I guess I shouldn’t be surprised, but it is disappointing when a company starts behaving like an incumbent politician. There are those who firmly believe that incumbents are heavily influenced by campaign contributors and special interest groups; often forgetting the needs of the constituents who they are truly supposed to represent. Similarly, there are established companies that lose focus on the very customers who made them successful. With their drive to maximize revenue and profitability, instead they find that slowly over the years they start spending more and more of their time catering to their advertisers. This is sadly ironic, given that those advertisers are only interested in the eyeballs and wallets of those very customers. Lose the audience, lose the advertisers.

Now, don’t get me wrong. I know that companies need to generate revenue to survive and thrive. I just believe that they should align their revenue models with the needs of their customers. In essence, happier customers should equal more revenue. Instead it seems that too many companies generate revenue by placing obstacles (i.e., often irrelevant ads) between users and their goals, hoping that they will click those ads along the way. They need to take a long, hard look at the performance of the advertising on their site, especially the traditional display CPM advertising. Would the click-through rate (CTR) on those ads be so low if they were really adding value to the experience, if they were truly targeted for the user, and if they were mapped more closely to what users are looking for? Please.

Performance-based advertising is certainly one way to improve the experience, since it is in the best interest of the publisher to target high-quality ads to the right user at the right time. And there has long been talk of Cost-per-Lead (CPL) and Cost-per-Action (CPA) slowly replacing CPM and CPC advertising. However, many feel that the pendulum swings way too far to the side of the advertiser with these models. In addition, the lower volume of campaigns and complexity of tracking and confirming transactions present challenges for both advertisers and publishers. A new hybrid model is in order for a better long-term solution, but it won’t happen overnight.

Dave McClure points out in this post that we’ve been living with this flawed model for too long (Caution: Rated TV-MA for strong language):

We have largely WASTED an entire web decade of time, energy & venture capital on extremely inefficient revenue models. There have been a few interesting examples of startups acquired in the 00’s for large amounts due to amazing growth (eGroups, MySpace, Skype, YouTube) or advertising potential (aQuantive, DoubleClick, AdMob, RightMedia). However, mostly the decade has been an uninterrupted string of uninspiring business models and small-time acquisitions of Web 2.0 startups filled with rainbows & unicorns, rather than those based on simple, transactional revenue models…. Gradually we are discovering that the default revenue model on the internet should probably be the simplest one — that is: basic transactions for physical or digital goods, and recurring transactions (aka subscriptions) for repeat usage.

So, certainly one path to increasing independence from this often unnatural relationship with advertising is to create and/or offer something of value that customers actually want to pay for. Wow. Imagine that. But, since the dependence on advertising revenue may never go away, we also need to invest in new marketplace models that incent both advertisers and publishers to truly cooperate to deliver high quality, highly-targeted, relevant advertising to consumers when and where it is appropriate, so that they knowingly engage and receive real value from what the advertising offers. Companies need to remember the fundamental reason they have achieved scale and success: Consumers choose to spend their increasingly precious time and dollars with them. The revenue they derive from selling that “attention” to advertisers can and will disappear if they forget that.

Grinds Coffee & Tea House, Capitola, CA,
originally uploaded by Larry Cornett.

I have talked about the commoditization of the coffee business before. You can certainly get a good cup of coffee (or name your favorite coffee drink) at many of the coffee houses that sprang up over the past decade. So, when “quality” is no longer the differentiator that it once was, what is a coffee house owner to do? Well, as many industries are discovering, you start focusing on differentiating through the consumer experience.

I visit Santa Cruz, CA occasionally on the weekend when I need a break from Silicon Valley. For those of you who have spent time there, you know what I mean. Each time I am in the area, I go out of my way to visit the Grinds Coffee & Tea House in Capitola. Sure, I could just as easily hit Starbucks. There are at least five in that area. But, I don’t. Why? Because I’m in Santa Cruz and Santa Cruz has a very specific culture and context.

Grinds is a Santa Cruz experience. It is a bit quirky with the bright green exterior, but very authentic, unique, and pleasant inside. It is a treat to go there and get whatever coffee you want made fresh by the cup. Grinds is a differentiated experience and it certainly fits the Santa Cruz context.

Yes, there are economies of scale in providing the same menu and even interior decorating when you are a global business. And, yes, you will attract customers who want “the comfort of the same.” But, increasingly, consumers are starting to tire of the McDonald’s-Walmart-Starbucks effect and want to experience something unique, something new, something with “local flavor.” Sites like Etsy are yet more proof that the pendulum is starting to swing back.