is about as good as it is going to get for Salesforce.com. I think even Salesforce.com agrees in that last year they took advantage of their incredible market cap to raise $500M in debt and now sit on a $1.7B pile of cash.

More on Disclosure of my interests:  I do not hold and of Salesforce.com's stock nor do I hold a short position. 

The Problem with Specialty Publishers

The technology industry, like every industry, has a group of publishers serving it.  These specialty publishers are facing even more pressure than the publishing industry overall and it is showing in the quality of their reporting -- particularly when they are reporting on their advertisers.  Take this example from Channel Insider yesterday:

The Story:  

Starting with the headline: "Tech Data's Recession 2009 Strategy Pays Off" Jessica Davis quotes Tech Data's CEO Bob Dutkowsky as saying the company's fourth quarter was exceptional.  She goes on to paint a picture of Tech Data just as Tech Data presented themselves to her.  The main points:  Tech Data's revenue was up in a down market; Tech Data's profits were up; Tech Data walked away from undesirable business.  From the article you gotta think that this Bob Dutowsky is one amazing CEO.

The Rest of the Story:

So let's dig into the numbers a bit. Q4 Revenue:  As reported in Channel Insider, Tech Data's Q4 revenue was great:  $6.28B vs. $5.71 -- and increase of 10% over the previous year. The other three quarters were all down 18%, 16%, and 8% for a total of the year including the killer Q4 of DOWN 8%.  The article says revenue was UP 8.2% even when accurately stating the revenue figures.  I take this as an indication of just how far the author was swept away by the press release, and the fact that no one else read the article before it was posted.  The rest of the industry was down 1.8%.  Ingram Micro (IM) was down 14% and Synnex (SNX) was down 1%.  So Tech Data is doing better than some, worse than others, and worse than the industry.  To their credit, they did pull out some pretty good net income in a tough environment.  

It appears that the investment community looked at the data instead of taking Channel Insider's reporting at face value because the stock fell about $3 on the earnings announcement on 3/2. Eric Savitz at Barrons on 3/2/2010: "Tech Data: Q4 Beats; But Stk Slides As Q1 Outlook Disappoints"

If these publications are going to survive a good place to start would be better reporting.

Deloitte Brings Us Back to Earth

If you have not already read the 2010 Media Predictions recently published by Deloitte -- I recommend it highly.  Leave it to a venerable firm with its feet on the ground to help me gain some perspective on the world we live in.  I was shocked and swayed by several of their predictions and the common thread was:  those of us in the tech industry should remember that the "other half" is really the "other 95%" and they are the customers.  Here is what I mean:

Deloitte Predicts:  "Linear's got legs: the television and radio schedule stays supreme"

What?  There are people out there that still watch TV according to the schedule?  I thought the DVR took over in 2007!  Well it turns out that 90 percent of all TV is consumed according to the schedule and at the rate of between 20 and 30 hours per person per week.  The DVR people only watch 90 minutes a week.  So the schedule dominates.

Deloitte Predicts:  "The shift to online advertising: more selective, but the trend continues"

Well this is an easy one -- online advertising is going to continue to take marketshare.  Just when I am thinking that this is hardly a prediction they point out that by increase they mean going from 10% of the market to 15% over the next 2 years.  With the overall market contracting, this is really not much of a change.  Again, the web is cool, but advertising is a big industry and the web is still the infant.

Deloitte Predicts:  "Publishing fights back: pay walls and micropayments"

They predict that all of the huff and puff around paying for written content on the web will fizzle this year -- I happen to agree.

Deloitte Predicts: "Video-on-demand takes off -- thanks to the vending machine"

Look out Netflix -- here comes the ...... vending machine?  The prediction is that by the end of 2010 there will be 30,000 DVD vending machines in place and a capacity to deliver 1.5B DVDs per year.  This is quite a number -- and even if it does come true it looks like it might at best match Netflix's rental volume.  I suppose the question hinges on how to define Video-on-demand.  Getting a DVD in the mail is hardly on-demand, but driving to the vending machine is not either.  So this prediction is kind of a dud for me except that it reinforces the point I took away:  when you look at the whole market -- things just are not changing that fast.

Do download the article.  There were several other interesting points on eReaders, TV - Web convergence, Music, and 3D TV.  It does not seem like the theme was intentional, but each prediction reinforced the point:  even the most developed marketplace in the world is still dominated by relatively old technology.  Plenty of room for expansion in our market -- as long as we can break out of selling only to our "half".

