IKEA Catalog Cover 2012

If you’re like me, then you were anxiously anticipating the arrival of the new 2012 IKEA catalog, and as soon as you got it in your hands, you couldn’t help but flip through it right away.

The printed IKEA catalog has been around since 1951, and IKEA now distributes approximately 175 million copies worldwide each year. The catalog is beloved by IKEA fans, and is acknowledged by IKEA as their main marketing tool, consuming around ¾ of the entire marketing budget each year. In fact, even the most ardent fans of the company would be hard pressed to recall an IKEA TV commercial (unless you watch a LOT of HGTV), print advertisement, or web banner.

More recently, IKEA supplemented the catalogue by launching a website in 1997, and subsequently added online shopping in 2000. While this may not seem like such a big deal in the age of ecommerce, IKEA has built itself on its in-store experience. Going to pick up a shelf or a bed frame is as much about walking the showroom and being inspired as it is about purchasing a cardboard box filled with flat-pack fiber-board. In fact, with almost no additional marketing effort beyond the printing and distribution of the catalogue and the wonderment of walking through its staged rooms, the company grew from a single store in 1943 to more than 150 in 1996. Of course, customers have always been able to order over the phone utilizing the print catalogue as a guide, but the move to online retailing marked a significant shift in corporate mindset for a company that has achieved extraordinary success by largely avoiding the flash in the pan marketing and advertising trends that come and go year after year.

Yet now, for the second time in less than 15 years the company is undergoing a similar shift in philosophy, as a digital application version of its catalogue has been created specifically for the iPad. I admit, it may seem as though the company is simply adapting the same old idea for a slightly modified medium, but the app is more than just a digitized version of the catalogue with some fancy page-turning graphics, it is a new way of thinking about the IKEA experience.

I was eager to check out both versions, and was immediately drawn in to my trusty paper version by the gorgeous room on the front cover. At approximately 375 pages, the full-color catalog features beautiful photography, and showcases all the old and new products and pricing. As usual, the layout is organized, yet there is enough fluctuation to keep it interesting. At a modest 7.5 inched by 8.75 inches, the catalog is not too much larger than the iPad screen.

IKEA iPad Application

The initial screen of the IKEA iPad App.

I was definitely curious to see what else IKEA would bring to the iPad version, and was keeping my fingers crossed that it wouldn’t just be a tablet version of the website or a pdf that was available though the app store, and as it turns out, my concerns were unfounded. At first glance, the iPad version does in fact contain all the pages and information in the printed version, and anyone who has viewed one will quickly feel a sense of déjà vu while browsing the other. But, IKEA did not stop there, and really made full use of the touch screen interface. The application contains links to the contents page, the IKEA website, and also has a bookmark function to mark your favorite pages, and after a quick visual tutorial, I was able to easily navigate through the app. Almost every page has extra content, which includes more detail about the designers, and more specifics about their new products. Some pages even have videos with IKEA employees further explaining the design choices, and touring the spaces. The one feature that I would have liked is the ability to touch any item pictured in the scene, and get specific product information about it, but overall, I was very impressed at how much more content they were able to bring to the app, as well as the intuitiveness of its navigation.

IKEA Kitchen Page

The Kitchen page of the printed catalog, and some of the extra content fron the iPad app.

Ultimately, the question becomes, what does the digital version of catalogue bring to table that the print version does not, and how will one affect the other? First of all, the benefits of using the digital version for the shopper are obvious; more information, more personalization, and easier search and navigation. But the app does more than that, it makes strides to bridge the gap between the convenience of catalogue shopping and the experience of walking through a retail store. The additional content available in the app is accessed easily and organically. It does not require you to weed through pages and pages of information if you aren’t interested, but it does allow you a bit more insight into the rooms and products in the stunning, yet 2-dimensional photos if you are curious about them. For a company more like Sears or Best Buy, who lines up all the dishwashers next to each other and encourages their customers to make the rational decision, an app like this would be useless, but for a company who encourages their customers to buy with their hearts and eyes, this app gives them the chance to immerse themselves in the world of IKEA, even when they can’t make it to a store.

Obviously, the iPad version is aimed at a specific, and somewhat small audience compared to the worldwide IKEA clientele. But if everyone enjoys using the iPad app as much as I do, then it is absolutely possible that iPad users may choose the digital version over the printed version next year. And if that happens, you can surely expect to see versions tailored for iPhones, Android phones and tablets, platform specific programs for computers, or even a total redesign of the IKEA website in the very near future. This sequence of events would eventually reduce the cost of printing and mailing, not to mention the reduction in waste that jives with the company’s current eco-friendly initiatives, and while I don’t think there will much impact for at least a few years, we will certainly see IKEA echo newspapers and books, and begin to shift to more digital content and less printed content.

Aside from the potential to lessen the costs of their marketing efforts, what other effect will it have? It’s hard to say so soon after its release, but there is definite potential for it to help increase overall sales. Now that it’s downloaded to my iPad, I will keep it for future reference, and there is now very little to stop me whipping it out mid-conversation to show someone what I am talking about. That means that my 2012 IKEA catalog will be with me whenever and wherever I carry my iPad. Of course, my iPad doesn’t come everywhere, but I can say that I’ve never made a point to take my printed IKEA catalog any further than my coffee table.

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Netflix Doesn’t Give a Crap About Me

How Netflix Could Have Raised Prices without Completely Ruining Their Credibility

For those of you who aren’t subscribers or have not been following the news surrounding Netflix in recent weeks, the company has announced that they will be drastically raising their prices, and the decision has been met with an understandable amount of ire from within their customer base. Currently (though about to be altered as per the new pricing scheme) Netflix offers several easily comprehended levels of service; 1 Disk at a time through the mail for $9.99 per month, 2 Discs through the mail at a time for $14.99, 3 for $19.99, and 4 for $27.99, all of which offer unlimited online content streaming as part of the subscription price. A streaming only plan was also available for $7.99 per month.

In an overtly direct press release on July 12th, Netflix announced that they would be separating their DVD by mail and streaming content services. A single DVD would drop to $7.99 per month while two at a time would drop to $11.99, and it appears that 3 and 4 discs at a time have been phased out altogether. Additionally, to continue to have access to the company’s streaming services, customers would be required to pay an additional $7.99 per month, meaning that a subscriber who wanted to continue to use both services would have to pay a total of $15.98; a 60% increase from the $9.99 they currently pay.

Ultimately the issue here is not that the company chose to raise prices on the services that they offer, in fact as recently as 2010, they increased the cost of a single DVD by mail by $2. Rather, it’s the method through which they chose to implement the decision and the general lack of appreciation for the customers who have made them what they are today.

To me, the decision to release the statement directly to the media in a press release, foregoing direct contact with their subscribers first, is a mind boggling one. This is a company that, with their customer’s full permission, sends out as many as 3 emails per movie or TV show watched, ensuring that discs were delivered promptly and that the quality of their streaming content was acceptable. It is not much of a reach to imagine a scenario where a carefully worded, mass email was sent out to each and every subscriber before the information was disseminated to the press. Yet it was only after the story was picked up on the news that they sent out a tersely worded email to subscribers notifying them in as few sentences as possible that they would be billed more unless they took direct action to change their accounts

The lack of a well timed notification from the company is staggeringly irresponsible from a brand loyalty perspective, but even more egregious was the message behind the announcement. You can read the full press release here but in essence it made no apologies or coherent rationalizations for the 60% price hike, and instead they did the absolute worst thing they could do; they told their customers what to think, and they did it with a bit of an attitude. In generically explaining why they were raising prices they danced around the notion that their subscribers valued choice and that by separating their two services it allowed them to tailor the service directly to individual preferences. They made it abundantly clear that they, the company, were not making enough money off of their DVD-by-mail service, yet they never once mentioned the reality of the fact that most of their customers want both services and would be subjected to a substantial price hike, or for a moment suggested that the increase in price would benefit the customer in any way. The internet practically imploded with rage.

The reality of the situation is that Netflix absolutely has to raise their prices. As the founder of what is quickly becoming a crowded segment, they had the luxury of structuring several highly lucrative content streaming deals with TV channels and movie studios long before either recognized the value of the service. In 2010 Netflix paid approximately $180M in licensing fees, yet as their 4 and 5 year deals expire and are restructured, it is estimated that their licensing fees in 2011 could top $1.9B. THIS is an acceptable reason to raise prices. Trying to convince your customer base that they wanted more choices at higher costs is not. The company, in the end, was thinking like a company that needs to balance their income and expenses, and for some unknown reason they expected their customers to share that perspective.

Incredibly, Netflix was able to make the situation infinitely worse, as company spokesman Steve Swasey apparently loves the taste of his own feet and keeps continuously shoving them in his mouth. In an interview following the press release he claimed that many customers want the option of streaming-only or DVD-only packages, and said:

“We wouldn’t have charged this when the streaming catalog was still lean. The streaming catalog is robust to the point where a lot of people won’t want DVDs anymore.”

