Thursday, 31 July 2008

Mystics and Revolutionaries - the Drivers of Innovation

You'll have gathered from the title "Pragmatist" and my explanatory blog, that I'm fairly sceptical when it comes to messages from our institutions, and I support positively disruptive innovation and innovators whenever possible.

Bob Mayo, of St Stephens in Shepherds Bush, is an innovator in one of the most conservative institutions on the planet, so I'm always fascinated to read his crisp observations in "Parish the Thought", Bob's weekly 200 word email. This week Bob hits on a theme at the heart of Web 2.0:
"The gospel passage for this Sunday sees Jesus feeding 5,000 hungry people with five loaves and two fishes (Matthew 14:13-21). Making the world a better place is not something limited to Jesus 2,000 years ago. Helping the poor and hungry and looking after those who are vulnerable or in need is the responsibility of us all. Nouwen (1994) says that we need to be ‘mystics’ and ‘revolutionaries’. The ‘mystic’ is concerned with changing the human heart and the ‘revolutionary’ is concerned with changing human society. In case you think of yourself as being one or the other, Nouwen also says that every real ‘revolutionary’ is challenged to be a ‘mystic’ at heart. ‘Mysticism’ and ‘revolution’ are two aspects of the same desire to make the world a better place to live. The whole socio-political world in which we live is geared against change. This should mean that we do not want to try. William Wordsworth talked about being as ‘impatient as the Wind’"
Two particular aspects chime with the disruptive trend we know as "Web 2.0". First, that the successful disruptive business models are motivated by making the world a better place to "live" - i.e. for individual people, personally. It's not about institutions, it's about each individual customer's personal experience and effort contributing in an "architecture of participation".

The second aspect is the idea that "the whole socio-political world in which we live is geared against change". One cause of our declining faith in our institutions is perhaps the realisation that regulations and rules (including the business rules by which institutions and big suppliers choose to transact with us) have tended to be written to suit the way institutions wish to do things, rather than what might suit us personally. We are told that these regulations and rules are hard to change, but become cynical when we see Parliament rush through laws that curb civil liberties or regulators move quickly to protect the banks but were slow to act when pensioners' money was at stake, or big corporates stop doing things overnight when ordered to do so by some other institution after years of consumer detriment and complaint. Yet inertia means that it takes such shocks and a lot of energy from people who are "as impatient as the Wind" to kick us all the way along the "change curve" to the point where we plan to do things in a different way.

The fascinating aspect of the digital revolution of Web 2.0 is that not only can facilitators enable individuals to harness technology to access more music or personalised holidays more cheaply, but it also provides a medium for generating and sharing the passion and connections necessary for us to find the things in the Long Tail of products that improve our own, personal lives.

Thursday, 24 July 2008

Long Tail Financial Services: Passion & Connection Require Social Network Services

Kevin Kelly has built on Seth Godin's discussion of the idea that there are "three profit pockets" on the tail of product popularity.

In brief, Seth says that the first two - at or near the head - are profitable for the creator, while the third - the long tail - is only profitable for the aggregator:
"The most common misconception about Long Tail thinking is that if you don't succeed at pocket 1, don't worry, because the tail will take care of your product and you'll just end up in #2. That's not true. #2 isn't a consolation prize for mass market losers. Mass market losers are still losers. In order to become a mass market star you make choices about features and pricing and quality--and if you lose that game, there's no reason to believe that those choices are going to pay off for a different market."
Kevin (with whom Chris Anderson agrees) says you shouldn't conflate the views of creator and aggregator, but view each section consistently from each perspective. True, because you then see clearly the challenge that each faces when products are in the long tail - albeit one that aggregators are able to meet more easily:
"...if we view the long tail as a market of a different type, as a market of enthusiasm and connection, then as the long tail expands, this increases the chance of two enthusiasts meeting, and so the longer the tail, the better. The first two pockets of the curve are trying to maximize profits; the last pocket of the long tail is trying to maximize passion and connectivity.

There is one further indirect advantage to the long tail. Since your creation now exists in a market (where it would not have existed at all before) it can, if you are lucky, start to migrate uptail."
This emphasises why creating a social network among interested buyers and sellers of each of the products, or sets of products in the long tail, becomes critical to maximising revenue from it. As discussed on Wikipedia:
"A social network is a social structure made of nodes (which are generally individuals or organizations) that are tied by one or more specific types of interdependency, such as values, visions, ideas, financial exchange, friendship, kinship, dislike, conflict or trade."
Facilitators' discussion boards, blogs and social network services all clearly help enable those buyers and sellers to find their type of interdependency - so do open marketplaces like online auctions, or simply knowing what people who bought one item also bought, or what other profiles they viewed, and so on. Ultimately, transparent, reliable, timely pricing and product description are key to sales.