The Real Reasons for Advertising

 It was right here in Seattle in March of 1922 that Remick's Music Store purchased the first radio advertisement on station KFC, some months later on August 28, 1922 the Queensboro Corporation in New York City advertised apartments for rent on WEAF.  In those days the results were dramatic.  The ads that worked -- really worked, and those that did not were not renewed.  By worked of course, I mean produced more sales.  Back then you advertised to get more sales.  Now the reasons are more complicated. 

There are whole books about how and why to advertise.  Here are my thoughts about the real reasons:

1. Surface New Opportunities: Of course an advertisement cannot actually sell anything.  Even on the web, an ad can only deliver the prospective customer to the web site.  The selling is up to the advertiser.  Some sales are a quick order processes - buying a movie ticket on Fandango for example - but most involve a sales process beginning with the new opportunity and ending with real revenue.  So even today the number one reason to advertise must be to drive new opportunities into your sales pipeline.
2. Improve name recognition (build the brand): Brands are important and advertising can introduce people to your brand.  Interestingly, Millward Brown just released their survey of the most trusted worldwide brands and Amazon.com got the #1 spot in the USA.  I would venture to say that Amazon.com somehow achieved this without advertising.  "Advertising is the price you pay for having an unremarkable product or service," said Jeff Bezos at the 2009 Annual Meeting as reported by the Seattle PI.
3. Defend against the competition: Every industry has a publication that is central to their universe.  This publication, whether on the web or in print, has the trust and the eyeballs of just the people you want to sell to.  An advertiser can work to exclude their competitors from the publication as part of their agreement to advertise.  But only as long as the company continues to advertise.   So if you want to keep the competition out of a publication, just advertise.
4. Make the sales department think marketing is doing something:  Sales is measured by revenue, marketing is measured by.... well we still don't know.  Marketing should be measured by the delivery of new opportunities to sales.  Absent the ability to track such a thing, most companies resort to measuring marketing by the perception of performance.  Advertising is visible and leaves a perception.  
5. Get recognized at industry events:  Companies like to get recognized just as much as people do, or for that matter, just as much as movie people do.  What if you could get an academy award for your movie just by spending a few extra dollars advertising?  Luckily the academy works hard to prevent that kind of thing.  If you want to get recognized in your industry, advertise with the people who give out the awards.
6. General employee feel good stuff:  We have come to think of the people that run Google as logical, quantitative types.  So why spend the big bucks for a super bowl ad when 70% of the searches done in the world are already done on your site? To make sure your employees feel great about working at Google.  It worked and it only cost $2.5M.  

I am not trying to say that companies should not advertise.  There are cases where advertising is absolutely the right tool for the job, but you must know what the job is.  I wrote another post about Getting the Digital Dollars that proposes that as advertising gets more measurable -- sales of advertising will actually increase.  I still think that is true.

Companies that can measure the impact of their advertising on specific new opportunities in their pipeline will be rewarded.

Here are some other lists of reasons to buy advertising:

The Newspaper Association of America

The Newspaper Association of American (web)

San Diego Radio Broadcasters Association

Science vs. Spray and Pray

The recent decline in advertising spending is not only attributable to the great recession. It is also evidence of the marketing industry getting serious about pursuing measureable results. The days of spray (money) and pray (for increased sales) are fast coming to an end and this is a good thing.

The companies that figure out how to measure every step from campaign to revenue are going to have a very large advantage over the others.  By developing a measurement construct that can be trusted, marketers will get the ability to employ a process that looks more like the scientific method.

The scientific method:  develop a hypothesis, invent an experiment to test it, conduct the experiment, and evaluate the results. In the end you get a conclusion about the efficacy of the hypothesis – and the experiment can be repeated to produce the same results.

When applied to marketing campaigns such a construct proves its value because resources can be invested in creating and testing of new marketing ideas.   And when something works it can be repeated and scaled.

Unfortunately, marketing departments that do not have a trusted measurement construct, meaning they cannot measure each step from campaign to revenue, must resort to measuring whatever they can and it often works like this: look for something good in the numbers, look for a marketing activity that could have created the good thing in the numbers, and quickly construct an argument demonstrating the connection between the activity and the outcome. Unfortunately, this does not produce repeatable results.

