Silicon Valley's Greatest Opportunity? Better Marketing

It's crazy how time flies.  In October of last year I marked my 6 year anniversary in Silicon Valley.  It's been quite a ride and I've been privileged to see and be part of some pretty amazing things:  the booming of the app economy, the explosion in Android adoption,  the growth of mobile gaming, and the launch of Google playjust to name a few.  

Like many, I'm perpetually amazed at the level of energy, innovation, drive and creativity here. I've lived in 11 countries and actively worked in 7 of them and I don't think it's a solely an American thing to claim that there is no place like the Valley.  There just isn't.  The unique mix of energy, technology, capital, innovation and cultures simply doesn't exist anywhere else.  It's what makes this place so unique and dynamic.

But the Valley has its dark sides and its own challenges as a recent article in The Economist points out.  Success and financial gain aside, one that's very rarely talked about but is becoming more widely acknowledged is the lack of focus on marketing.  I'm constantly surprised by how little focus there is on marketing at many companies - both big and small.  Many marketers will agree: For all the innovation in the Valley, marketing if often under utilized, misunderstood or de-prioritized as part of the business.  

Why?

To appreciate the answer you have to first understand what the role of traditional marketing is.  Philip Kotler, a professor at Northwestern considered by many as one of the gurus of marketing defines it as follows:

"Marketing is the science and art of exploring, creating, and delivering value to satisfy the needs of a target market at a profit. Marketing identifies unfulfilled needs and desires. It defines, measures and quantifies the size of the identifiedmarket and the profit potential."

Sadly, marketing is often misunderstood or under appreciated in the Valley.  Ask many founders and even VC's and they will tell you marketing is about PR, advertising or "growth hacking."   

As a marketer with 20 years experience I've developed a thick skin and don't take this personally.  I remember being at Google several years ago in a staff meeting when a product manager proclaimed "marketing could go home and we really wouldn't feel the difference on the revenue side."  When you're Google and your app is pre-installed on every Android handset that comes to market it's easy to feel that way but sadly that didn't help the usage of that particular app. As a matter of fact, never has Google's marketing spend nor the size of its marketing team been larger than it is today.  

But let's get back to our earlier definition of marketing for a minute.  Another famous marketer, E. Jerome McCarthey developed what's widely known today as the 4-P's of classical marketing.  For the uninitiated these are Product, Place, Price and Promotion.  

This is also where things get really tricky in the Valley.  Product in technology is usually owned by product management / engineering team (and in early-staged companies by the CEO / founders).  Place, more commonly known as distribution, is usually owned by business development and sales. Price is owned by sales.  Which leaves marketers with...you guessed it "Promotion."  More commonly known as advertising or growth hacking here (cough cough).

Now I'm not saying marketing should own all of the above.    The complexities and skill sets needed are too great and you're not going to change the culture in which tech companies operate.  However, not having marketing deeply involved in all these aspects of the business can result in products not fit for market, brand erosion, and reduced profitability.  

Let's look at each of these in turn.

Product.  All too often I've seen startups fail because founders build cool tech in search of a market.  This happens because you have incredibly smart technical teams that love to build cool things but aren't close enough to consumers or customers to understand what problem they're actually solving or whether those people actually even need this technology (Google Glass anyone?).  The other day I met with a serial entrepreneur who showed me his "Instagram for VR."  I looked at it and was like "Cool.  Eventually, there will be a market for that but not now.  There simply isn't enough of an installed base and capturing and sharing content hasn't been established in VR.  You're at least 3 years too early."  

Another problem you get when marketing isn't involved in product is "feature creep".  I often see great products crammed with tons of cool features.  But the truth is that what makes products like Whatsapp, Instagram or Snapchat great isn't all the cool features. It's that they actually solve a real problem and do it simply.  Argentineans have a saying which is "A preuba de boludos."  Translated into gringospeak as "idiot proof."  Too often products (whether B2B or B2C) are too complicated, lack clear tutorials or onboarding and/or don't directly address a particular need.  The result:  cool tech with no clear market and possibly wasted VC dollars.  Building a successful product is about thinking about the long term.  Improving and adding features as consumer needs evolve over time. However, at the onset you have to solve 1 problem and do it freakin well!  