When millions of customers responded with irate messages to the contrary, Swasey went on to say:

“We knew there would be some people who would be upset. To most people, it’s a latte or two.”

Then when the inevitable backlash on THAT message started pouring in he confirmed his absolutely asinine ignorance by releasing a statement that said:

“I made a comment to someone, on background, that the $6 difference between the old and new prices is the equivalent of a couple of cups of latte. And that’s gained a lot of traction. I’ve received a bunch of hate mail, because people thought Netflix was being insensitive to people who don’t drink latte. That’s not the case at all. I’m not a coffee drinker, and my wife drinks regular joe.”

Typically I would attempt to break down such a series of statements into where he went wrong and why, but I am actually at a loss for words, so I will simply say that this man is coming across as a fool of the highest order. First of all I personally take issue with the statement that the streaming catalogue is, to use his words, ‘robust’ because unless you like straight-to-DVD releases, hopelessly low-budget knockoffs of popular films, and obscure documentaries, you will quickly run out of things to watch. Then to insinuate that by cutting back on coffee his customers can continue to afford the service his company is providing is wildly inappropriate and completely misses the point. And finally to respond to that statement with an even more idiotic one is either a very poor attempt at sarcasm or a confirmation that he is in fact the worst PR man on planet earth.

Oh yeah! That's that movie I've never even heard of before! I'll watch it when I get back from Starbucks...

It is my opinion that Netflix customers are not really angry about the price increase. Sure, $6 per month translates to $72 more per year and that is no inconsequential sum, but really they are upset about the cavalier way in which they are being treated. The company is acting as though this cost hike is the natural and expected progression of business, yet their customers are not directly seeing the reason behind any of it and are becoming increasingly annoyed at the disinterested and disconnected way in which their concerns are being (or are not being) responded to. In fact, as if to hammer home their new customer service policies, anyone who reduced their service to the streaming only level received a rather curt email instructing them to return any outstanding discs they may have or face being billed for the missing DVDs.

It is my belief that this entire situation could have been avoided with a little more attention paid to the customer, and that it can actually still be salvaged, despite the fact that Netflix now ranks dead last among the media streaming companies in brand perception, their stock price dropped 10% in 2 weeks, and unsubstantiated reports have surfaced claiming that more than 2 million people have cancelled their subscriptions since the announcement was made.

First of all, we have established that the channel through which the message was released was not right at all. Subscribers deserved to know what was going on before anyone else, and even though the news would have quickly spread to other media sources, it would have given the company a slightly stronger leg to stand on having put their customers first.

Secondly we have established that the message was completely wrong. One of the first rules of branding is that you can lay out all of the facts for consumers, and you can even suggest that they feel a certain way about them, but ultimately you have to let them make a decision for themselves, and Netflix failed miserably at this. In attempting to tell subscribers what they did and did not want, and convince them that this increase came at their own request, they opened themselves up to attack, forgetting that online social networks offer a fairly unrestricted platform for customers to vet such an unlikely claim with each other.

Netflix should have approached the situation by being as transparent as possible, and openly claiming that their commitment to providing customers with the most high-quality streaming content on the net required that they restructure a number of licensing contracts that will unfortunately translate to increased costs to the end user. Within this context it makes perfect sense that the two services (streaming content and DVD by mail) be separated so that anyone who does not wish to use one or the other is not subjected to the price increases associated with it. I am sure that people still would not have been overly happy about the rising costs, but at least they would have understood the reasoning behind them and felt as though they were getting something for their money.

Which brings us to the several things that Netflix COULD have done differently to make this price increase less of a slap in the face to its loyal customers, and they all revolve around the idea of generally being nicer to the user.

Netflix runs a service. Their product is nothing more than the distribution of other people’s products, and when a service stops paying attention to customer service you know they are in for trouble. The key to maintaining a strong service is the continual demonstration of value to the customer. Unlike a product, which is paid for one time and continues to satisfy its intended purpose over and over again, a service must exist in a constant state of positive interaction with the consumer in order to maintain its appeal. Generally speaking, Netflix should have approached the situation from the minds-eye of the consumer, rather than the analytical eye of their accounting department, and I have come up with three simple ways in which they could have helped to make this a reality.

If in fact Netflix had chosen to adjust their message in the previously suggest way, they could have also implemented a gradual price increase as opposed to a one time massive adjustment. I would hazard a guess that despite their ever-growing catalogue of streaming movies and TV shows, and the rising number of users viewing them, any customer satisfaction surveys are still likely to allude to the fact that users want more new releases and popular films available to them. Therefore the existing price increase has very little demonstrable value to the customer, as they will soon be paying a great deal more for the same service that they already weren’t entirely satisfied with. However, if the company had released a message to its customer base saying that the price would be rising $2 every six months for the next year and a half (the same $6 total increase) while the company restructured their licensing deals and began increasing the number of offerings in their streaming catalogue, it is very likely that subscribers would be more than willing to wait it out and see whether the improvements justified the eventually identical price increase.

And yes, you are absolutely right. Even with the 2 Million subscribers (and counting) who have canceled their subscriptions, the company will still make more money over the next 18 months under the new pricing scheme than they would with my proposed graduated one (about $250M more, or about 4% of their totally revenue). But it remains to be seen how much damage is yet to be done to the brand and to the company because of Netflix’s ineptitude, and I don’t imagine that it is a stretch at all to believe that their ‘new-subscriber’ rates will go down dramatically, whereas publicly increasing the services offered under a graduated plan would undoubtedly have attracted new blood.

One of the primary sources of these new customers is through the sale and receipt of gift subscriptions, and the continuation of service once the gift duration has expired. However under the new agreement, all gift subscriptions are being honored for their monetary value, and not for the service level that they were intended to provide. This means that a gift of $120 meant to provide a single DVD at a time and unlimited streaming for an entire year will now last for less than 8 months before the individual who received the gift will have to begin paying for the service themselves. It is my belief that as a show of good faith, all gift subscriptions should have been honored for their intended duration and not for how long they can last before running out of money.

Lastly, the company is taking much too hardline a stance on the battle between their streaming and mail services. Publicly, they seem to believe that their streaming catalogue is on the cusp of replacing their DVD-by-mail business, but privately, they must know that it does not provide anywhere near the same selection. In all fairness, they probably know a lot of things that we, the general public, do not. In fact, they may have several extraordinary deals in the works that will transition every movie they own to their streaming service. But the bottom line is that at present, any such information is being kept behind closed doors and what we, as customers, are left with is a corporate statement that seems quite out of touch with the reality of the situation.

I understand Netflix’s desire to push their streaming services, as they certainly are the future of their business, and they have far lower overhead costs than mailing hundreds of thousands of DVDs per week. But the most important thing for them to keep in mind during what should be a very slow transition, is that the customer experience always has to come first. There are certainly ways for them to highlight their web-based products and showcase the new features and content they are going to have to add to keep it competitive, but to downplay, or worse, devalue, the DVD-based service that meets the majority of their customer’s needs is like a condemnation of anyone who still wants to make use of it. They should continue to take a balanced approach to promoting both services until there is enough of an overlap in content between them that customers can have ultimate freedom of choice in which service they would like to use. Only then will they be able to reduce, and eventually kill off their DVD business without really affecting their customers.

For those of you out there who are holding on to hope that Netflix can to return to its former glory (all 12 of you), take solace in the fact that all is not lost for them quite yet. They have certainly not thought through their actions of the past month, and their PR gaffes may be remembered for quite a while, but they still have the opportunity to save face if they make the choice to admit to their mistakes.

In a world of absolute transparency, it is honesty, more than anything else, that wins customers. We live in a time where nothing can be kept in secrecy, and everything gets out eventually. If you do something wrong, publicly acknowledge how wrong it was and what you intend to do about it. If an unforeseen complication arises, tell the world and then fix it. And if you have to raise prices, be honest about why rather than crafting some innocuous PR line about how you are simply satisfying the needs of your customers. There is an old saying that ‘only the truth will set you free’ but never has it been more relevant in business than right at this moment.

What do you think about Netflix’s recent strategy? Are you a subscriber? Were you a subscriber up until 3 weeks ago? Tell us what you think!

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Fireworks Explode as the Industry Starts to Implode

Why our cherished fireworks displays may be overthrown by new technology.

With another 4th of July upon us, most Americans are getting ready for a long-weekend filled with parades, barbeques, and fireworks. In fact, for most people, this holiday would not be complete without these patriotic-themed celebrations, capped off by the obligatory ritual of colorful explosions filling the night sky. The tradition of launching fireworks on the 4th dates all the way back to 1783, when they were used in Boston to celebrate the end of the Revolutionary War, and the tradition is still enjoyed by many today. But there are several indications that these shows may start to take on quite a different look in the future.

