Sentinel Peak

Pandora: Changed Revenue Model After Focus Groups

Reading After Maxing Out A Dozen Credit Cards, Is Pandora Headed For An IPO on Private Equity Hub, one section stood out in particular.  Much has been written about Pandora, the online radio network, as it transformed from near failure to success.  Moreover, many startupers relate to Pandora's stories of hardship:

PeHub says about the keynote Tim Westergren (Pandora's founder) gave at Vator Splash in San Francisco Thursday,  "Early on, he was working on creating a subscription-based model. The business plan didn’t go that well. Westergren talked about the struggles of deferring payment for more than two years (totaling $1.5 million in salaries) to his employees, which today number more than 200. At one point, he jokingly said he thought about going to Reno to win some money from gambling. Instead, he said he ate a lot of Ramen noodles and maxed out a dozen credit cards." 

This section caught my eye:

"During his introductory remarks last night, Jim Feuille, a Pandora board member and general partner of Crosslink Capital, noted that early on, the firm didn’t think Pandora’s model was viable, based on focus groups insisting that they would never pay for it. Feuille then played the theme song “Who ya gonna call?” from “Ghostbusters,” and his answer–which he got the audience to say–was Tim."

Making changes to the actual streaming radio service was not the key success factor.  The key success factor was changing the revenue model.  This is apparent in hindsight, but what I am interested in is the here-and-now of helping grow companies.  So let's discuss some ways this Pandora revenue model situation could be applied to companies starting today.  I am not in any way knocking anyone who has been successful without research — my goal is to explore ways to increase success rates in startups and to increase returns on sales & marketing investments:

1) Focus groups and other types of market research & marketing research are a drop in the bucket dollar-wise compared to actually building out a product/service line.  Notice that the above focus group objection was not to any product benefit or component - it was simply that people were not going to pay for internet radio; you do not even need a working prototype to ask the question and get the response. 

2) If you skip the research and go straight to the build-out and go-to-market, you now are in the position of having sales & marketing people find out about the market, which has three drawbacks: 1) end-users are going to be less open with sales & marketing people with a new company's active product than someone conducting a market investigation, 2) it costs a lot more money to find these things out after staffing-up, and 3) it is tougher to change direction (the current buzzword is "pivot") when you have moving pieces in a live startup.

3) Despite the merits, some startupers have an aversion to research because to them, it may not "feel" like moving things forward.  To them, I would say this — you can likely qualify for an R&D Tax Credit for your market research & marketing research expenses.  Conversely, you're not going to get a tax credit for selling expenses.

Whether you are looking at taking a new product/service to-market, you are in the process of product launch, or are eating ramen after a rough launch, I can help you with my Market Validation services.  After all, the satisfaction of telling a hardcore startup adversity story is less than the satisfaction of you making money in startups.  

I love to cook, so now I am going to go figure out how to make this kobe beef burger infused with truffles that Mr. Westergren raves about...

Thursday night, I attended the marketing analytics panel discussion in Seattle at MRM Worldwide's office.  During the discussion, the panel's moderator, Vipin Mayar, MRM's EVP Global Director of Data, raised the point that one research house had identified 43 metrics for social media effectiveness alone.  When the moderator asked the panel which set of measures the panel members thought were most important, Neil Strother, Analyst, Forrester Research, responded with a single success measure - sales.

Suddenly, a smile swept over my face since I couldn't agree more.  There are many in-process measures of marketing effectiveness, but in-process measures pale in importance to the end-result  - sales.  Some people in marketing with whom I speak, whether at operating companies or at consulting firms, want to talk with me about what I do in terms of functions - marketing department , business development department , sales department.  I look at things in terms of customer acquisition and retention processes rather than divided up by functions.  In Drucker terms, I focus on how to create a profitable customer and keep that customer.  Therefore, sales is the perfect measure for my approach.

In my mind, spending time evaluating 43 measures of marketing effectiveness for one marketing tactic is akin to spending 5 hours on Facebook - what's the ROI?  I choose to focus on spending time with real, live, breathing customers, prospects, and channel partners to figure out how effective marketing efforts are.  I don't think it is possible to be a good marketer without spending at least a third of the time with customers and potential partners.  Moreover, none of my clients has ever complained about new customers or new channel partners I've brought into the pipeline as a result of spending time with people to figure out how to do a better job meeting customers and channel partners needs.  In sum, I'm a firm believer in the premise that companies are built one customer at a time and one dollar at a time, with sales being the perfect measure.

Thanks MRM for a great event - Vipin Mayar's marketing mix econometric model dashboards were impressive!