Applying this to retail financial services is interesting, given current market conditions. Where's the passion? Well people get really passionate (angry) when there is significant change. The last time the most people got the most passionate about retail financial services was in the early '90s when many houses prices plunged into negative equity (the dotcom bubble-burst mainly affected the retail investment world - the preserve of far fewer consumers).

The Internet wasn't around commercially to help people get out of negative equity in the early '90s, but a whole "specialist" (and substantially sub-prime) mortgage industry ignited around the fact that 25% of the people who'd had a mortgage from a high street institution suddenly couldn't get one. Connectivity arose because their lawyers and other advisers knew that those clients who were "battlers" and worth a punt. They arranged loans from other clients or themselves, starting new mortgage and loan providers and brokerages in the process. All manner of strange, alternative finance deals became available - a veritable long tail of mortgages, secured and unsecured loans - and daytime television advertising hasn't been the same since.

Most recently, Northern Wreck sent a shock wave rippling through the UK population, and similar disasters are striking at US retail borrowing sentiment. But this time the Internet and social network services are there to facilitate connectivity amongst the passionate at the same time as the institutional and specialist mortgage market has panned. Coincidentally, social lending facilitators, like Zopa (2005) and Prosper (2006), are also on the scene, enabling individual consumers to lend and borrow at rates that suit them personally. Importantly, lenders decide how diversified they wish to be, and choose their borrowers. Zopa is still citing a default rate of less than 0.1%. These sites were started by people (and I confess to being one) familiar with the effect of both the dotcom bubble on personal investment as well as the early '90s issue of negative equity. They've had time to work on their propositions, strategies and tactics - the use of social networking tools being amongst them.

Of course, the long tail of products represented by online social lending did not really exist before (except perhaps more informally, off-line). These products are being created by the individual lenders offering their money, and the borrowers who post their requests for money (depending on the model operated by the relevant facilitator). Successful lenders, in particular, therefore challenge the notion that creators can't make money out of the long tail.

It's also worth keeping a look out for other shocks that signal passion in other markets - particularly those not yet disrupted by the Web 2.0 trend. Insurance? Pensions? I shudder to think of the disasters that will set those wheels in motion!

Friday, 4 July 2008

The Long Tail of Banking: Define "Head" and "Tail" - Part 2

Fascinating post by Chris Skinner on The Long Tail of Banking.

In any such discussion, it's important to define the "head" and the "tail". In essence, Chris says:
"The Long Tail in banking would be a mass market of niche microgroups that incur no cost overheads to manage but, for each transaction, creates a small profit... You want to reach people who were previously underserved, because it would not be profitable....We are talking about children, students, the unbanked, the underbanked, the grey market, the welfare market, the pensioners, the migrant workers and more. And we are talking about social lending and saving, [e-payments], prepaid and mobile.... we need to look at prepaid and mobile for these folks."
I understand Chris to be saying that current bank customers are the "head" and everyone else as the "tail", and that the "long tail" challenge is how to get existing bank products (e.g. prepaid cards and mobile payments/banking) to the tail.

However, I view the "head" and the "tail" in terms of the breadth of product selection and related customer need, not the customers themselves. The long tail challenge being how to enable customers to find or create the product that is right for them personally. As Chris Anderson explained in his response to the recent HBR long tail review:
""Head" is the [product] selection available in the largest bricks-and-mortar retailer in the market... "Tail" is everything else, most of which is only available online, where there is unlimited shelf space."
The reason why Web 2.0 is now disrupting traditional retail banking is that banks and their direct competitors have followed a traditional "blockbuster" approach - marketing comparatively few, very inflexible products (the "head") and relying on those to attract most of the market, rather than trying to market the "tail" of products that would solve every person's individual savings, investment, borrowing and payments needs. Online facilitators, like Zopa and Kiva have spotted this, and created the means to enable consumers to create, or find, and buy the financial product that is right for each of them personally, in the same way that they can now design their own holiday instead of taking a package holiday. Using these facilitators, consumers effectively create thousands or even millions of "products".

Currently, the scale of participation in social finance platforms, and the resulting liquidity levels, only makes a long tail strategy feasible in the markets for retail savings, microfinance and personal loans. But at scale there is no reason why people can't finance each others mortgages, mutually assure general insurance type risks or offer short term trade finance for SME's and so on, depending on their individual need.