For the exclusive few in the fireworks industry, this yearly tradition is truly the bread and butter of their businesses. Much like Valentine’s Day is to the chocolate trade, July 4th, or Independence Day, is the holiday that mainly supports the fireworks industry in the United States. Ironically for such a patriotic item, most fireworks are manufactured outside the U.S., and the American based companies make their money primarily through retail distribution, and display production. Since strict federal regulations and exorbitant insurance costs are difficult obstacles to overcome, these current market leaders face little competition from potential newcomers, and it would seem that there is little threat to their future. However, there are three things that are exerting serious pressure on the growth, and potentially the existence, of the fireworks industry, as we know it: the down turn in the economy, environmental concerns, and new technology.

While some fireworks displays are a small part of a larger event, most displays, especially those for July 4th, are free events financed by local governments. With the economy in its present state, it has become difficult for some smaller governments to fund such events. In fact large-scale municipalities like Chicago and North Providence, RI, have already scaled back, or eliminated the programs all together. The choice becomes whether to cut the performances entirely, much to the disappointment of eager townspeople, or to continue the tradition, potentially incurring unnecessary debt in the future. At this point in time the overall sentiment seems to be to keep these types of events in tact, as many government officials feel that bringing the community together for celebrations like Independence Day maintains a strong sense of patriotism, fraternity, and civic pride. But as local government budget crisis’ escalate, expect people to continually look for viable alternatives to fireworks, or begin scrapping the celebrations all together.

The world has also become more conscious of polluting the environment (see why here), and more attention is being directed at anything that has the possibility of negatively affecting the air quality, water quality, and wildlife. Of course, accurately measuring the effects of chemicals, casings, and the resulting debris, from the fireworks that are shot up in the air is not easy, but a potentially harmful chemical called petrochlorate has been found in local water supplies directly following fireworks celebrations. In an effort to preempt community outrage, major manufacturers are constantly striding toward using safer chemicals and launching technology that reduce their overall impact on the environment. For example, Disney has adopted an air-launch system that eliminates the chemicals used to propel fireworks into the air. Since Disney World in Florida is among the top commercial users of fireworks in the U.S., this innovation has allowed their nightly fireworks to continue with lessened negative effects on the surrounding area’s population and environment, and by incurring the substantial development costs, Disney has made this technology more accessible for smaller communities to adopt.

However, some states have enacted bans on fireworks for reasons other than environmental damage. States like Arizona and Colorado have prohibited fireworks for the potential wildfire threat that they present. Unable to cap their celebrations the traditional way, they are seeking other types of amusement, and many have settled on laser light shows and 3D projected light shows. Largely supplying the same grand effect, but with less potential pollution or wildfire concern, these newer technologies will undoubtedly continue to grow in popularity due to their safer nature, and their potential for customization. Not only can these types of shows be synced to specific music, but they can also contain specific imagery as well, and if technology like this can create a comparable experience to traditional fireworks, then it’s possible that many groups in the future will make the switch.

Laser Show for an Independence Day Celebration

A modern laser light show put on by Lightwave International.

Overall, these factors do not bode well for the fireworks industry, and there’s a good chance that the big players in the industry will have to get much more creative to stay in business. While the retail outfits may have their hands full creating eco-friendly versions of their already popular products and more advanced launching systems, the solution for the fireworks display companies is to expand their service offering. Instead of simply providing the actual pyrotechnics, they should look to create a complete experience including event planning, entertainment acts, security, and even post-event clean up. A more full service approach would allow for more revenue opportunities for the business, and translate into cost savings and simplicity in planning for the customer.

I think that we can all agree that it would be a pity to lose such an entertaining, nostalgic tradition that has been a part of American culture since its conception. But it is a very real possibility that these town-wide, city-wide, and country-wide, events may start to dwindle in number and frequency due to economic and environmental concerns, or simply a desire to try something new and different. For those events that are able to continue, the American public may need to embrace the idea that these events will start to change, and ultimately may take shape as a more technologically advanced light show, and less of the standard fireworks display we have grown accustomed to. At the crux of it all, it’s really the experience of togetherness, and the celebration of American culture that people seek at an Independence Day celebration no matter what form the entertainment takes.

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How Three Brands May Have Changed The World of IPOs For Good

Several prominent web-based companies have gone public in the last few weeks, but are their eye popping values the result of their potential to make big money, or are they due to something else entirely?

Over the past few weeks there have been a series of very high profile, very high value tech IPOs (Initial Public Offerings) that have hit Wall Street, fueling speculation that we are either entering into, or are already in, yet another tech bubble. As many of you are probably aware, much has been said and written about the wild overvaluation of these web goliaths, yet despite this pervading belief, investors have firmly bought into the hype surrounding them.

Now, before we delve too deeply into this issue, let me say that I am not a ‘finance guy’. I don’t understand the ins and outs of taking a company public, nor do I have a deep comprehension of what factors directly influence the monetary valuations of companies when they do go public. If I’m being honest, I typically do what my accountant and my financial planner suggest that I do, and sometimes I have to make them repeat it to me twice before I know what they’re talking about.

That said, finance and business, while intrinsically related, are not two sides of the same coin. The goal of this article is to examine the business practices, and by extension the branding practices, that have recently proven so effective in influencing the financial markets, and to do that we are going to focus on three big tech companies; Pandora, Groupon, and LinkedIn.

Pandora, for example, has been around since 2000, and in that time it has lost over $92M. Last year, their most “profitable” ever, the company was still $1.8M in the red, due mostly to paying nearly $140M in artist’s royalty fees. For those that aren’t familiar with it, Pandora is an internet radio service that allows users to customize the styles of music they want to listen to, without specifically requesting the tracks they want to hear. For anyone listening up to 40 hours per week (the vast majority) the service is free, while anyone over 40 hours is asked to pay $.99 to continue listening for the remainder of that month. Over the past couple of years, the company has also begun inserting short 30-second advertisements every 6 to 8 songs in an effort to increase revenue, as well as offering a yearly $36 unlimited, ad-free account, yet nothing they have done has been able to turn the company into a solvent entity.

As a Pandora user, I love the service, but there doesn’t seem to be much a business model in place. They can only insert so many advertisements before people stop listening, and as a program or service that typically runs in the background, visual ads on the site would have little to no value. Any corporate partnerships with music labels or individual artists would compromise their ability to tailor music specifically to the users preferences, and with so many smaller, free competitors, they cannot hope to move to become a paid only service without losing the majority of their user base. So what is it about a company that can’t turn a profit and doesn’t seem as though they will be able to in the foreseeable future that is worth a valuation of $2.6B? Fans of the website are borderline rabid in their devotion to its simplicity, its ease of use, and its comprehensive music library, but their usage does not directly translate to money in the company’s pocket, and the stock price has been fairly volatile since its offering as investors try to make sense of the situation.

One of the biggest trends on the web at the moment is collective buying, and Groupon is currently the leader of the pack. Collective buying works on the same principle as bulk warehouse clubs like BJs or Costco, except that they typically feature only a few deals each day, in each regional market that they serve, and it is most often for a service, event, or credit at a specific restaurant, rather than a physical item or set of items. A typical deal is initiated by the service provider and placed through Groupon with a 50% reduction in cost. Groupon then splits the revenue on each sale, meaning each party gets 25% of the total actual value. Launched in November of 2008, the company hosts more than 35M users in more than 250 separate markets, and recently turned down a $6B offer from Google, preferring instead to go public.

Groupon claims that their revenues topped $713M in 2010, yet several analysts contend that upwards of $615M of that came from various acquisitions and substantial marketing spending. In fact after accounting for all of the various movements that the company made last year, less than $100M of that revenue came from the natural growth of the business, and since Groupon does not release their actual financials, we don’t know whether any of this has made them profitable. Yet the company, which has filed for its IPO, but has not yet completed it, claims that they will seek to raise over $750M at a price that will value the company at around $20B – $25B.

To the vast majority of users, the beauty of Groupon is in its simplicity; a couple of carefully selected deals per day, no usage fees, and full accountability in case anything goes wrong. The deals represent a pleasant little opportunistic surprise for those with some expendable income, but who probably would not deliberately seek out the services that are being offered to them. In many ways, the community of Groupon users all share the common desire to indulge in something out of the ordinary, but they do so only because they can rationalize it as ‘a deal that was too good to pass up’. The majority of businesses who participate in these deals praise the company for the one-on-one attention they receive, and despite only 66% of them profiting from their offers, almost all say that due to the exposure they receive, they would host another deal in the future. But many argue that in order to meet the expectations of its future stockholders, the company is going to have to drastically shift its business model to allow many many more deals each day, in larger geographic markets, with lower discount rates, from a wider variety, and thus, less curated selection of merchants, and the deals themselves will automatically be set up over the web, without the personal attention of a regional representative.

Essentially, this means that the business formula that has made Groupon so successful today is being thrown out for one that is far less special in an effort to increase their profitability. Troublingly, this is not raising any red flags for investors seeking short-term gains, and the IPO is expected to achieve the valuation the company has placed on itself.

The first decade of the 21st century is bound to be remembered as the one where social networking was the answer to every single problem in the world. Want to reconnect with your high school girlfriend? Social Networking! Want to meet someone new instead? Social Networking! Want to find a new job? Social Networking! Want to solve global warming? Social Networking! Have a toothache? Social Networking! And it is in this regard that LinkedIn has become the modern day equivalent of the power lunch, allowing professionals to endlessly connect with each other through mutual acquaintances.