How Marketing can help Product

The key to nailing product-market fit and avoiding feature creep is having product teams and marketing work together from product concept through launch.  Don't build a product, throw it over the wall and expect marketing to "acquire users."  What's worked for me is what I simply call D2; the "dynamic duo".  This duo is a PM (product manager) and PMM (product marketing manager) who develop the product together from the onset.  While the PM develops PRD's (product requirement docs) and works with engineering to build, test and iterate on the product, the PMM's role is to look at the market, consumers and competition and ensure that 1.) We're solving a real pressing need 2).  We can differentiate against what's out there currently and 3). We can make money doing that.  Good PMM's are both technical enough to understand how products are built but also business savvy enough to understand the economics of the business and where there is an opening to position the product uniquely to have a competitive advantage.  This structure worked for me both in games (studio heads + PMM's) and even at Google (PM's +PMM's). Once the product is ready, PMM's will also work to develop all the necessary assets, brand materials and tools to bring the product to market.  In larger organizations they will then hand this off to consumer marketing teams that handle acquisition and retention while in smaller orgs they may even handle this themselves.  Often the PMM will also run market research and work with the PM to do client interviews, qualitative research and focus groups to more deeply understand consumer needs and how the product can meet these needs.  It's usually a win-win scenario where PM's and PMM's both own the product and the P&L and have clear responsibilities to ensure everybody wins.  Likewise, if things fail they both take the rap ;)

Place.  More commonly known as distribution.  Distribution can make or break a product.  Regardless of whether it's hardware or software.  You can have the best product in the world but if you're competitor has a slightly weaker product but is more widely available you're probably going to lose.  When I worked at Pepsi in the 90's (yes, totally dating myself) one of the big reasons why Coke kicked our ass wasn't advertising (Actually Pepsi's advertising is better than Coke's - I'm biased like that) but because they have way better distribution.  The joke in the industry is that you can find Coke more easily around the world than drinkable water.  Sadly, that's also statistically true.  

The same is true in tech.  You have to be where your customers are and even where they aren't.  The more consumers see you the more brand "recall" you have (ie. the first brand they think about when they are considering a purchase). Twitter and Facebook aren't massive just because of their product and virality. They are successful because you "see" them everywhere.  They are distributed by 100,000's of 3rd party brands on their websites, apps and in the press.  In effect, their ubiquity is a reflection of their distribution.  It's the power of being everywhere.   Coke and Pepsi have enjoyed a duopoly in the soft drink market since the 1890's mostly due to distribution not just advertising.  

How Marketing helps distribution

The key to unlocking distribution is to identify all your possible distribution channels: ie, where are users / clients going to find my product and figure out how to market to each based on their own, unique characteristics.  Once you establish the different channels or partners you have then marketing usually works with your BD teams to develop channel marketing plans.  That's marketing-speak for marketing programs specifically tailored to the needs of that channel.  Here's an example.  When I ran Google Play marketing, one of our programs was called "Comes with Google Play."  It was a program targeting handset vendors and carriers where we provided them with programs, assets and tools to communicate to users that Android devices came with Google play content.  The goal was to ensure that consumers considering Android wouldn't buy an iPhone because Android lacked content.  So we developed the program to provide those channel partners with assets and programs to help carry that message to prospective users.  We even had a partner marketing team who helped push the program to partners and provide them with the framework for brand approvals to communicate this to end users.  

One of the best known programs of that sort was Intel's famous Intel Inside campaign (developed in 1995).  Not only did it help users understand what a processor was and why it mattered but, more importantly it told users why they should only consider PC's running with Intel processors.

Price - show me da money!

Usually the domain of sales or senior management effective pricing can dramatically increase profitability, extend product life cycles and destroy competition.  