Worse yet, it creates the illusion of real measurements so progress towards a trusted measurement construct is drained away.

The central challenge to anyone wishing to be more scientific about their measurements is that the initial investment in building the trusted measurement system does not in itself produce any revenue for the company.  With good leadership it can be done and the companies that do so will be well rewarded.

The Ultimate Walled Garden

I spent some time yesterday at Disneyland – the ultimate physical walled garden.  I can only marvel at Disney’s success in controlling every part of the experience.  From the music playing everywhere to the delicate balance of the wait times, to the happy and helpful staff, to the cleanliness, to the renewal found in the new additions, it is hard not to be impressed.

Of course none of this compares to the impressive marketing effort that brought me here for the fourth time since my girls were born – and manages to fill the park just about every day of the year.

Later this spring I am taking the girls to New York City – the ultimate open environment.  My mind is full of all of the potential contrasts – and I can hardly wait to hear what they think.

I was relieved that my girls elected to go to the beach today instead of back to Disneyland.  I have not deciphered their reasons for not going back, but here are mine for being relieved:

1. Coffee:  For some reason Nescafe has the exclusive for coffee in the park.  I do enjoy good coffee and being in an environment where it cannot be found at any price is downright disorienting.
2. Pricing:  The pay at the gate, wait in line, pricing construct is a highly complex business case to be sure.  Once in the gate we pay for rides with our time and the purveyors offer rides at a level that I suspect is just sufficient to prevent the customers from resorting to violence.  In the seven hours we were in the park we got in 9 rides (about 5 mins duration each), waited in line about half an hour each, and consumed one meal of unremarkable quality, and got a fair amount of exercise walking around.
3. Recommend it?  Strangely yes – as long as your kids are 10 or under.  Mine are 10 and 12, so I don’t think we will be back.

So what?  The connection between Disneyland and Steve Jobs is hard to miss.  Pixar is everywhere in the park these days and Steve Jobs is in fact the largest shareholder in Disney.  The Apple customer experience is the Disneyland walled garden of computing.  The iPad looks like it will be building another layer of bricks on the wall and the growing rift with Google and Amazon leads me to believe this trend will continue. 

I recently replaced all of the Macs in our house with PCs – mostly in response to Apple’s efforts to control every part of the experience. 

It will be interesting to see if the Apple marketing machine continues to keeps its park as full as Disneyland does.  

Parallel Universes

Anyone in tech not watching Cranky Geeks is really missing out.  In the past few weeks, John Dvorak and Sebastian Rupley have become the new Smothers Brothers with the straight man - slow guy routine.   Of course they claim to be covering the tech news, and they do regularly have good guests, but it is much more entertainment than anything else.

Now I don't know if either of the geeks has any musical talent, and their humor is certainly not  as widely appreciated, but I find myself busting up every time John Dvorak asks who Om Giga is.  One could say the Cranky Geeks are a parallel universe of the Smothers Brothers show.

This brings up something I wonder about often.  Of the people that participate in the technology industry we seem to have a few parallel universes.  Three that I think about are the Channel, the Geeks, and the New Media.  People and companies often operate in more than one universe, but sometimes it surprises me how much distance there is between them.  

The Channel is concerned mostly with how technology products are sold to businesses and the discussion is usually around the channel partner programs of the main vendors and how the go to market propositions differ from vendor to vendor.  The leading commentators are Everything Channel and Channel Insider and the leading association would be CompTIA.

The Geeks are concerned mostly with the technology itself and the discussion often revolves around new product launches, technology standards, and how the makers of the products are getting along.  The commentators include PC Magazine, TechCrunch, Cnet and the leading association would be CEA.  The Cranky Geeks are probably in this group and maybe Robert Scoble and Leo Laporte.  I sometimes cannot decide where those guys actually fit.

The New Media are the bloggers and maybe some institutions like the New York Times.  The discussion in this group is mostly about how technology is changing the way we consume information and the impact on the newspapers, TV stations, movies, music, and ultimately our society. The commentators include Jeff Jarvis, Dave Winer, David Weinberger, and many others of course.  

As a follower of people and organizations in all three universes I am often struck by how the conversation in one universe can be disconnected from the others.  I will be writing more about this phenomenon and would be very interested in comments on your experiences. 

People You Like

People buy things from people they like.  I don't think this is changing.  In many cases (see previous post) we end up buying things without any people involved.  At those times, we are buying things from brands we like with processes we like.  Well, we probably don't like anything about it much, but we seem to be doing it anyway.