Founded in 2002, the site has more than 100M members from around the world, and claims to grow by 1M each week. Although the company offers paid memberships that allow for more advanced methods of connection, the vast majority of members hold free accounts (Aura is on there, check us out!). And while the company sells advertising to the more than 2M companies on the network their primary source of income is actually the sale of ‘hiring solutions’, which essentially amounts to digital headhunting. Last year the company posted a net income of $243M and a first time profit of $15M, 42% of which came from being hired to match employers and employees.

LinkedIn’s IPO, which took place on May 18th, valued the company at just over $9B and shares, which opened at $45, have traded as high as $103 over the past few weeks. This, coincidentally, accompanied news that the company expects NOT to turn a profit this year, despite their extremely modest gains last year, alluding to the fact that they simply do not do enough paid business to meet the needs of their sustained growth. Having discovered that advertising and paid accounts simply don’t pay the bills, the company is going to have to massively expand their job matching efforts, which may prove to significantly impede their ability to be seen as an impartial, unobtrusive networking tool in the future.

In case the subtext of the three recaps wasn’t clear enough, these companies simply do not make, nor are they expected to make, enough money to justify their valuations. The fact that each of them is planning a tremendous shift in business model following their IPO should be a warning flare to investors, but very little seems to temper their enthusiasm for the possibility of big gains. Long-term, what really are the chances that all three services become better than they are right now after their core strategies have been altered in order to increase their profitability? I’d wager the odds are not in any of their favor, and in a way it’s not entirely their fault.

The problem is a gross misunderstanding of scale in the digital age. LinkedIn boasts over 100M users, and the first mistake is thinking that a user is the same thing as a customer. Many investors are seeing such eye-popping numbers, and they can’t help but start to salivate, but they do so without realizing that in this day and age, the size of a business is no longer a good indicator of its financial potential.

Once upon a time, any company with over 100M customers was a world changer. Unless they were inept and on their way to bankruptcy, it was almost automatic that they would be making serious money and wielding a serious level of influence. The logistical tasks associated with physically making and moving more than 100M of anything goes a long way toward establishing a price for that item, and the majority of consumers can subconsciously justify the cost of an object based upon its size, origin, and perceived complexity.

But the internet has greatly changed this dynamic. Some online retailers have, of course, been very profitable, but they still trade primarily in physical goods. Rather, we’re talking about a trio of web-based companies that are highly visible, well known, and yet whose primary offering has little or no monetary value to their users. And these three are just the tip of the iceberg; there are literally thousands of successful web networks and services that are immensely popular, and nearly every one of them has achieved their level of success by giving access and the majority of their content away for free. As each has demonstrated, when it comes to the web you can be the industry leader in your segment, and you can have tens or even hundreds of millions of loyal fans, but none of that equates with making money when your users don’t feel they should have to pay for the service you’re providing.

Now in the interest of fairness, each of these three companies has found ways to make money without damaging or changing the relationships they have with their users. In fact the wealth of the founders and executives of these types of companies is often a high-profile topic, but the issue again is one of relative scale. Traditional finance thinking says that a business with 100M customers and $15M in profit must be doing something wrong, and that with the right cost-cutting measures and business adaptations, they could be making significantly more money. I would argue, however, that a social networking company with 100M users and $15M in profit may well be the new norm, and that by the very nature of the service they provide, it is quite unlikely, for all of the previously listed reasons, that they can substantially increase that profitability without losing the trust of their community of users.

It would be easy to call Groupon the black sheep of this trio. While their service is based in social behavior, they are not really a social network, and their users conduct monetary transactions which the company is ultimately benefiting from, as opposed to providing free usage for the vast majority of their community like Pandora and LinkedIn do. They are also arguably the most financially successful of the three companies as well, and are probably the best positioned for significant profitability in the future. But the point I’m trying to make not that they will never make money, it’s that they will never be worth what traditional economics says they will. Any company that nets $700M in the same year they refuse to reveal their profit statements simply is not worth $20B – $25B, but Groupon is essentially getting a free pass because investors cannot seem to reconcile the notion that in the digital age, a company can be both big and small at the same time.

Ultimately, the world of finance is falling in love, not with the companies themselves, but with their brands and the abstract immensity they represent. These brands are modern and exciting. They are popular and very ‘now’. Their users are loyal, and each service has succeeded in striking an emotional chord within its respective community. But these are generally not businesses that have been built as money-makers from their inception. Digital technology has given rise to the ability to build a website or network from your living room that satisfies a perceived need, and global interconnectivity means that it can grow at a rapid pace. But without the need for pre-launch financial backing and extensive management, these sites can grow to extremely large sizes before anyone realizes that they aren’t properly positioned for profitability.

Clearly this is a concept that traditional finance cannot seem to grapple with, and with so much positive attention at such a grand scale, investors are sticking by the notion that each has to be able to make money somehow, despite most evidence to the contrary. So, rather than investing with businesses that continually demonstrate the ability to turn a profit or utilize a business model that allows them to eventually turn a profit, they are throwing money at these ultra visible, well-known, yet ultimately unprofitable brands, in the hopes that they can magically transform reputation into revenue. As a fan and user of all three services, I sincerely hope that each company has an ingenious plan for increasing their net income without fundamentally changing who they are and what they do, but it is fairly unlikely that this is the case.

Keep in mind that cautioning against fundamental change is not a castigation of the type of organic growth that a company must sustain to keep itself ahead of its competition. Successful brands typically have a culture of innovation, adaptation, and reinvention, and they do so without losing sight of the goals and characteristics that make them uniquely desirable. Instead, we are talking about the type of growth and expansion that abandons, or worse, deliberately opposes the brand values that made the company successful in the first place.

Dude, you're gettin' a Dell, and I am SO sorry...

In the late 90’s through the early 2000’s, Dell was one of the most popular and fastest growing computer companies in the world. As they grew more and more ubiquitous, the Dell brand began to take on a life of its own, becoming known for inexpensive, reliable, somewhat cool machines, and the company cultivated an exciting, startup feel that lent it a great deal of credibility with consumers. However over the course of several years, as their product lines grew and their global market cap expanded, the quality of their machines and customer service plummeted to make room for increased profit margins. They expanded into TVs, radios, MP3 players, and printers, and in short order, the Dell name came to embody opportunism, empty promises, cheap products that they refused to stand behind, and a lack of dedication to their customers. The brand has yet to recover its luster, even if the company has survived on selling to schools and offices, and new players have taken their place as the PC maker of choice for consumers.

Brands, we can draw from this, are not names which lend credibility to the products and services under them, rather it is quality products and services that lend credibility to the brand. The management teams at Pandora, Groupon, and LinkedIn have succeeded thus far in building products that people like, and will undoubtedly do everything in their power to maintain the integrity of their companies. But facing so much pressure from shareholders, it will become increasingly easier to rationalize one unsupported, or off-brand service extension after another in an effort to meet financial benchmarks, until there is very little left of the brand that everyone was so excited about in the first place.

Now for me to conclude that it was simply a mistake for these three companies to go public is to take the easy way out. IPOs have become the bar mitzvahs of the business world. They are a rite of passage that signifies that the company has achieved a level of size, maturity, and stability that is coveted and respected in the corporate community, and often, an IPO is a way of financially rewarding the creators and executives of these companies for all of their insight, ingenuity, and hard work. To suggest that web-based businesses, especially social networks, avoid this process is unrealistic, and frankly, would ultimately deprive us of many of the great innovations that we see as a result of companies continually having to prove their value to both consumers and investors.

Rather, the point of this article is two-fold; I am suggesting that we think long and hard about the future relationship between social value and monetary value, but I also want to highlight these three companies as branding success stories. In fact, these three brands have been cultivated so well that it actually may have hurt them in the long run.

Last month, we published an article that warned against trying to quantify your brand. You can read it here, but in summary, it is more or less impossible to place a dollar value on what your brand alone is worth, and ultimately it is a fruitless endeavor since the moment you try to capitalize on it, rather than continually build and improve it, you begin to erode what makes it so special in the first place. But these three IPOs have showcased a different side of brand monetization. The extraordinary valuations that each has achieved relative to its actual size, revenue, and profitability, can be attributed almost exclusively to the effectiveness of its brand.

Each service represents something wonderfully unique to consumers. And while dissecting and reporting back on the detailed tactics that each of the three businesses have utilized to become as successful and well known as they are would be another article altogether, the underlying message is that their popularity, and thus their perceived value, is a direct result of the brands they have created. A company that makes car parts, is $92M in the hole, and doesn’t turn a profit would never dream of valuing itself at $2.6B, but Pandora is getting away with it because their brand has positioned the company as exciting, authoritative, trendy, and cutting edge. These attributes have succeeded in attracting a large user-base to the service, and that user-base in turn, has convinced investors that the company has far more potential than it probably does. And the same holds true for the other two, as well as the dozens, if not hundreds, of social networks, web-based communication channels, and content sharing sites that have succeeded in satisfying an emotional need, but do not necessarily satisfy the company’s financial needs.