Getting pricing wrong can also have dramatic consequences on your sales.  In 2011 Blackberry introduced their first tablet: The Playbook.  Aside from having a terrible name which had nothing to do with the product (they had virtually no games or entertainment content and were targeting business owners) they priced the device initially at $499 to $699 which was the same price as the market leader: the iPad.  The result was a dismal flop.  It should have been intuitive.  After all why would I buy an inferior product, with less content at the same price from a company with little expertise in tablets?  Blackberry's fall from grace had many contributing factors but a large one was marketing or the lack thereof.  

The other two things to consider when thinking about pricing are your business model and your product life cycle.

One of the biggest challenges when I started working in mobile gaming back in 2005 was that we were effectively asking consumers to fork over 4-5$ to experience something they had never experienced before.  Consumers, especially when considering new products and services, often are hesitant to shell out money for something they've never experienced.  At glu mobile we solved that by providing Try-b4-u-buy versions of our java games.  Years later, this eventually morphed into free-2-play games which is now the standard and has helped turbo charge the entire industry.  For years what held the mobile industry gaming back wasn't just shitty distribution (yes that's you Verizon, T-mobile and Vodafone) but bad pricing.  Once games became free to play, a big reason not to download them suddenly melted away and the market exploded.  Today free to play games account for the vast majority of revenue on both the App Store and Google Play.

Another way to juice up adoption and sales and maximize profits is life cycle optimization.  This is commonly done in many traditional industries from consumer electronics to fashion and cars.  It can and should be used in software as well.  The simple notion is that as a product ages and a replacement approaches you should gradually decrease price to extract additional value.  In 2007-2008 we had amazing success at Glu in Europe by doing this.  Once mobile games had been on the market for six months, we would reduce the price and 1-2 months before a sequel we would reduce the price yet again.  In this way we were was able to capture users who wouldn't pay full price while also seeding awareness for the next title.  The console gaming industry has also seen some success doing this.  

Marketing and pricing

Let's go back to our dynamic duo - D2.  Ideally, both the PM and PMM who own your product should have a pricing strategy not just for launch but for the entire duration of the lifecycle of the product before you launch it.   This pricing strategy should reflect the competitive landscape, the introduction of new features (and whether your going to charge for them) and the planned obsolesce of a product to pave way for a new one.  In the Valley not only do teams spend too little time on pricing (often finishing a product without even figuring out whether to charge for it or not) but they often will either underprice a product (our competitor charges X so we should charge X) or fail to identify features that should justify higher pricing.  Pricing is important not only for profitability but also as an indicator of perceived brand value / strength.  

Let's say your positioning your firm as the "market leader" in X space (who doesn't?).  What does it say if your pricing is the same as everyone else's?  It says you don't have enough confidence to charge more for it.  If you don't have enough confidence to charge more for it than is it really better than what's out there?  It might be but that's what your customers are going to be left asking.

Marketing teams need to be assessing how sales and volumes change over time as a function of pricing.  They should be looking at one-off sales promotions targeting specific times of the year and they should be planning price reductions when products are being phased out and pricing increases when products ad valuable features.  Lastly, if you're selling physical products your marketing teams should be working with sales to identify opportunities to price discriminate according to different channels.  Ever notice how a can of Coke (or Pepsi) costs more in a restaurant than in a gas station?  There's a reason for that.

Last but not least Promotion (aka Advertising, Growth Hacking, UA)

Congratulations.  If you've actually read this far and didn't realize what other things marketing can help you with you may have actually learned something ;)

Yes, it's true.  Advertising does remain a core function of the marketing team. But here's the catch: Advertising isn't as effective as it used to be - particularly among millennials.  Why?  There's simply too much noise and too many fragmented channels to market through.  Too many ads, too little time coupled with consumers and clients who are sometimes a bit lazy and usually irrational (if you don't buy this read Dan Ariely's book "Predictably Irrational").  Consumers are filtering out all the noise and are basing purchasing decisions based on other things (friends, the latest fads, what they've used before, the first thing that comes to mind etc.).   Even Google admitted last year that possibly up to 50% of Adwords clicks are accidental.    On the B2B side, many customers are saying that they are actually more into buying products and services from companies who they trust and who "help" them with their business.  The translation in B2B is a greater focus on content marketing and developing materials that actually teach customers something that helps their business as opposed to trying to sell them something.  Content marketing is on the rise and an increasing number of marketers are finding that this is the friendliest path of least resistance to building relationships that eventually translate into greater sales and longer retention.  A great article in Adweek captures why content marketing is on the rise and some of the trends we're seeing.  

