RonAmok!

There are two things that we know about the great game of business:

• Companies are pretty good at predicting costs
• and they’re not very good at predicting demand.

If they were, companies like Ford, Coca-Cola and Columbia Pictures never would have released the Edsel, New Coke, or Ishtar.

The problem is that until recently, the financial success of a project was determined posteriori (after the fact), by how much revenue was generated. But wouldn’t it be better if we could actually predict the project’s financial success a priori (before the fact?) Recent advances in “social” technologies have resulted in a new sort of crystal ball that can not only predict marketplace viability accurately, but can also establish the holy grail of marketing: value-based pricing.

A New Way

Imagine for a moment that you have an idea for a great new product. You know how much that product will cost to develop and manufacture, but don’t yet have a good feeling on how well the marketplace will respond to it. Sound familiar? So how do you determine whether or not to continue with the project? Product testing? Focus groups? Surveys? And even after performing all of these expensive pseudo-scientific actions, doesn’t the decision still come down to a gut-feel based on “intangibles?”

But, what if, instead of surveys or gut-feelings, we had a way to know exactly how many people would prepay for your product? And what if, those same customers would also determine an average selling price (ASP) for the product too?

Fantasy? Nope. Just another business innovation that is resulting from our experimentation with social technologies.

Musician Julia Nunes explains.

“Normally I’d record the album and incur a fun amount of debt, and then, I would try to make that money back by selling the album,” she says in her Kickstarter project video where she’s requesting $15,000 to fund her project. “But now we have this awesome platform called Kickstarter, and I can basically pre-sell the album, and offer up a bunch of stuff that I’d never sell on my regular website, with the added bonus of you guys knowing exactly where your money is going…directly into the studio.”

Had Julia decided to follow the traditional business decision cycle, she’d have to consider investing $15,000 of her own (or borrowed) money to record, manufacture, market, and distribute her album. If she assumed an ASP for each album at $9.99 on iTunes, she’d need to sell well over 1,500 of them (to also cover sales costs) just to break even. If that number passed her gut-check, she’d probably green-light the project.

However Kickstarter opened a new way for Julia to assess the financial viability of her project. Having already calculated the $15,000 that would make the project worth her while, she didn’t have to wait to determine the financial success of her project posteriori, instead the marketplace determined that for her a priori, as 1,685 people prepaid $77,888 for her to create her album.

Business Ramifications

Many people look at Kickstarter as a cute way for the little guy to make it. And they’re missing the point. Something much bigger is happening here as networked technologies are squeezing inefficiencies out of traditional business decision-making processes. The concept of network funding has applicability in any business, not just musicians, as indicated by the 5,258 people who gave $364,000 to Peter Dering to manufacture his Camera Clip System, or the 12,521 folks who gave $1.464M to Casey Hopkins to manufacture his Elevation Dock: The Best Dock for the iPhone.

The business ramifications of network-based funding run even deeper. Consider the fact that companies are never quite certain that they’ve optimized the price-to-demand ratio to generate the most revenue. Companies spend many hours trying to determine pricing, constantly “guesstimating” the consequences of setting prices high to establish a perceived value, or “diving the boat” to drive revenue through volume. Either way, the uncertainty frequently leaves companies with a nagging suspicion that they’ve left money on the table.

Yet, Julia Nunes established a value-based selling price for her album a priori to recording its first note. The ASP for her album was $46.22 [($77,888/1,685), with a median of $30 (determined by the breakdown of backers provided by Kickstarter]. Without a service like Kickstarter, had Julia gone to a record publisher and said, “I can sell exactly 1,685 albums at an ASP of $46.22,” she would have been laughed out of the building, because even the best A&R person in the world can’t predict sales with that level of accuracy. However, Julia’s prediction wasn’t based on the squishiness of a gut-feel; it was based on fact.

So, what does this mean for your business?

The more we use our social networks, the more we learn about their value. As we learn, new uses will emerge, such as helping businesses assess risk in a way that was impossible to do just a few years ago. Services like Kickstarter offer producers the ability to see exactly what consumers are willing to commit to their credit cards before getting too deep into the product development cycle.

So, I have a question. Is your company actively considering the power of networks in their business, or has it already dismissed them as minor tools to be placed into the hands of corporate communicators?

Note: If you’d like to read the full story behind Julia Nune’s successful use of social media technologies, please feel free to get your free copy of The Rule of Thumbs.

For the past two years, this blog has discussed a theory that Audience is an Asset that should be carried on a company’s balance sheet as opposed to the commonly held belief that social media should be tracked as P&L. Over time, the theory has been refined through other posts, such as: Valuating Your Social Media Asset, Social Media is a Mutual Fund and Assets Produce Distributions.

Yet, to be blunt, no matter how much I write, lecture, or consult on this concept, most folks still look at me as if I have two heads. “That’s a nice thought, Ron, but what do I tell my boss when asked about ROI?” Unfortunately, I’ve come to understand that as long as social media budgets are controlled by those afflicted with Communications Myopia, the value of investments in social media activities will remain underestimated–that is, right up until some event forces some of those assumptions to be revisited.

This morning, I read about such an event in the New York Times article: A Dispute Over Who Owns a Twitter Account Goes to Court. The article describes how a company (PhoneDog.com) is suing a former employee (Noah Kravitz) for control over the Twitter audience that he built while working for them.

Originally tweeting under the Twitter handle @Phonedog_Noah, Kravitz had successfully built an audience of over 17,000 followers. Since Twitter allows a user to change their handle without jeopardizing that audience, after leaving Phonedog.com, Kravitz changed his handle to @NoahKravitz. Eight months later, Phonedog.com filed a lawsuit against Kravitz, claiming $340,000 in damages [(17,000 followers) x ($2.50/follower/month) x (8 months)].

Phonedog.com released the following statement to the Times:

“The costs and resources invested by PhoneDog Media into growing its followers, fans and general brand awareness through social media are substantial and are considered property of PhoneDog Media L.L.C. We intend to aggressively protect our customer lists and confidential information, intellectual property, trademark and brands.”

In a nutshell, Phonedog.com isn’t suing him for the handle, which has their brand in it, but instead is seeking to “aggressively protect” its assets (property, fans, followers, lists, trademark). Sound familiar?

There’s an old saying that says: “You don’t appreciate what you have ’til it’s gone.” Phonedog.com now has a new appreciation for its social media assets. What about your company? Is it still trying to figure out the ROI of a blog post, tweet, or YouTube video? Or has it come to the conclusion that its investments in social media are compounding into long-term marketable assets?

This summer, I started writing a book called The Rule of Thumbs. Named after a blog post that I wrote ten months ago, the book covers the research that I’ve been conducting since I wrote Read This First.

While writing, I came across an amazing success story that demonstrated some of the book’s most important principles. The story involves a young musician by the name of Julia Nunes, who used social media to raise $78,000 US in thirty days–for her yet-to-be-recorded CD!

The story demonstrated so many of the book’s concepts that I wanted to release a case study immediately. The result is the following e-book: The Rule of Thumbs.

Please feel free to download a copy in your favorite electronic format: PDF, Kindle, iPad, or EPUB. The e-book is free and requires no annoying sign-up shenanigans.

Please let me know what you think of it!