Thursday, April 14, 2011

I Think NWN's Analysis of How SL Should Grow Its Revenue Is Flawed

I think the reasoning in this article is deeply flawed. I don't wish to do an 'argument from authority' or something like that, but I have been involved in the strategic financial and business planning at the highest levels of a Fortune 50 company. So, I do have an inkling as to how you go about positioning the company for growth, customer retention, etc.

What I learned foremost is that if you have a handful of customers providing over 80% of your revenue, you do everything in your power to please them. You build features just for them, you continually meet with them to find out what their needs are. You analyze why they spend that much money with you and you make it easy for them to spend more money with you if possible. If they are big enough, you provide them with their own individual account managers whose only job is to keep that person happy, fix their issues, track down problems, etc. For the biggest, you send representatives and the account manager to where they are at to look at their workflow and find ways to streamline it or see how you can change things to help them. Gather their requirements and build things for them. Basically, you coddle them in every way possible.

These customers have already demonstrated they will spend large amount of money with you - the rest of your customers haven't. You give them specials, discounts, and every incentive you can create to allow them to spend more money with you. You do exit analysis and 'diving saves' when one leaves, offering incentives, even ones that temporarily mean you lose money on them just to keep them as customers. Hopefully things will turn around for them and they will start to make money for you again. The *last* thing you do is change things in a way that displeases them. And you definitely don't ignore them for the big pile of customers that provide you with less than 5% of your income. Those customers haven't demonstrated a willingness to spend anything appreciable with you.
Because of the analysis of 'what makes the big guys spend money with you', you can find the ones in the 'second tier' of customers that fit those models that you can grow into bigger customers using knowledge learned from 'the big guys'. Give them special benefits as well, this is how you replace the biggies on your platform when they do leave. Spend some people on this but not large numbers.

It'd be nice to know the percentage of new users that actually spend money in SL. It looks like the average 'low end customer' spends about US$6 per year in SL. If you estimate high and say 50% of new users spend money in SL, you'll see that you need to find about 24 *million* new users to replace the 5500. Even at SL's hey day of user growth that would take many years to accomplish. And anything you do now won't pay off in that large a number anytime soon. You spend a couple of employees in the entire company to worry about how to achieve that, it's a long shot bet. You definitely don't change things to please them that would in any way affect your most loyal customers.

You also analyze the new customer demographics and provide ways for them to mature into that 'second tier' of customers. Hopefully, one of those new ones will eventually grow into one of your biggies. But don't spend too many resources on achieving this, it's another long shot bet.

Given the analysis of who spends the most money with you in SL, you go out and market directly to those people who aren't already customers with you and who fit the demographics of the 'big spenders', hopefully you can attract a few directly into the 'big spender' fold. You offer them incentives, reduced prices and remove all barriers for them to become customers.

If the average big customer spends $11,000 a year with you, you know you can give about $11,000 worth of incentives to attract one of those - sure you don't make money on them in year one, but in year two they bring in more money for you than nearly 4000 new signups would. This could translate to something like, 'we will give you a free extra sim with no setup fees for a year if you sign a contract for two years.' Tweak this so you still make money, you might be able to squeeze that to less than a two year contract to attract more people willing to sign that contract. Find a way to lock in future recurring income as much as possible. The cell phone companies have that right. A diving save would also include a temporary reduction or hold on charges to give them a chance to recover financially, that little bit may be enough to fit their new financial status.

Sure, a lot of the biggest customers make their money by renting land, and for that you need new customers, you need to pull in more people to replace/grow their constituency. There are also a lot of people who make their money from creating content - improve content creation tools.

But whatever you do, don't piss off the people who actually spend money with you. Bend over backwards to please them, even reduce your profit margin on them if it means they increase their spending to compensate.

A company of LL's size needs to focus on their core and their strengths, rather than continually spending significant resources to reach out of that. It's like the apocryphal story of the American table tennis team that goes to China. After the US gets trounced, the US coach comments to the Chinese coach about how the Chinese players were all 'one trick ponies' using one or two swings all the time. He advised the Chinese coach to work with them to make them more 'well balanced' players. The Chinese coach responds, "Why would I spend time working with my players to improve a swing that wins 25% of the time to one that wins 50% of the time, when I can spend the effort to improve their best swing from a 96% win rate to a 99% win rate? They shouldn't use the swings that don't win as frequently as the best one."

LL should focus all their resources on reaching the point where diminishing returns make growing their biggest customers not worth it. I doubt they are anywhere near that. They shouldn't spend resources pursuing something else until that point.

There are a number of things that the number estimates I made don't take into account like costs to support them, but you get the general idea.

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