One would hope that with the ever quickening bubble and burst cycle of the recent past serving as a backdrop, investors will be paying close attention to the performance of these three companies over the next year or two, with the intention of gathering some perspective on how accurately their success was predicted. But if the past is any indication, opportunism often wins out when pitted against rationalization. The practice of overvaluing a company based upon the perceived potential of its brand, rather than its demonstrated performance, is not a new phenomenon, but rarely is it this obvious that things aren’t adding up. If nothing else, these circumstances demonstrate the true power of a brand. For the sake of the health of our economy, I hope that we learn our lessons quickly, and start looking at companies like LinkedIn, Pandora, and Groupon for what they really are, but as a case-study in effective branding, there is no better proof of concept than a trio of companies that uses what they represent, rather than what they do, to define themselves. If there is anything to be taken away from this scenario, other than maybe ‘do not invest in web-based tech companies long-term’, I would hope it would be that a strong, emotionally rooted brand can go a long way toward real-world change in the performance and perception of a business, and with social media powerhouses like Facebook and Twitter expected to go public this year or the next, some serious evidence supporting this may be just around the corner.

Business Week, Money Morning, The Guardian, Market Watch, Signpost, Reuters, Bloomberg, Media Post, and The LA Times.

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When Having More means Using Less

How cultural change is slowly subverting millions of years of evolution.

You may have noticed that that bright yellow Hummer H2 you bought 5 years ago is no longer the envy of the neighborhood. ‘Ahh well’, you think. ‘C’est la vie. On to bigger and better things…’. But wait, your buddy and his brand new Cadillac Escalade aren’t fairing so well either, and neither is his brother’s Yukon Denali. In fact, your next-door neighbor seems to get much more attention in his Mini Cooper than anyone you know, and your daughter keeps asking you to drop her off around the corner until you trade your ‘monster truck’ in for a Prius… What on earth is going on here, and what happened to bigger and better?!

To figure it out, it helps to have a little bit of context, and I’ll establish it with a quasi book review. Evolutionary Social Psychologist Geoffrey Miller writes in his book, “Spent”, that since the dawn of time, animals, including humans, have striven to overtly display what he calls ‘fitness indicators’ to pretty much anyone or anything who will pay attention. For the vast majority of species, these fitness indicators are physical traits and actions meant to attract a mate, intimidate competition, assert one’s dominance, or ward off predators.

Geoffrey Miller's 'Fitness Indicators' expressed across the animal kingdom.

What is unique to humans, however, is that as we as a species have progressed intellectually, the methods through which we display these characteristics have progressed as well. Sure, going to the gym day after day to sculpt rock-hard abs is certainly going to give you a better chance at meeting a member of the opposite sex at the bar or on the beach than someone who sits around all day eating potato chips, but the pervading logic says that driving around in a sports car, wearing the right clothing, or even simply being in the right places can assist you in accomplishing this same task with little or no physical effort. It is Miller’s assertion that the human brain is wired to play an evolutionary-based game of “if, then” when forming opinions about those around us. In a very basic and instinctual example, if a woman sees a man who drives a nice car, then she assumes he must be powerful and have a very good job. If he has a very good job, then he must be very smart. If he is very smart then he will be a good provider, and if he is a good provider, then he will be able to pass all of those desirable traits on to his offspring.

It’s not surprising that Miller is sometimes criticized for being sexist, out of touch, and marginally elitist, but it’s hard to deny that he has a point in its most basic form. The driving forces behind the social behavior of gorillas in Mali and the social behavior of girls at the mall really aren’t all that different, and can be traced back to the desire to either impress or be impressed. Yet while the end results are largely the same across the animal kingdom, the behaviors that achieve them vary wildly, and continue to evolve over time. The quest to find and attract people (friends, business partners, mates, etc.) whose combination of traits aligns with our interpretation of the ideal while warding off those who we prefer not to associate with is an unending one, and humans are constantly seeking to mesh basic evolutionary desires with much more variable cultural preferences. Our intellect and ability to change our own societal circumstances have somewhat reduced our reliance on physical size and power as ‘fitness indicators’, however we have largely replaced (or at least augmented) that criteria with a desire for cultural size and power instead.

If you rewind human existence to the time of the Cro-Magnon and watch it happen all over again on fast-forward, you will notice that throughout history, and with very few notable exceptions, those who owned and consumed the most resources wielded the most influence over others. We may fawn over Hollywood bodies today, but not so long ago, girth was a sign of intellect and power, and ironically, was a ‘fitness’ indicator, as one had to be of supreme intelligence and importance in order to have access to enough food to get fat off of. At various times throughout the evolution of our culture, society has coveted physicality, fires, animal pelts, horses, spears, farms, castles, kingdoms, corporations, politics, Ferraris, and Coach handbags, but the underlying current has always been that the conspicuous consumption of resources and expenditure of wealth has equated to power. Hence why an expensive car with low fuel economy, an absurdly expensive pair of sunglasses, or a big, mostly empty house is traditionally seen as an item of great status today. This, however, and against all odds, is beginning to change, and it is also where the book review ends.

What we are seeing for the first time in recorded history is a reversal of this behavior, where suddenly it is the ability to preserve resources, rather than consume them, that is an indicator of an individual’s social standing. While not yet considered a standard practice, and still often times poorly executed, there is no doubting that it is a very real change in behavior. In the 1970’s and 80’s, small, efficient, foreign cars exploded in popularity due to a dramatic rise in gas prices, but the shift to lower consumption levels was unique to the auto industry (and to a degree, home energy practices), and was reactive, rather than proactive. Once fuel costs stabilized, buying habits corrected and both cars and houses resumed growing in size while largely ignoring efficiency until they reached their current levels.

Cars waiting in line at the gas pump in 1979.

Today, however, what we are seeing is a fundamental, and largely voluntary shift in consumer behavior that is, for the most part, independent of any external influences. Of course it is easy to draw a correlation between volatile gas prices in the mid-2000’s and the rise in popularity of hybrids and smaller, more fuel efficient cars, but that does little to explain why they stuck around as oil prices rode a roller coaster of highs and lows. Or why people are switching to fabric grocery bags, paying extra for organic, sustainable foods, fabrics, and furniture, putting solar panels on the roofs of their houses, and supporting companies that are pursuing environmentally friendly practices like packaging reduction, transportation efficiencies, and cleaner materials and manufacturing processes.

While it is fairly easy to see daily examples of this movement, understanding it is not as easy, as its roots can be difficult to trace. Some contend that decades of dedicated environmental activism are finally getting through to consumers, while others say that global connectivity has simply helped to push the message out to the right people. Some claim that it is a fundamental reaction to the environmental changes (melting ice caps, violent weather, etc.) we are already starting to see as a result of our irresponsible global lifestyle, while still others say that it is realization of the impact we have on the environment brought on by watching developing countries like China and India industrialize at an unbelievable pace and scale with frightening results. I would argue that it’s probably a little of all of those things, but more than anything else, it stems from a perpetual effort by consumers to keep up with the Joneses.

Without trying to come across as too ethnocentric, much of the world’s behavior is defined by that of the United States. Whether due to emulation or simply as a reaction to changes in the world’s largest economy, the preferences of American consumers dramatically influence goods made all over the world. The 1980’s, 90’s, and early 2000’s were a very good time for the US economically, and with more and more people able to live the “American dream”, one-upmanship, or the desire to display one’s fitness at a greater capacity and assert dominance over one’s competition, flourished. Houses grew, cars grew, clothing got more expensive, food got more impressive, the number of gadgets doubled, then doubled again, and leisure time was spent at the mall acquiring newer and better things in an effort to climb toward the top of the social ladder. Everyone bought a ride-on mower, a 3rd car, and a speedboat as they tried to showcase to their friends and neighbors how successful they were, and all of this resulted in the compression of the gap between the middle class and the upper class.

This may not seem like the type of behavior that would naturally lead to more environmentally sustainable consumerism, but one should not underestimate the impact of an executive noticing that all of his or her employees are living a lifestyle that appears to be comparable to his or her own. Between 1965 and 2000, the ratio of a CEO’s pay to that of an average employee rose from 23 : 1 to over 300 : 1, yet they also began to run out of ways to show it. Due largely to population density in high-value real estate zones, houses got about as big as they physically could, even for the wealthy, and they were still filled to bursting point. Of course a more affluent individual could build their home out of better materials, potentially in a marginally better location, and fill it with better stuff, but the fact remained that that CEO and their subordinates were all still living in 6,000 sq ft homes that looked largely similar.