Whenever possible at the grocery store I use the self check out line.  The line is often shorter, but the real reason I do it is the experience with the real person has disappointed me so many times.  How many times has the check out person said "I can't wait to get out of here; my shift is almost over" when you ask how they are doing?  Yes indeed I would rather talk to a machine than someone like that.

When buying something more complex than groceries, say a business service for example, I would much prefer to have a competent and credible salesperson to help me make the best decision.  With the right person I get a much needed education, make a better choice, and probably even spend more money.  In addition, if something goes wrong I have someone to turn to for help.  I am still the buyer and it is still buyer beware, but with a salesperson I have someone with me to help.

Without a salesperson, I become the salesperson -- and that is a whole new level of buyer beware.

Yes we do need salespeople in our business ecosystem.

Everyone Wants to be in Sales

It seems like everyone wants to be in sales these days.  The twist is the new entrants want to be in sales -- without salespeople.  I spend good deal of time thinking about this because my company is an outsourced provider of sales and marketing services.

In the past decade many web based services have forever changed the way that customers interact with the makers of the products and services they buy.  And those interactions are being done more often than ever without the participation of a salesperson.

Travel:  Web services like Priceline, Expedia, Hotels, and Kayak have been cutting the travel agent out of the travel business for over a decade now.  Some of these services have real people in call centers somewhere, but I rarely talk with them and I suspect you don't either.  

Specialty: You can buy just about anything from Amazon, eBay, iTunes, and Craig's List without ever encountering a salesperson.

Advertising: Google is working hard to position itself as the salesperson for everything, but for now they are mostly disrupting the sale of advertising.  Google leads the market for advertising on the web through its AdWords and AdSense programs in a largely self service model.

Homes:  Zillow has not completely blown up the realtors yet, but it may not be long.  

Cars:  The great recession has caused the car manufacturers to dramatically reduce the number of car dealerships.  And car dealerships were mostly full of salespeople.  Car buying may be the next thing we do without the aid of salespeople.

Everything Else:  Last week a the latest digital personal assistant, Siri, was launched.  Yes I know, the Newton never panned out for Apple, and the world (and a box in my garage) is filled with failed PDAs, but if this one gets over the top, it aims to be the salesperson of everything from taxis to concert tickets.  All of this done without any actual salespeople.

All of the human salespeople better do something! 

The New Reply All

Today Google launched Buzz -- its new addition to Gmail that is predicted to be killing everything in its path from Twitter to SharePoint.  That is right, just read these articles and you will see that the Google steamroller is destined to crush at least a dozen companies with the announcement alone!

Mashable

PC Mag

ZD Net

I went to try it today and did not see it in my gmail account -- maybe I will get it tomorrow.  Either way, from what I have read and seen on the video it could in fact be pretty cool.  It would be nice to wrap some of these things that we do in different places into one place.  

On the other hand, anyone who has ever accidentally hit the Reply All button will want to be very careful.  I gather Buzz will enable you to broadcast messages to just a few people, or your entire network, or maybe even anyone.  That is going to be some sinking feeling when you realize you accidentally hit that button.

Stay tuned for more Buzz on Buzz tomorrow.

Social Media Measures You

Our social media tools measure many things and I like things measured. So I suppose I should not be surprised that I find myself drawn into the social media vortex.  In the technology marketing industry, measures matter, and that probably explains why we all find ourselves talking about social media often.  

The ultimate measurement in our business is the top line.  Our job is to generate revenue for our clients and revenue is quite measurable.  Accordingly, we spend our time working to correlate activities to revenues with the goal of understanding which activities to expand and which to kill off.  As potential revenue makes its way through the sales pipeline from campaign to lead to opportunity to deal to actual revenue we measure every step.

Within each step there are intermediate things to measure.  The size of the market, the number of potential opportunities, the qualification of potential opportunities, the number of attempted contacts, successful contacts, conversion rates, close rates, cycle times...an endless stream of things to measure and we have not even added in the cost of each and the resulting ROI.   

So why are we so attracted to the prospect of measuring more things?  Why do we want to add followers, friends, links, hits and other social media measures to the mix?