The key to understand advertising is simple:  advertising is a process and a journey.  I've often used a framework to help explain this journey: ALTR. Awareness, Likability, Trial, Repeat.  

Before a consumer is going to buy your product they have to have heard of it. Once they've heard of it they need to "like it" or accept it as part of their consideration set among other products they might buy.  Third, they have to try it.  They may buy it or try it but that doesn't mean they will stick to it.  The rule of thumb among marketers is that a customer you already have is always worth significantly more than a new one you have to acquire.  That's why many VC's are placing so much emphasis on retention.  Acquiring a user on Facebook at $5-7 is one thing but loosing 92% of them after 30 days is another.  

What your marketing team should be doing in regards to advertising

Good marketers will develop advertising strategies that capitalize on each stage of the consumer journey as outlined above.  Successful marketing strategies will have different messaging, different creative applications and different advertising channels depending on the goals at each phase.  Each step of the process should be measured and evaluated based on its own metrics.  For example, awareness should be measured in terms of aided versus unaided brand awareness, visits to your website, shares, posts etc.  Trial can be measured in terms of the number of consumers / clients that tried your product and the duration during which they used it while retention is a function of how long a consumer continues to pay for and use your product.  

Different advertising strategies need to employed depending where in the consumer journey you're targeting users.  Billboards or display ads may be good for awareness but not for trial.  Re-targeting is effective for consumers already considering your product but not for those already using it.  Blog posts, white papers and webinars are only effective if the content is tailored to the right audience at the right point in their customer journey.  If you're writing posts on your product features and expecting leads than you're simply wasting keystrokes.  

The good news in all this?  There's still a ton to do to improve tech marketing in the Valley.  As a marketer, I'm excited and optimistic about marketing's prospects.  The Valley is in many ways building the future of consumer and enterprise products across many different industries.  Better marketing will result in better products, targeting the right audiences, with the right message, at the right price available wherever those consumers expect the product to be available. It's a good time to be a marketer in the Valley (if you have a thick skin) and never before has marketing been more important both for the top of the funnel as well as for the bottom.  Marketers should embrace this opportunity while CEO's and VC's should encourage both their marketing and product teams to work more closely together before they actually launch their products.  Firms, clients and investors will be much better of for it.  

Mad Mork

Zynga: is it a good investment?

In December 2013 I started a games studio with 3 co-founders.  I shut down the studio and gave the money back to the investors 7 months later.  There were many reasons for this but part of the reason was that there was little to no appetite for VC money going into games start-ups in the US.  Given Zynga's past few years and King's IPO it's understandable.  That said, investment in gaming companies in Asia continues to go from strength to strength.  Funplus was acquired this year for nearly $1billion by Zhongjii Holdings while companies like Nexon, Tencent and Netease continue to pump money into early stage gaming companies. Ironically, Funplus, started by Andy Zain in 2010 was profitable by 2011 and actually built it's business on the back of four games, one of which was strikingly similar to Zynga's Farmville.

I've been in gaming since 2005 and was part of Glu's (GLUU) European management team when the company went public in 2007.  Much has changed since then including the rise of iOS and Android and the decline of Nokia and Blackberry.  More importantly, the death of carrier distribution and the rise of platform app stores completely changed the distribution landscape and democratized distribution for thousands of game developers.  Now, instead of walking up the yellow brick road and begging the Wizard of Vodafone or Verizon to publish your games you simply upload your games to Google Play and the App Store and hit publish (with the exception of China where you need to work with multiple local app stores like Tencent, Baidu and others for Android).  Coupled with social media, offer walls, Facebook ads, an overwhelming number of tracking / analytics solutions and some smart PR you can build a decent business like never before.  Better yet, with the advent of in app billing which allows developers to make their games free and only charge users for micro transactions, game developers removed a major barrier to entry which was the carriers' insistence on fixed price points.