The same went for cars. With middle management taking out leases on big BMWs, Mercedes, Audis, Jaguars, Cadillacs, Hummers, and Lexuses, it left very little room within the marketplace for their bosses to leapfrog them. There are only so many ultra-luxury vehicles like Ferraris, Bentleys, and Rolls Royces available in a given year, and even if one becomes available, the cost difference between it and a BMW 7 Series is fairly significant, pricing out all but the high-end of the upper class. And so it went; clothing, shoes, food, computers, phones; all of it had reached a point where there simply was not enough of a distinct difference between what was within reach of the common man and what was exclusive to the wealthy. In other words, consumption simply got so high across the board that those looking to assert their power and status as leaders had nowhere to go but to the opposite end of the scale.

We now understand that in reality, a great deal of this growth was completely artificial, and that a substantial percentage of those making purchase after purchase could not really afford to do so, but within this context it doesn’t matter. Essentially, we peaked. The trend-setters, movers, and shakers of our society simply were not able to visibly out-consume those beneath them on the social ladder and were forced to find a new way of asserting their dominance. Now we see prominent celebrities, trend makers, and executives spending lavishly to live in LEED Certified homes, buy premium electric vehicles, and shop exclusively at organic grocery stores in an effort to display their authority by way of a lifestyle that is not as easy for the average consumer to replicate en masse.

If this all seems like a deviously calculated effort by the wealthy to stay on top of some sort of feudal caste hierarchy, keep in mind that this is more-or-less the natural order of capitalism, a system that most in this country believes in above all else. The decision to change what we value as a culture was not the result of some shady back-room meeting amongst the world’s elite, but rather was the natural progression of high-powered individuals looking to differentiate themselves, and having to shift course to make it happen. Our economy runs on the notion that people want whatever it is they don’t have, and despite what might seem like sinister motivations, the shift to more sustainability is almost universally a positive development.

Leonardo DiCaprio and his Toyota Prius Hybrid

Leonardo DiCaprio owned one of the first Toyota Prius hybrids in the US. At the time he was a rising movie star and could have driven around town in just about anything he wanted. But Bentleys and Aston Martins are a dime-a-dozen amongst the Hollywood set, and the young DiCaprio chose to drive something that was extremely exclusive for an entirely different reason. Whether or not he was concerned about the environmental benefits at the time is something we may never know, but the results of his actions were profound. The car became a Hollywood staple, and its prominence likely gave traction to the hybrid movement that has since captured the attention of so many. Now, with Priuses and other hybrids so accessible across the world, these stars have moved on to Hydrogen powered cars, solar panels, wind turbines, sustainable clothing, and really anything else they can do to lower their eco-footprint that the common man cannot yet emulate.

Of course, the adoption of this type of behavior is not universal; Donald Trump continues to gold-plate everything he can get his hands on, the Real Housewives of Who-Cares compete on TV to see who has the priciest shoes and the most marble in their kitchens, politicians insist upon placating their constituents by assuring them that every American is Constitutionally entitled to as much as they can afford of whatever it is they want, and the Average Joe continues to buy plastic cups, SUVs, and toss out their laptops every 2 years. After all, the behaviors learned over 2.5 Million years of ‘out-consuming’ one another can’t be unlearned overnight. But we are starting to see subtle shifts that are a direct result of ‘Less’ being the new ‘More’.

Some skeptics believe that the ‘green movement’, as it has come to be called, is nothing more than a fad, and is likely to disappear as fast as it has risen in prominence, but I believe they are wrong. Without wishing to make the same mistake as Charles Duell, the 1900 Commissioner of the Patent Office who famously suggested it be closed as “everything had already been invented”, I hesitantly suggest that we have reached the glass ceiling of irresponsible excess.

Roman Abramovich's 550ft long Yacht, Eclipse; 1 of 5 in his personal 'navy'.

Private yachts have long been the domain of the ultra-rich, but apparently there are limits even within those circles. Since the early 20’s and arguably since the time of the Greeks and Romans, extremely affluent individuals have engaged in competition to see who could own the largest boat, but with Roman Abramovich’s most recent commission clocking in at over 550ft long, even his fraternity of magnates are balking at going bigger. So what is the next executive or monarch to do? If there is no reason to build a bigger boat, you have to build a smarter one; maybe one that can cruise around the world without refueling, or one that runs off of salt water electrolysis. You have to do something new if you want to establish yourself as the alpha dog.

The Porsche 918 Spyder Hybrid Supercar

Porsche’s next supercar is not a 1000 horsepower 12-cylinder behemoth meant to compete with the Bugatti Veyron, but rather is the 918 Spyder; an $845,000 hybrid capable of 78 miles to the gallon. Why? Because it was crazy enough to build a 1000 horsepower car that costs $1.5M but it’s even crazier to build a bigger, more expensive one. Instead, a car that does not sacrifice luxury or performance while working to minimize its environmental impact is on track to become the new status symbol.

Of course, while the intention is good, the execution is far from perfect. The real eco-friendly choice would be to save the materials and the energy put into manufacturing, and not buy a new supercar at all, or take a cruise instead of having a yacht built, but I for one am glad to see a shift in luxury goods toward more sustainability, even if only in spirit. Barring a complete change in American (and for that matter, global) ideology, we simply cannot stop the consumption cycle. But if the goal of those who have the power to make change is to eliminate their environmental impact, even if only for social reasons, the effect can be immeasurable. Game changing ideas often trickle down to the masses from the top end of the market, and as more and more consumers covet the green lifestyles of the rich and powerful, more innovative companies will have to find ways of producing eco-friendly commodities at far more accessible prices.

So what can your company do to embrace sustainability and help make it more available to the masses? Remember that this is not a trend. ‘Going green’ can’t be capitalized on by shifting color schemes, adding leaf logos, or starting up in-office recycling programs, rather it requires a holistic shift to more eco-friendly practices. Can your packaging be more efficient than it is right now? Can you fit more products in each container than you are currently? Can your production line utilize alternative materials or renewable sources of energy? Can your office go paper free?

I am the first to admit that transforming a business into a more sustainable entity is not really a ‘branding’ practice, but becoming known as a more caring, responsible company can give you the credibility to actively participate in a very topical conversation. A great deal of businesses have made it clear that they intend to wait until new laws and regulations force them to adopt new energy or material standards, but we are already seeing a shift in consumer preference to favor those who have voluntarily made changes on their own. Don’t be afraid to do a little research into ways to reduce your environmental impact; the ease of implementation and potential for consumer recognition may surprise you. And the best part is, it just may increase your profitability at the same time.

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What is the Value of Your Brand?

As many of you may know, every year since 2001, multi-national branding agency Interbrand has released a ranking of the most valuable brands from around the globe. The results of this study are highlighted on every business news site and blog on the web, and even occasionally make it into the print world by gracing the pages of Time, Newsweek, or Business Week magazines. We in the branding world are always grateful for the attention it throws on us, but of the millions of people who click the link or glance over the list, very few stop and think about what it is they’re actually reading.

Interbrand's 2011 Top 10 Brands

The Interbrand ranking (here, for anyone who is curious) is a prime example of our insatiable desire to quantify what is inherently unquantifiable. I invite you to read their explanation of how they construct their list and make up your own mind, but I take issue with it both in concept and in practice.

I won’t argue that any of the companies on Interbrand’s top 100 list should be removed, because frankly they are all extremely successful, well-executed brands. But their success stems from the way in which they creatively respond to their own unique circumstances. No single brand can be proven to be better than any other, rather each must blaze its own trail, determining what works best for them along the way. Trying to mathematically determine which of two brands is superior, especially two brands in completely different industries, is no more feasible than trying to scientifically prove which is more delicious; an apple or an orange.

To say that Coca Cola is number one because their brand alone (not the company or their product) is worth $70.5 Billion and that IBM is still a good brand, but not quite as good because theirs is only worth $64.7 Billion, is absolute lunacy. One could certainly argue that Coca Cola is the number one brand in the world because of the emotional attachments and fierce loyalty they garner from their customers, but why bother to rank them at all? Coca Cola is the top soft drink in the world by sales volume. It’s recognized, understood, and appreciated by people all around the world, regardless of their race, language, or religion. Isn’t that enough proof that its brand has a great deal of inherent value?

And if one must place a dollar value on each brand’s name, there are an endless number of ways to do it, all of which would yield different results. Interbrand’s calculations are based almost entirely upon an opinion-based grading system invented by none other than Interbrand. ‘Scientifically’ proving or disproving anything (global warming, evolution, brand value etc.) is easy when you are the one supplying the data sets and inventing the processes by which they are compared. Like a teacher grading poetry or an art expert ranking the impressionist painters, no amount of rationalization or calculation can mask the fact that the entire list is subject to the interpretation of those assembling it.

But I don’t blame Interbrand for inventing this ranking, nor was the purpose of this article to give them a public flogging. In fact, I give them a lot of credit for seeing an opportunity that so many other consultancies missed. The business world is run on spreadsheets. It has long been understood that cultivating a desirable brand can add value to a company or product, but without being able to quantify that value, the picture of how much return a company is getting on their investment never quite comes into focus. The ‘100 Top Brands’ list is successful because it appeals to our cultural tendency to rank things, or determine which of a given group of options is best. But it also reinforces the idea that one’s brand should be able to be isolated and accounted for, a notion that we at Aura can’t help but disagree with.