Maybe it is the same reason I like to mow my lawn.  For me, mowing the lawn is an individual pursuit.  I do it by myself.  I know when it needs to be done, I know when it is done, and I can see the result of my effort.  So far, social media is a decidedly individual exercise and with the exception of a few companies that have implemented collective social media campaigns, the measurements are mostly measurements of us as individuals.  

So I think we like social media because it measures us as individuals.  The rest of our work is collective and the results are team results.  Our efforts are hampered by a multitude of dependencies and corporate constraints.  Our social media activities are refreshingly unencumbered by comparison and we can apply our creativity directly and see the results directly.

Capacity of a Salesperson

How many salespeople does a country need in order to achieve its GDP growth? Can salespeople increase GPD (pull us out of a recession)? If we only had enough salespeople, we could put the whole country back to work. Clearly the world is not this simple, but hidden in a ridiculous argument like this may be a few interesting things to think about.

Every industry has its key metrics and just about every industry has salespeople.  From what I can tell the mid point in salesperson production is about $1 Million in revenue and $100,000 in compensation.  A Starbucks Barista would generate much less and get paid much less, and a bond salesperson on Wall Street -- well much more on the pay part anyway!

So I know this number is weak, but let's just go with it for this discussion.  One salesperson = $1M in Revenue.

The other day I analyzed 8 tech companies including Apple, Google, Microsoft, IBM....  Together those companies generate $400 Billion in revenues.  Using our little formula above, they collectively would need to have 400,000 salespeople to generate this amount of business.  Even though they collectively employ 900,000 people, clearly half of their employees are not in sales.

So where do all of those other sales come from?  Some from automation (Google's service apparently sells itself), but most comes from channel partners.  Partners ranging from the distributors, to the retailers, to the four person computer consulting company in Everytown, USA.

Despite what has been happening on the NYSE the last few days, the economy is showing signs of life.  Our President is looking for ways to get more jobs into the recovery.  Many economists are pointing towards small business as the place where the hiring is going to happen.  Well the President should be proud because this is exactly what we are seeing happen right now.  

The large technology companies are ramping their channel partner programs up in a big way.  This is presenting many opportunities for growth in their channel partners, and those channel partners are hiring.  And for every 100,000 new salespeople we will grow a whole IBM ($100B) worth of new GDP. 

Microsoft = Platform

My first job out of college was as a Computer System Analysis for Boeing Aerospace in 1987. Our group of about 16 people had two responsibilities: get office users in the company to start using all of the computers the company had bought, and establish standards for desktop computing. For those of you who are interested, back then we did email on the HP 3000, used Netware for PC networking, did word processing with Word Star, databases on Rbase, and Lotus123 for spreadsheets. And all of the PCs ran on MS Dos.

I remember getting a call one day from a friend at Microsoft who was working on the MS Word team (Dos only back then) asking about how we made decisions and the dynamics of the relationships inside the company and how influence impacted purchasing decisions.

Microsoft already knew that its success depended on its partners (Novell, WordStar, Rbase, Lotus...) who made apps that ran on their MS DOS platform. Microsoft was just starting to think about another layer to their partner program; internal or external consultants that had an influence on setting standards and purchasing decisions. Back then everyone bought software from Egghead Software -- in today's lexicon, Egghead Software was the Microsoft App Store. It sold all of the applications available to run on the Microsoft Platform. Microsoft has evolved considerably since the late 80s and now has as many partners in the consulting side as it has in the application development side.

Steve Jobs made a big deal last week about the iPhone/iTouch/iPad Platform, the 140,000 applications, and the 3 billion downloads. In technology we love new things and really don't like old things much. So the whole platform idea has been recast as new by Apple. Microsoft has so many applications built on its many platforms that no one can even count them all.

Apple may have a large and growing number of people writing applications for its platform, but in an effort to completely control its environment has actively discouraged hardware partners - even bringing out its own chip this time - and has no interest in building a consulting partner base.

All of this reminds me a little of a company everyone thought was on the way out 20 years ago -- but now generates $100B in revenue with 400,000 employees (IBM).

It would be crazy to count Microsoft out of the platform game.

Two Big Speakers this Week

Two of the most iconic figures of our time took the stage this week. To someone who has been a student of public speaking since I took my first public speaking class in the 9th grade I am bound to find the performances interesting regardless of the content or context.  Add to this my interest in both technology and our nation and Wednesday was quite a day.