All this is good and bad news for developers.  It depends on which side of the fence you're on as a developer or as an investor.  But what does this mean if you're Zynga?

Well the good news is that games are not the risky investment it used to be.  Many say that games are like the movie business in that they are hits driven.  While that's certainly true for high budget console games like Destiny it's no longer completely the case for mobile.  Mobile games and mobile games development has become much like software development overall and has now become more like Games as a Service (GAS for those who like interesting acronyms).  GAS means that a games developer can develop a game, put it on one of the app stores and conduct extensive beta testing until they achieve or come close to achieving the monetization metrics they need to maximize the value of the game.  This means that Zynga can generate a fair amount of valuable consumer data by launching a game in a limited number markets, iterating on it and improving the games' features while holding back valuable marketing dollars until the game is fully tested and where it needs to be.  Even once a game is launched, its developer can continue to make tweaks and changes to the game over time while even introducing new levels, characters and items to keep retention rates high and reduce churn.  Zynga certainly benefits from this model and as long as the games they make aren't complete flops they can continue to iterate on them over time and improve their retention metrics even once the game is commercially live.

Zynga also benefits from its size and resources in several different ways. First, it's position as a top developer gives it clout with the app stores.  It's able to negotiate premium placement for its titles (much like Looney Tunes' featured visibility on Google play currently), get access to early API's from Apple and Google and even get included in some of Google and Apple's marketing.

Second, its financial and human resources allows it go much deeper into marketing then most smaller developers.  Why is this important?  Developers today have literally dozens if not hundreds of different sources of inventory to buy media from to promote their games.  Each of these needs to be integrated, tested, tracked and measured.  Larger companies like Zynga have entire User Acquisition (UA) teams dedicated to doing just this.  For the smaller developer, every new source of inventory means integrating a new software development kit, testing their game, launching, measuring and tracking that source.  Scaling to more then a dozen or so sources simply isn't achievable.  For Zynga it still is.  More importantly, Zynga has the marketing firepower to get its games noticed.  This is becoming more important given the overwhelming number of games available on both platforms.  With merchandising space being so limited, the only way to get noticed is to use marketing and acquire users (unless your game is highly viral in which case you can rely on consumers to push the game for you - which is rare).  The cost per install (CPI) to get users has also been rising as more developers compete for limited, high quality inventory to get users.  The effect here is to weed out smaller developers who have less resources and consolidate the power of larger developers like Zynga who have the firepower to acquire users over time.  This kind of marketing power actually becomes a self fulfilling prophecy since acquiring more users actually drives the game up the rankings which generates more visibility and users generating more downloads.

Finally, Zynga has the advantage of localization and distribution.  Gaming is a global business and in some markets consumers will not play games that are not adapted and/or localized for that market.  The most obvious cases are markets like China, Japan, Korea or Russia.  Zynga has both the resources to fully localize and adapt their titles if they wish and also the distribution agreements to guarantee widespread distribution in those markets (this is particularly key in China which has at least a dozen high profile Android app stores which compete for consumers' attention though Tencent, is by far, the largest).

So do all these advantages make Zynga a good investment?  Well, the answer is maybe ;) Though Zynga has many of the advantages listed above it still needs the essential ingredient which matters most:  a good product which monetizes well!

To this extent, last weeks release of the the Warner Brothers (WB) title Looney Tunes was a step in the right direction.  Was it enough to warrant a 13% rise in the stock? Sadly, no. While some analyst mentioned Looney Tunes' initial downloads, consumer reviews and rank in top free apps that doesn't tell the whole story.