Rather, we believe that the strength of a brand is its inability to be defined. Good branding taps into people’s emotions. It can make you laugh or cry, smile or frown, nod in approval or shake your head in disgust. Compelling brands, like compelling people, are opinionated. They have distinct personalities that give context to the products that they make and the services that they offer. Everything that a company says and does helps to define its brand, yet its brand defines everything that it says and does. To try to isolate and place a dollar value on a company’s brand is like trying to decide what percentage of a salesman’s income is due exclusively to his charming personality.

A brand’s value is reflected in a company’s long term success, not in its yearly productivity, and no company understands this better right now than GE. As the manufacturers largely of heavy industrial equipment, the company has seen little perceived need for a consumer-facing brand in the past. Yet over the past few years, and under new leadership, General Electric has invested heavily in positioning themselves as an eco-friendly corporation whose focus is on safe and responsible innovations that improve people’s lives. At face value this strategy makes little sense; GE has a consumer product division where they make refrigerators and microwaves, yet all of GE’s consumer facing advertising is talking about wind power, water desalination, and recycling. GE’s profit margins and revenues have remained relatively consistent, showcasing very little return on their massive branding investment, however what GE’s management knows, it that the real value of this program may not be seen for many years to come, and its success may not be instantly apparent.

GE has embarked on an effort to streamline who they are in the public consciousness, and they understand that it isn’t going to increase sales today, tomorrow, or even the day after that. Five years ago, the GE brand stood for something completely different in every industry they were involved in, but today, their ‘Ecomagination’ brand positioning is defining who the company is as a whole. If you believe the hype, GE is out to save the world, and even if you don’t, you still might perceive that GE oven to be slightly more environmentally friendly than its competitors. Is this brand worth $50.3 Billion as Interbrand says it is? Maybe. Or maybe its real value is that people smile a bit more than they used to when they think of the company. Maybe GE’s brand’s value is that ‘Ecomagination’ feels like just the thing we need right now, and only time will tell what that is really worth.

We encourage our clients to put down the spreadsheet themselves, and try to fundamentally understand how and why their brands are helping or hurting their businesses. It’s always tempting to spend a little less on printing, or packaging, or plastics, or pop up displays, and such acts can even be rewarded by increased short-term profit margins and happy shareholders. But ask yourselves, what will those decisions do to your long-term brand value? By committing yourself to a lower standard of quality, what type of message does that send about your company? If your profits drop steadily for the next two years, will you connect that decision with those results? And if you are willing to accept a lower standard of quality in one aspect of your business, what is stopping your customers from assuming that you are willing to accept a lower standard of quality in all aspects of your business?

In meeting with new clients, we often express the need to craft an identity for the company that is unique to their market perspective, but in many ways, branding is as much about commitment as it is about strategy and creativity. We urge you to have the courage to allow your brand to affect change over the long term, without succumbing to the desire to justify every penny spent along the way. Look past quarterly and yearly profits, and ignore the naysayers and disgruntled traditionalists because ultimately, the real validation of a brand’s value is not expressed in a chart or graph, but in the growth of a thriving business with happy, loyal customers.

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Thoughts and Reactions to Lightfair 2011

Lightfair 2011 at the Pennsylvania Convention Center

Last Wednesday, Aura spent the day wandering the aisles of Lightfair International, housed for the first time at the Pennsylvania Convention Center in Philadelphia, and we came away both amazed and somewhat disappointed. Apologies in advance for the lack of visual evidence, but they aren’t too keen on us taking pictures.

First off, many of the new developments in LED technology are fantastic and we cannot wait for them to come over to the consumer side of the market. Innovative companies are creating incredible new lighting solutions that take the idea of eco-friendliness beyond energy savings by utilizing the power infrastructure that many already have in place. Others still are creating fantastic new lighting technologies that are bound to spice up the worlds of retail and hospitality design while saving their owners a great deal on their electricity bills. Residential fixtures were represented as well, including some wildly fresh ideas for outdoor lighting and some extremely elegant and advanced interior fixtures. Of course, not every product was a home run, but in general, it seems like the industry is moving in a more responsible, much more visually interesting direction.

Much like the product spread, the trade show itself was a mix of the really good and the really quite bad… Some of the major players like Phillips and LG have set the bar pretty high for booth design and construction, and while many smaller companies are doing their best to give them a run for their money, it’s clear that a great deal of the exhibitors have chosen to avoid playing the game all together. We have a very healthy respect for small startups trying their hardest to put their product into the spotlight, but it’s not easy to take them seriously when their folding table and foam core posters are sitting adjacent a two-level, wood floored booth nicer than most people’s homes. Check out our full article on perceived vs. actual quality to understand why at some point, it doesn’t even matter how good these small company’s products are, they aren’t going anywhere without some serious effort put into their brand experiences.

It was also quite interesting to see the emergence of a Lightfair aesthetic. Slowly but surely, nearly every large booth has gravitated toward white structures with rounded edges. Whether this is because of a lack of creativity on the part of the designers, or some attempt at riding the coattails of the trend’s originators is unclear, but there were very few quality exhibits that had not adopted this stylistic language. One notable exception was the presence of two-story London bus that had been wrapped in the Union Jack by ACDC Lighting, to whom we say… Bravo.

All in all, Lightfair was a great experience, and we look forward to going back next year. Thank you to all the vendors who took the time to explain their products to us and we look forward to seeing what you come up with in the future.

Were you at Lightfair? What did you think of it?

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Brand Awareness in the Candy Aisle

With the Easter holiday approaching, it is nearly impossible to ignore the abundance of pastel-colored Easter candy lining the aisles at the supermarket. There is a certain excitement brought on by the familiar colors and flavors of a seasonal food or drink, like the Gingerbread Latte during the winter at Starbucks, or Sam Adams Oktoberfest. Products like these are anticipated each year because of their association with a season or holiday, and suspense and excitement are maintained simply because of their exclusivity.

But as Americans we thrive on choice, and exclusive seasonal items alone are not enough to satisfy our collectively enormous sweet tooth. There are hundreds, if not thousands of items that are sold all year long, but repackaged, or reshaped, to match whichever season or holiday comes up next. M&M’s, Hershey’s Kisses, and Oreo Cookies, all have products for just about every holiday on the calendar.

Do these products garner the same elite status as their elusive competition? Kind of, but not really. Almost everyone is familiar with Reese’s Peanut Butter Cups. They are available year round, and are delicious. But during Easter, the company also sells Reese’s Peanut Butter Eggs. What makes them different from the original? Absolutely nothing, except the shape.

But the Reese’s Egg works as a brand extension because the core values of the product and the brand do not change. The customers are able to follow from Reese’s Peanut Butter Cups to Reese’s Peanut Butter Eggs, with the knowledge that they are still purchasing a product they already love, albeit dolled up for the Easter season.

While Reese’s Eggs work with the brand, other products like Life Savers Bunnies & Eggs seem to fight the brands they represent. While this product undoubtedly increases Life Savers’ sales for a few weeks in the spring, it is ultimately damaging the Life Savers brand. If not for their shape, Life Savers would be nothing more than a hard candy available in a couple of colors and flavors, but the brand equity of the donut shape makes them instantly recognizable and helps them to stand out from their competition on the candy shelf. While the Life Savers Spring Mix of pastel colors and fruity flavors does not stray too far, once they move into the territory of gummy bunnies and eggs, they completely lose everything that makes the Life Savers brand so unique. There’s no way for the customer to recognize the candy out of its package, or to rely on the taste and texture they may be familiar with.

Like Reese’s, other companies are able to allow their brand values to permeate through their blatant holiday packaging, for example, M&M’s Halloween Collection, Hershey’s Kisses Christmas Holiday Collection, and York Peppermint Pattie Valentine’s Hearts. These limited editions are, of course, only available at certain times of year, and despite their appearances, are virtually the same product that is available year-round. So, why would these manufacturer’s bother to spend the time and cost to make holiday editions of their standard product? The answer is brand awareness.

We’ve all seen the immense displays of themed items in retail stores, and there’s no denying that impulse purchases are made based on visibility and price. Seasonal items always seem to be marketed as being on sale, and of course, are always placed in prime locations. And that is what these companies are really after. M&M’s are always available in the candy aisle, or near the registers, but for Easter, the only way people will buy them is if they are pastel-colored, and right next to the Cadbury Crème Eggs. This keeps sales up, and even more importantly allows you to associate a brand that you already love, with a holiday that you are celebrating. It gives continuous year-round brand presence to items that would otherwise be overlooked until a time between holidays.

Now, I would never suggest that this plan would work for every company or every product, as in the Life Savers example mentioned previously. In fact, it can definitely dilute a brand message if not done correctly. Companies without a strong sense of their own brand’s place in the consumer mindset often over-extend themselves, in an attempt to move product during a time when profits have the potential to go up. The other products mentioned here have managed to keep the core product similar enough to the original that they do not turn away loyal customers, but different enough that people will purchase the holiday branded item over the original more often than not.