Steve Jobs Introduces the iPad

Technophiles and ordinary citizens alike are all hoping this is not the last new product presentation we get from Steve Jobs. His gifts are many and to see them on display is a thrill. He himself has raised the bar so high with the Mac, the iPod, and the iPhone that it seemed almost impossible for him to deliver yet another home run. Of course only time will tell on the success of the iPad but and I found the presentation to be short of my own expectations.

He did not help his credibility when he massaged the numbers to position Apple as the largest mobile devices company in the world. Comparing all of Apple's forward looking revenues to just the current mobile devices revenues of Sony, Samsung, and Nokia does not hold up to event the dimmest scrutiny. This illuminated the fact that he was really speaking to the already converted and I find that the underlying fabric of the whole presentation and product.

There were many references to how the iPad will interact with existing Apple products. This emphasizes the closed nature of the Apple environment, and with their own chip, the porting of existing iWork apps, the exclusion of flash, and the extension of iTunes into iBooks -- this is putting another layer of bricks on the wall around the Apple community. The fans are going to love it, but the product is not cool enough to be the catalyst to new conversions from other platforms.

Ahead of the announcement some had speculated that the device and deals with content partners would save the TV industry. It appears that was never part of the vision for the product. Featuring the NY Times was nice but incremental -- no revolution there. As a gaming platform bigger is better, but gamers are not going to make this their main device -- so I don't really see that as a big change either.

In the end I did not think Steve really was wowed by the product either. If they have sold 250 million iPods -- they clearly will sell tens of millions of these things. But the primary motivation will be for one Apple fan to tell another Apple fan that they have it.

I will get into my thoughts about the Apple upgrade cycle some other day, but that is another reason to not buy the iPad now. Apple will continue to innovate on the platform and 12 months from now the new version will be cooler, cheaper, and maybe not even backwards compatible with this one.

Regarding killing the Kindle -- since Steve proclaimed that ALL iPhone apps work out of the box on the iPad -- that means that anyone buying the iPad can read their Kindle books on the Kindle App for the iPhone. This is great news for Amazon. Amazon has never been a hardware company and I bet they make much higher margins on the books than the Kindle device. So iPad could mean more Kindle book sales for Amazon. Also, Jeff Bezos will be off the hook with the publishers now that Apple is in the biz. So I don't think the Amazon people are going to be unhappy about this.

President Obama Calls it Like it is

It has been quite a year for the President. The vitriol between the parties has left everyone diminished and the independents in between seem to jump back and forth every day. It will be years before we understand how the decisions made by our well intentioned President re-shape our universe. Getting out of the financial crisis by turning from bank regulator to bank owner, and getting out of the war by putting more of our people in harms way, are hard things to explain even when over half the members of the choir are your own.

The good parts came when the President focussed our attention on the reason we need to make changes: The "How long should we wait? How long should America put its future on hold? ...I do not accept second-place for the United States of America." sequence hit the target right in the middle. All of the references to the things we are going to do -- particularly those laced with details like forgiving student loans in 20 or 10 years or $20 billion in savings in government spending next year -- do not resonate at all because we are skeptical about our government's ability to do anything. With the possible exception of sending tax dollars to special interest groups on Wall Street and the Pharmaceutical companies -- there is very little evidence that our government can do anything.

One year into his term, the repeated claim that the problems were not created on his watch, were tiresome and hurt his credibility.

Our President did rise to the occasion however and he showed his resolve calling out the "Deep and corrosive doubts about how Washington works." His proposal to put all earmarks on the web is bold and would be a big step in the right direction. His willingness to get some of the mud on himself by calling out the broken nature of our political process is great leadership. President Obama believes that the government can do good work. He has called out the bad stuff, committed himself to do something about it, and I believe his intentions are honorable.

We should not give up hope and all of us should do what we can to contribute to his success.  

Sales vs Engineering

We are coming into earnings season and accordingly we have the chance to look at the financial reporting of companies in our industry. IBM and Google both posted their numbers last week and that got me to thinking about one of my favorite subjects -- how companies choose to spend their money. Specifically I am interested in how much a company spends on sales and marketing, how that compares to engineering (R&D), and how they each compare to the amount of money a company has available.

We know that gross profit as the amount a company has available to spend on all things not associated with delivering their products or services to customers. There are essentially four places this money goes. General and Administrative, Sales and Marketing, Research and Development, and Profit. A company cannot survive without just the right balance of each of these four things. So I thought it would be interesting to take a look at how eight well known companies in the technology industry choose to spend their money.

