The Coming Retention Revolution…
Tech entrepreneurs who dream of launching “the next Google” should consider customer retention, a largely untapped goldmine for search stakeholders (platform, consumers, and merchants).
Paid search has fundamentally changed the economics of customer acquisition, driving new business creation in multiple industries and reaping the enormous rewards that have historically accrued to similar transformative technologies (Intel, Microsoft, etc).
But that’s yesterdays news, entrepreneurs who dream of global scale and revolutionary economic impact want to know what’s next. What technology will unlock value for businesses (and consumers) on a similar scale, and launch the next startup into the large-cap corporate firmament? For a possible answer, let’s first look at one of the reasons paid search is so successful, it’s vibrant long tail of both consumer and merchant activity.
The long tail of search is where the entrepreneurs live, identifying and creating new markets. And key to these exploratory businesses, aka startups, is customer acquisition cost.
Acquisition is critical for any entrepreneur with a “startup” rather than a business. A startup’s costs exceed its revenue, and for the vast majority of companies, seed capital delimits the time available until profitability or failure (again, for the vast majority of companies, re-capitalizing is not an option).
Search-based acquisition affords the entrepreneur transparency and a moderate level of control over this cost, making it an enormously attractive acquisition channel.
After Acquisition Comes…
One way to get ahead of the curve in business is to identify a large group of economic actors, with a life-cycle that has known, or at least highly probable, needs, and provide a solution. Economist Burton Malkiel made a tidy fortune investing ahead of baby boomers’ needs, and profiting as boomers flooded into those markets (diapers, cars, drugs, etc).
Applying this model to the search ecosystem, we find thousands of online businesses that have identified an opportunity, and thanks to the efficiencies of search acquisition, have launched and grown to profitability.
So what’s next for search businesses? Search solved acquisition, but what are they doing to retain those customers?
I believe the average search business hasn’t paid much attention to the issue of customer retention. Acquisition costs have been so low, in what are still early days for this marketing technology, that the massive pool of potential customers maintains a steady-state environment of stable profitability, and perhaps even growth. We can count on reversion to the mean in any economic system however, so these days are numbered, and many of these businesses are going to have to look elsewhere to stay in the black and/or continue growing.
The tactics of customer retention are well-established, but much as pre-internet global customer acquisition was the exclusive domain of large companies, the absence of scalable, long-tail-oriented retention platforms has kept this powerful growth tool out of reach for most small businesses.
A platform that allows an ecosystem of customer-retention applications to flourish has transformative potential, a business and technology revolution that creates the elusive “next Google.”
Examples and Opportunities
Salesforce.com (and of course, the Google Apps suite… including website optimizer) is one such player, but their top-down, vendor-services orientation cannot tap into organic customer behavior in quite the way search does, providing a true ecosystem for perpetual economic innovation.
Who has the behavioral data that will drive innovation in retention technology on par with search? Social networks.
Consider the Facebook Connect program. The consensus is that Facebook will build an ad network on top of this data asset. As the only big social network to take significant risks in the past two years, my bet is we’re in store for a lot more.
Imagine Facebook providing their applications ecosystem with access to this data, significant innovation in customer retention results, creating scalable retention solutions for multiple industries, all of them sharing the low cost of entry and (relative) ease of operation that permitted the explosive growth of paid search.
Open social initiatives have the potential to connect innovators and consumers directly, but cut out the “all the world’s a stack” kerfluff-ing (advocated most fiercely, no surprise, by folks with the biggest stake in its success) and the historical antecedents say we need a trusted walled garden to get us there first. Would the internet be where it is today without AOL? Facebook will chart this path for the industry, and elevate the art of “my lifedata online” to the point where users can accept this data swimming out of the Facebook pool to join the wider web experience.
As online economics mature, merchants will need additional innovations to generate continued sales and margin growth. A long tail-friendly retention technology platform that offers utility to both consumers and merchants is going to be a search-scale win, creating enough new value in the lives of its users that the provider’s share will catapult them into the realm of the most profitable companies.
Coda: The futurist’s are discussing this elsewhere, with a closer look at Connect and more product insight. For the early stages of one of the most important tech-entrepreneur stories for 2009, Nicholas Carlson and Ben Parr both have very good recent reads up at Alley Insider and Mashable, respectively.