And, I’m as guilty as anyone when it comes to seasonal products. I’ll buy anything that is orange or Pumpkin flavored when the fall rolls around, and nearly everyone has a similar weakness. Why are we so enamored with such slight changes to such common products? And is this something that will continue to grow into other industries or does the sheer volume of seasons and holidays confine this practice to perishables? Feel free to leave us a comment and let us know what you think!

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Somebody Co-Branded my Banana!

No big fancy post today, but I thought I’d share something I came across this morning when having my breakfast.

I don’t think I’ve ever seen this before, and I’m not sure whether to be absolutely frightened or really really impressed… Come to think of it, Fox is really pushing this film in some interesting ways, even despite the fact that it looks like a pretty awful assembly of bird puns, nearly-racist jokes about Brazilian women, and generic CGI glamour shots of the tropics.

I bring it up only because I reached for the banana moments after putting down my in-progress game of Angry Birds Rio,

and the same morning that I got an email about a bizarre Rio-Nestle augmented reality game going on overseas.

It’s tempting to say that this branded over-stimulation isn’t a good thing and that it’s only making a world full of product placement even worse, but damn if I’m not having fun playing yet another version of Angry Birds, and whose to say that there isn’t a squealing little German boy out there right now getting interested in computer programming (and funky Brazilian music) because of a silly little cereal box game with a blue bird in it. And as for the Banana, it tasted just fine.

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Perceived Quality vs. Actual Quality

Please read the following out loud in your best Howard Cosell impersonation, and then when your coworkers look at you as though you have lost your mind, tell them to visit this blog. Thank you for your cooperation.

Ladies and Gentlemen welcome to the knockout in New York City, the coup in Cupertino, the deathblow in Detroit, the smack-down in the Suburbs. Today we witness a battle of epic proportions between two contenders who have seemingly been going at it since before the dawn of time. They represent the endless struggle between logical facts and figures, and raw, unchecked human emotions. And now without further ado, we take you ringside for the introductions.

In this corner of the ring, weighing in with the entire worldwide force of the marketing, advertising, and branding industries combined, sporting a dominating record of only a handful of losses to several million wins, featuring significant victories in the clothing, auto, and caffeinated beverage industries, the master of mind-games; Percieeeeeved Qualityyyyyy!!

And in this corner, the challenger, weighing in at over 32 trillion lbs; the combined weight of every last piece of manufacturing, testing, and shipping equipment ever made, with less than 10 wins to its credit, coming mostly in the grocery and medical industries, the dot on your ‘i’ and cross on your ‘t’; Actuaaaaal Qualityyyyyy!!

You can now stop reading as Howard Cosell, although you most certainly don’t have to.

The battle between perceived quality and actual quality truly is an epic struggle. Generally though, when we speak of this dichotomy, we aren’t talking about trying to convince consumers that a bad product is good, as it might seem at first glance. First of all, we have to own up to the reality that as much as we like to use such labels, no products are completely good or bad; rather they all exist in varying degrees of grey between the two. And second of all, no legitimate business with any long-term success has ever set out to make an intentionally terrible product with the goal of selling it on false merit, so banish any thoughts of evil corporations trying to trick you out of your money, because it doesn’t factor into our equation.

For the most part, companies worldwide are doing the best they can to create products that people want to buy. We may occasionally berate their massively misguided attempts at doing so (Pontiac Aztek, Microsoft Zune, any cell phone by LG, etc.) but if one were to step back and view these attempts objectively, even the worst products satisfy the most basic set of functions that is required of them (the Aztek could be driven, the Zune played MP3s if you could figure it out, and LG phones make calls most of the time). Typically, the quality of a mass-produced product falls somewhere between a C- and an A+, or in other words, very few companies are getting an F; spending the type of money necessary to launch something, only to find out that it doesn’t work at all.

If we continue the grading analogy, the curve is set fairly high for consumer products. It’s very difficult to be the star student when everyone else in your class is getting the same grades as you, and this is why the idea of perceived quality is so important.

The auto industry is one of the best examples of how perceived quality dominates actual quality. Despite the fact that all cars share 99% of the same technology, materials, and construction techniques, car companies move mountains to establish characteristics that are perceived as being unique to each nameplate. For decades, Toyota and Honda have been seen as the ultimate quality brands. Their cars outlast any other on the road, and are light-years ahead of any other manufacturer when it comes to dependability. Want to know who beat them in JD Power’s 2010 dependability rankings? Lincoln, Buick, and Mercury (in addition to the slightly less surprising Porsche, and Lexus; a division of Toyota). The interesting thing is not that Honda and Toyota have been beat at their own game, but that their brand positions, and in turn, their public perceptions remain unchanged.

Toyota and Honda place numbers 1 and 2, respectively, on ALG’s perceived quality rankings, despite the host of recalls both have endured over the past year, while Buick ranks 13th, Mercury falls to 20th, and Lincoln doesn’t even make the cut. Over the years, both Japanese brands’ claims of quality have been backed up by their customers’ real world experiences, and even now that they have lost a step and their competition has leapfrogged them, that perception persists. Not even uncontested data, and widely publicized problems within the two companies have made a dent in their brand armor.

But the word quality does not always have to mean the physical and functional integrity of an item. ‘Quality’ can be replaced with ‘qualities’ to mean something completely different. Within the same industry, each auto brand is trying to express a vastly different set of qualities to persuade customers to choose them over their competition. BMW is seen as one of the premier luxury brands, and its brand position as ‘the Ultimate Driving Machine’ cannot be rivaled by any competitor. Again, this is due to the fact that over several decades, sporty, stylish cars flowed out of Munich as though a spigot could not be turned off. However in recent years, the company’s prowess has been challenged not just by predictable competitors like Mercedes Benz, Audi, and even Jaguar, but by the most unlikely of sources; Hyundai.

The Hyundai Genesis is being quietly lauded by auto publications as being a real challenger to the BMW 5 series, Audi A6, Mercedes E Class, and Jaguar XF. It handles comparably, shares many of the same features, and does so for nearly $20,000 less. The challenge for Hyundai is that their perceived qualities do not live up to the standard set by their actual qualities. BMW, Audi, Mecedes Benz, and Jaguar all have brands that support their claims as being the top luxury carmaker in one way or another, while the vast majority of informed consumers would say that Hyundai simply doesn’t belong in the same comparison test, despite the data saying otherwise.

What many companies fail to realize is that perception is reality. If consumers think a product is made poorly, it doesn’t matter that it can be run over by an Abrahams Tank and survive. The purveyors of such goods often treat their customer bases with contempt, believing that they pulled the short straw and that they were simply the victims of a fickle populous needing someone to be at the bottom of the pile, but the reality is that brands all have the power to change the way that people think about the products they offer, and sometimes that change can be as simple as adjusting the context through which the product is showcased.

Recently I was on the hunt for white dress shirts. I didn’t need anything overly fancy or expensive, but I certainly didn’t want to buy something of poor quality. My first stop was at Macy’s, the traditional go-to department store for reasonably priced clothing, however when I got there, all of the shirts were in plastic bags, stacked on shelves in no particular order, and the salesman was being borderline rude through his so-thick-you-need-a-machete-to-get-through-it accent. I still have no idea whether or not the quality of the shirts was up to my rather lax standards, but the context through which they were offered just didn’t pass muster.

The plastic bags told me that that I wasn’t allowed to touch the shirts, which automatically made me suspicious of their quality, the disorganized shelves told me that the company took no pride in its customer experience, so I could not assume they took pride in their products either, and the unfriendly and unhelpful staff eliminated any remaining thread of trust I had that the company had my best interests in mind. Because of the environment through which I experienced the product, I was unable to give them the benefit of the doubt on any criteria that could not be determined on the spot. Instead, I went to Nordstrom and paid $20 more for the shirt, which I was more than happy to do because they were all stacked neatly on tables, by size, for me to touch, and the salesman spent a half hour with me, making sure that any questions I had were answered promptly and without any pressure to purchase.

The bottom line is that you could have presented the same exact shirt to me, or anyone else for that matter, with different labels and in those two different contexts, and 4 out of 5 times, people will be willing to pay the price difference for the emotional comfort of perceived quality.

The balance between perceived and actual quality is why a sports reporter on the local news is seen as unsophisticated and somewhat lame, while one saying the same things on Sportscenter is funny and cool. Or why Tide detergent is worth more than Costco’s Kirkland Signature even though under most circumstances, they will both get your clothes clean. Strong brands find universal truths about themselves, and build upon them until their customers begin to assume certain qualities about new products, services, or experiences offered by the company before ever getting their hands on them.

This is the ultimate goal of a brand; to develop assumptions about a company that promise a certain level of quality without the customer having to personally experience it to accept it as true. All companies live and die by their ability to create high quality goods, but if they can’t find a compelling way to make the promise of quality first, they may not ever get the chance to prove it.

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