Who’s turning a profit on the Internet? A year ago, an industry obsessed with building market share and revenues couldn’t have cared less. The conversations at the conferences and networking cocktail hours had more to do with “what’s your burn rate” and “what’s your business model.” All this hip, cool language made people like me – and of my age who still believed it was cool to make a profit – feel pretty out of it.
But last year, making a profit meant you weren’t spending enough to grow and grab share and build your company into a powerhouse. While investors still favored profit, they were told that they would build it into a much higher return on investment after the company went public. Many investors did get a huge return on their initial investments. Many, however, lost most of it on the next deal, which got caught in the dot-com meltdown.
I attended a Forrester Research conference last August that had very good content. One breakout session was titled “Defining the Customer Metrics.” Because the focus was on the future and addressing CRM issues, I was raring to go.
I entered the room along with about 60 others. To our surprise, we saw around the perimeter of the room two rows of disparate 8-inch-by-10-inch color photos of rocks, cows, people, racers, ducks, penguins and other objects and scenes. The session leader explained that this was a group discussion. “Fine,” I thought.
Everyone was to go to the wall, take down a picture and explain to the group why he selected the photo to represent customer metrics. I was eager to go, torn between a picture of stacks of money and a photo of a group of watches with the gears exposed, which seemed to me a perfect representation of customer metrics and resources.
I was hoping no one else would get to either one before I did. At the last moment, I decided to take the money photo. No one seemed interested in either of them.
As the session began, one younger colleague held up pictures of rocks and talked about the importance of technology infrastructure. One young woman held up penguins running after each other and said it illustrated the importance of first to market. An eager young man jumped up and shouted, “Absolutely!” He showed the photo of bicycle racers speeding around a track. This went on for a while longer.
“My God,” I thought, “doesn’t anyone realize that time and profit are important?”
So, I jumped to my feet and began explaining to these youngsters that the only real metric for customer value is profit per customer, that some customers are more valuable than others and the crucial importance of understanding the difference. It was as though I were speaking in a foreign tongue. The room went silent. When I finished, a woman jumped up with her picture of a calf suckling from its mother and began talking about customer satisfaction. The room was abuzz again. UGH!
It’s no wonder that Sturgeon’s Law, which says 99 percent of everything is crud, was adopted. It’s as applicable to the Internet spaces as to other aspects of life. Those unprofitable dot-coms, and any other company that hangs its fortunes on “first to market” or CRM or customer satisfaction without using metrics, made no sense last year and make no sense today. As the end began, the Internet companies whose only strategy was first to market or were highly leveraged like Pets.com, priceline.com and other stupid ideas like boo.com dropped quickly.
Fortunately, some companies like eBay, Yahoo and e*Trade realized they needed to focus on profit if they wanted to stay in favor and in business.
The drop in market value is being fueled by a lack of spending, unlike the year before, when the dot-coms had money to burn. Today, online ad revenues, which once were higher than a CPM kite, are in the Dumpster. Merrill Lynch released a report in late December that included Yahoo and AOL in the rate-cutting club. Many major online players are dropping CPMs below $10 and in some cases below $1. This won’t last for long.
The bottom line of this all is: If you want to play in the “new economy,” you still have to play the tired old game of making a profit and keeping the stockholders happy. When pigs fly is when profit stops being the measure of success.