I spent a few hours playing the game and found it polished, fun to play and ease to play.  Looney Tunes is a WB themed endless runner game where consumers can play a variety of different characters like Bugs Bunny that run along a continuous stretch of road to collect coins, carrots and other times with the goal of trying to reach the characters' home at the end of the road.  On the way they need to leap over various obstacles, avoid classic enemy characters and accumulate a minimum number of special items.  The games' graphics, controls and sound are all really smooth and the level design is well done and engaging.  Also as endless runner games go, they did a really good job at keeping new levels fresh with new characters, special items and fresh gameplay.

That said here are the problems I have with it.  First, endless runner games are a pretty competitive genre with the likes of titles like Temple Run, Despicable Me and Subway Surfers being pretty established in that category.  Though Looney Tunes gives them a fair run for their money and in many ways offers better gameplay and a stronger brand (with the exception of Despicable me) endless runner games suffer from another problem:  their gameplay and audience.  These games, like most of Zynga's historical franchises, target casual gamers and though they have mass appeal (read installs / users) they monetize only a small percentage of their base: typically 1-2% of users.  In addition, the average revenue per user (ARPU in industry terms) also tends to be fairly low.

Low monetization is the second issue I have with these particular types of games: the small percentage of consumers who pay implies a significant base of users are needed for the model to work.  Of the three games mentioned above for example, only Subway Surfers even appears in the top 100 grossing games (the chart that really matters) on Google play (#90 in the US).  That's despite it having amassed in the range of 100-500M installs which puts it as one of the most popular games among Android users.

The third issue I have with Zynga's choice of brand. Zynga chose to license Looney Tunes from Warner Brothers to develop the game. When I was part of the European launch committee at glu back in 2006-2008 we choose to avoid brands like this for Europe and EMEA because they didn't resonate well enough with international audiences.  While Looney Tunes might be a decent, if slightly old brand, in the US, the international audience will be far smaller compared to a much stronger, more culturally relevant brand like Despicable Me.  

In addition, since the title is licensed from WB, Zynga will likely be paying at least 15-20% of net revenues (after app store revenue share) to the the license holder.  Meaning that if Apple and Google take 30% Zynga has lost 50% of revenue right off the top (before factoring in marketing costs) before they see any money at all.  So essentially Zynga doesn't see margin benefits of having developed their own IP like a Subway Surfers but also will limit its reach by using a weaker brand with less relevant appeal.   

Don Mattrick's choice of licensed IP so far appears patchy at best.  My fear as an investor is that exactly the same thing will happen when they release Tiger Woods.  Golf is a niche sport particularly in video games which was one of the reasons EA discontinued the franchise on console (aside from how tarnished the Tiger Woods brand had become in recent years).  That said, I launched Tiger Woods golf on mobile back in 2005 while at i-play and the genre lends itself really well to mobile though monetization is still a question mark for me.  Can Zynga do better on  mobile with it?  I guess we'll have to see.

So where does that leave me in terms of Zynga?  The answer is cautiously optimistic.  Clearly they have many of the advantages I listed above and have the potential to make very good titles.  However, to consider this as a serious investment I would want to see three things:

First, a move to more hardcore games which involve higher, more sophisticated gameplay and development costs but also which require a far smaller, more engaged user base to monetize (since a higher % will monetize vs. casual titles).

Second, a focus on developing compelling own IP which can be built into stronger brands that are both more profitable but also have the potential for brand extensions over time and finally, a focus on developing games that will appeal to an international audience.  With mobile games growth slowing in the US but still on fire in Asia, Zynga continues to be too US focused in my opinion in terms of the games it's making for mobile.  Next year the Chinese games market will surpass the US in terms of size for mobile gaming and Japan is already 2x the size of the US market for Google play. Zynga needs to wake up to the reality that it operates in a global market place and either find / develop brands that are more international in nature or develop studio capacity to develop additional games targeting large, key international markets (in the way that rival Gameloft does).  It's currently Beta testing its Empires and Allies franchise for mobile.  Hopefully this title can address some of these issues and give Zynga shareholders a real reason to celebrate a 10% rise in the stock.

Mad Mork