Of course, the financial wholesale or capital markets already operate like this, and long ago evolved "products", like spread-betting and CFD's, and user experiences, like City Index, that are better suited to individuals rather than large market counter-parties. Worth noting that BJSS, who helped build the Zopa platform, also developed various financial markets trading platforms.

I take Chris's point about mobile being critical to reaching the long tail, but viewing any one access technology as a gateway in itself risks a slide into "blockbuster" thinking rather than long tail thinking. To access the long tail of individual requirements, the market has to be as porous as the participants need it to be to create their own "product" whenever and wherever is convenient or useful for them. In practical terms, you should be able to (and now can) share or publish your loan request or "listing" via your pc or mobile to all the social network platforms, in the same way you can share a blog that you like.

The role of technology in creating the long tail of products that meet individual customer requirements in the payments space is perhaps a little different. The act of payment itself is very simple and doesn't need to change. But the "blockbuster" approach has meant that banks and other payments providers have treated payment as an isolated act, and supported it with a few inflexible products. Whereas, from a customer standpoint, payment is always embedded in a longer process, activity or scenario. In-store payments aside, it has been a real struggle to enable individuals to make payments and money transfers when and where they want to. Integrating payments with online shopping carts and ordering pipelines to create a satisfactory customer experience occupied the first 10 years of e-commerce development, and many still get it wrong. Mobile payments (not to be confused with mobile banking) has had several false starts and still suffers from a lack of standards and interoperability. This makes it tough to enable each user to make up his or her own payment solution to suit a specific scenario. But at least providers are now focused on solving real user problems in real scenarios - like enabling you to find a product and buy it while you're on the move or remittances from foreign workers stuck in remote compounds.

Mobile banking, on the other hand, still suffers from the old blockbuster thinking - merely offering access to the same old, inflexible bank products, rather than enabling users to make up their own. I'm sure the long hand of the Web 2.0 trend will enable consumers to get there eventually.

Reaction to eBay's PayPal-only Rule: a Lesson in "Web 2.0"

The reaction to eBay's attempt to require sellers only to accept payments via PayPal has reinforced a key tenet of "Web 2.0" - that facilitators provide an "architecture of participation" within which users interact and collaborate to improve the service.

Users will tolerate unilateral acts by the facilitator, as long as they trust that the facilitator is acting to improve the architecture - greater efficiency or more features, for instance - although these are clearly best introduced in response to actual user feedback or user behaviour, either on or off-site. Friendster paid the price for not aligning itself according to users' on-site experience and off-site behaviour.

Firsthand experience at Zopa also taught me that users will even tolerate the introduction of fees to the extent that it's a genuine attempt by the facilitator to achieve financial health and stability.

But eBay's decision to impose the PayPal-only requirement appeared to be neither genuinely facilitative, nor motivated by user feedback or behaviour. It hardly seems critical to eBay's financial health and stability. So users punished it accordingly.

Had users not reacted in this way, there might have been a basis for doubting the continuing validity of Web 2.0 as a description of what's happening in the consumer sphere. But clearly the trend rumbles on.

National Rail's Secret to Great Train Timing

Wednesday, 2 July 2008

The Long Tail: Define "Head" and "Tail"

Fascinating post by Chris Anderson responding to a Harvard Business Review analysis of sales patterns in the music and home-video industries to see if they support or undermine the Long Tail theory.

In short, depending on your definition of "head" and "tail", the data could be used either way. A somewhat obvious point to make about any stats, but nice to see the pro's slanging it out, and good ammunition for responding to use of "Long Tail" buzz words in pitches.

The slightly longer version is that HBR finds that the "blockbuster theory" holds even for e-commerce:
"A balanced picture emerges of the impact of online channels on market demand: Hit products remain dominant, even among consumers who venture deep into the tail. Hit products are also liked better than obscure products. It is a myth that obscure books, films, and songs are treasured. What consumers buy in internet channels is much the same as what they have always bought."
Hence, even online businesses should focus their resources on promoting hit products rather than obscure products.

However, Chris Anderson points out that:
""Head" is the selection available in the largest bricks-and-mortar retailer in the market (that would be Wal-Mart in this case). "Tail" is everything else, most of which is only available online, where there is unlimited shelf space."
Using that definition, the data supports more "tail heavy" consumer demand on the sites analysed.

View or join the ongoing debate!
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