The Triple Crown of Web 2.0 & Online Application Development

From a product management perspective, the three major critical success factors for building online applications are Adoption, Distribution ,and Value. Notice that functionality is not on the list & I will explain why. Also, you may think I am having a product management conversation, but as with any good marketing, it has to be rooted in economics. More importantly, focusing on customer acquisition costs. 

Unless you have are building your online application as free-ware without a way to monetize the relationships (there are a good number of Silicon Valley garage & VC backed companies still doing this, also a good number of IPhone apps), then eventually you have to figure out how to make money from the application that you are building. Even if you are creating a free application to drive distribution, but you assume that at some point that you will sell something, upsell something, or advertise something; then you probably need to have thought though these issues.

1. Adoption – in a previous post, I discussed why adoption trumps functionality in Web 2.0 applications https://rosenhaft.wordpress.com/2009/05/21/in-web-2-0-software-adoption-trumps-functionality/ Bottom line is that without users, web 2.0 collaboration cannot occur. You can look at the ecosystem of twitter or facebook apps to get an idea, but it works on a micro-level, as well. If you don’t get a significant percentage of your available population to use your application, it isn’t very valuable. With near zero distribution costs on the internet, the real price is customer awareness. You have to capture their attention and interest; otherwise the value of collaborative applications is marginalized.

2. Distribution – If you are distributing your application, you would assume ubiquitous distribution, but the problem is that so does everyone else. I had coffee with a CEO recently who told me that there wasn’t a great deal of competition for their application, but when I went online to do research, I found at least 25 or so competing applications. The direct competitiveness was questionable, along with the quality, but even if you gave it away for free; it would be difficult to break through the noise without significant marketing $’s OR a partner that could distribute the application. In essense, you need a “big brother” partner to assist you in breaking through the noise so that you can overcome the barriers to market entry. The partner provides the ability to differentiate from the crowd, gain awareness, and creates an assumption of quality. This can be a technology platform vendor (Iphone, Facebook, Microsoft, Sony, etc) or it can be an industry brand that the customers already buy a complimentary offering. Giving away a free application to drive distribution is also a good strategy, as long as it is part of a larger strategy.

3. Value – you have to provide more value than the prospective user will give; whether its there time, money, attention, relationships, etc. This sounds simple, but when you take into account market segmentation, competitive factors, and other market noise, it isn’t as easy. Let’s assume that you are servicing a vertical market with a very cool web-based application that allows the customer to save 20% off their transaction costs & shave 2 hours per user a week on a particular process. No brainer, they should value this application at least $1,200 per user per month, we should charge them $600. We are done, let’s go to market…. right? Wrong!

Pricing the application is more complicated than that when you take into account the switching costs from things they are doing today, competitive offerings, customer acquisition costs, exist costs, etc.

  • You find out they are using an old windows application that they have been using for 12 years. 20% savings doesn’t really mean much to the people using it day-to-day.
  • The business owner has an annual contract for support that has another 9 months left on it so the 20% isn’t as attractive as you would think.
  • The legacy application does not have the ability to easily export the 12 years worth of data to your web application. So, even though you have used the latest technologies for creating your API, it requires professional services to transition them. Wipes out the 20% savings in the first year.

I could go on, but when you begin to think about how to launch a new web 2.0 application, even though it seems like a game-changer for the market, there are legacy issues that need to be thought through. “Build it and they will come syndrome” has tripped us a good many new improved software applications.

It is hard and costly to simplify the adoption, distribution, and value proposition, right? Yes and no. If you ask the market and potential customers, you will incur costs and time to understand and overcome the potential roadblocks, but the risk mitigation is priceless.

Some simple advise to close on:

  • Go where customer is, not where you think they are… Customer perception is your reality…
  • It is easier to sell to companies that have money… don’t be afraid of competition or large markets, but do your homework. Smaller, niche markets also can produce more revenue is the pain is greater.
  • Customers buy from the company that is easiest to do business fromwith… registration, price, package, etc.
  • Distribution on the web is about finding relationships to reach likely customers in buying mode…
  • Value is identifying pain, “must have” versus “nice to have” – we are all overwhelmed with choices, where do we focus is prioritized based on our perceived needs. Even opportunities are based upon perceived pain.
  • Emotional connection play a large part in impulse, attention, switching costs, substitutions, opportunity, & empathy – all of which play a part in buyer behavior

The single biggest mistake I see companies make in launching new online applications is that they do not think through the factors outside of their immediate control. If you had enough warning that you were going to crash your car, you could change direction or avoid a potential wreck. Involving distribution partnerships and customers earlier in the product development cycle is exactly the way to identify potential “app killers” and allow you to make that “killer app”.

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