Here is a graph comparing the companies on sales cost as a percentage of gross profit. Google has made a big point that their products are so good they sell themselves. They clearly are backing that up with good performance. They are only spending 13% of their gross profit on sales and marketing. The only company spending less is Amazon at 11%. One could argue that insufficient investment is sales will show up in slower growth rates -- but both Google and Amazon are defying that with 8% and 20% growth rates respectively. Salesforce.com is also growing at 20%, but is spending 57% of its gross profit on sales and marketing. So I think you want to be on the left end of this chart -- spending enough to grow the company but not too much.

Anyone wishing to have products that are so good they can sell themselves should be investing in R and D. One of the highest impact decisions a CEO can make is allocating resources between sales and engineering. The temptation is to invest more in sales because the results will show up faster there. But a company that starves its engineering effort in order to invest in short term sales results will pay the piper later. Here is a graph showing R&D spending as a percentage of gross profit. I think the left side of the chart is where you want to be for long term health in the company.

Once we add the two together, it is interesting to see that Apple, Google, and Amazon end up on the good (left) end of the chart. And all three of them are also turning in impressive growth numbers. The stock market agrees with this analysis because these three companies are on the high end of P/E ratios as well. Strangely, the highest P/E ratio of all is for Salesforce.com -- a staggering 110. I don't get this. To me it seems like Salesforce.com is having to try very hard to generate revenues by spending 57% of its gross profit on sales and is investing less than anyone in R&D. Could be a correction in the works there.

Finally, I think sales spending and engineering spending diverge in one significant area. Sales should always be compared to near term revenue, but investments in engineering can in some cases be disassociated with current revenues. In other words, size does matter here and this is where we see Microsoft flex its muscles. Microsoft is not spending the highest percentage of gross profit on R&D, but it is way ahead of the pack on total dollars committed -- over $9 Billion! This is a full 50% more than the next biggest number which is IBM -- who has 4 times the employees and two times the revenues.

Microsoft is spending six times as much as Apple. So far Apple has been the premier innovator -- something that will be hard to forget this coming week. But don't count Microsoft out yet.

Another SMB Move by HP

In my January 5 post on predictions I listed the line between consumer and business as one of the interesting things to watch in 2010. In the last few weeks, HP has been made a few announcements that seem to be focussed on this very issue. First they entered into a partnership with Microsoft to promote cloud computing to SMB and yesterday they announced a new sales and marketing effort called SMB Exchange to go after what they have estimated to be a $55 billion market in the US. As the market in between the consumer and business, SMB has always been tough to tackle. True it is not as fragmented as the consumer market where there are just as many decision makers as there are PC sales, but the dollars add up almost as slowly.

Of the approximately 150 million people employed in the US, half of them work for the roughly 120,000 companies with 500 or more employees. So if you want to sell computers to the 75 million users on the big business side -- you only have to target 120,000 companies. If you want to sell to the other 75 million users -- you have to pursue over 6 million targets. This is why companies like HP rely so heavily on channel partners to reach the SMB market, and presumably why HP has launched this effort. Working down from the 500 employee line, there is probably $55 billion in IT spending in the 700,000 businesses that employ between 20 and 499 people. Even this is a daunting number without partners.

So to those that are thinking that HP intends to cut their partners out of the market, take comfort in knowing that no matter what HP does in Rio Rancho, they are not going to be able to cover this entire market. In addition, there are 5 million businesses in the under 20 employee market up for grabs. Many economists have been thinking that this is where the hiring is going to happen when the recovery finally turns into more jobs. It will be interesting to see how our industry works to take advantage of that trend.

Old Channels meet New Channels

Channel marketing in the tech industry is not really all that new -- unless you compare it to car dealerships.   I often refer to the network of automotive "channel partners" when speaking about how the intermediated sales model works.  The next few years in the automotive sales and marketing business are going to be very interesting as the marketplace gets more fragmented and cars gain more technology.  It was pretty hard to miss Ford at CES this year!

Tech has had a hand in automotive sales peripherally for a few years now.  Every time a car was considered or not considered on the basis of iPod integration -- Apple had a very large impact on auto sales.

Todd Bishop has posted a good article in TechFlash  on some technology companies from the Pacific Northwest that are leading the way in this convergence of the auto and tech businesses.  It is only a matter of time before the sales and marketing elements of these industries also start to blend together.