Thursday, July 28, 2016

Paradigm Shift

Technology is always an interest for me. Recently, I saw a story about a major Internet company shifting their business model. It is worthy of discussion because their motivation may need to be a consideration for many of the rest of us.

Over twenty years ago, a company called Angie’s List started providing reviews of service providers on the Internet. In large part, the service afforded opportunities to rank and rate your plumber or other home repair contractor. Then, when someone was planning more repair or remodeling, they could peruse Angie’s List to see how others perceived various service providers that they had used. 

It was a membership site. So, unlike similar providers in the marketplace, only paying members could access these reviews. FoxBusiness reports that Angie’s List is now shifting its service to a new paradigm, and dropping its “paywall.”

Content is what draws us all to the Internet. There are many interesting things to read, movie clips and photos to view, and a vast spectrum of methods for communication. It is an amazing tool and entertainment forum. For many of us, there was a time that the Internet did not exist. Even after it existed, there was a significant period during which it was used only by academics and researchers. Even in the 1980s, the speed at which data was accessible over phone lines and modems made the experience interesting, but often slow and frustrating.

Creating content can be expensive. News providers are a good example. To have news stories for visitors to read, a website either has to pay reporters to write stories, or pay a provider (like the Associated Press wire) for the right to publish existing stories. News organizations have evolved recently from sticks, bricks, and paper to online purveyors of news and entertainment. This shift has challenged them and their assumptions, traditions, and comforts. 

Some news sites provide their content to consumers free of charge, but laced with advertisements (and you may notice those ads are hitting closer and closer to home as your search history and web browsing tell providers more and more about you). Others operate a pay-to-play format in which the consumer is footing the bill by subscribing to the website in order to access content. Still others have tried to build a hybrid model in which advertisement and consumer fees (subscription) each have a role.

Angie’s List was in this hybrid group. According to FoxBusiness, the majority of the company’s revenue was advertisement-generated. But, membership fees (subscription) still generated revenue, and only those who subscribed could view the information and reviews. This hybrid model is intriguing. People paying to read advertising content. At first, some see this as incongruous, but it is exactly the same model that newspapers and magazines have employed forever. You purchase a newspaper, read the articles, and the advertisers hope you notice their ads laced throughout. Back when I delivered newspapers, there were days that the "inserts" (color ads) were thicker than the paper I was putting them in.

Angie’s List is not a news site, so the “content” tends to be created by users (people like you commenting about what they like or do not about service providers). Certainly, there are costs to build and maintain such a site, but without the cost of reporters, editors, etc. So, what motivates Angie’s List's 21st Century paradigm-shift from hybrid to pure advertisement? It turns out that people are different (go figure), and that generations can sometimes be described with generalities.

The rise of the “Millennial” generation is credited with motivating the change at Angie's List. This group is not precisely defines, but generally they are born after 1980. They are generally seen as a group that became adults after the turn of the century. This loose definition includes a vast population of Americans. They are young, they are consuming, and they are getting marketer's attention. 

Angie’s List has been studying its’ customer base, watching behavior and purchasing. This is something companies have been doing forever. It concluded from its demographic research that “Millennials will not pay for reviews.” These “millennials” spend as much of their money on services, and use the same pool of service providers (plumbers, electricians, painters, etc.) used by other generations. But, 90% of Millennials are unwilling “to pay to access reviews.” And so, this growing segment of the population was likely turning to other Internet options for reviews and advice. 

The people visiting the site (subscribers) were valued by Angie’s List for two reasons. First, they paid to visit, that generates revenue. But also, the price that a platform (a newspaper, billboard, website, etc.) can charge advertisers is related to how many people might see the advertiser's pitch. A billboard on the interstate will cost you more to rent than a similar size billboard on a side road. As they tell us in real estate, “location, location, location.” And location may matter as much in the cyberworld (why do businesses pay Google to have their name appear first in the results of an Internet search?)

So, having visitors to the website justifies the rates its owner can charge advertisers. Coincidentally, it is a bonus if advertisement purchasers can predict the interests of those visitors in advance. The data being gathered across the web, for this purpose, is incredible in itself. Try searching a site for plane tickets to a distant destination. Then surf the net as normal. You will notice that advertisement is now tailored to your proposed trip (hotels, rental cars, tourist attractions in that city, etc.). Your search has allowed some algorithm somewhere to tailor sales pitches just for you. So, for example, knowing you need drywall installer, from your search, might allow Angie’s List to push advertisement on painters to you on future visits.

Angie’s List determined that its’ subscription model had “successfully penetrated over 70% of the digital baby boomer households in the United States and over 50% of the digital Gen X (born from mid 1960s to early 1980s) households in the United States. However, it only penetrated 30% of the millennial-owned households in the United States.” They concluded that Millennials are renovating, remodeling, and maintaining homes similarly to other generations, but they are simply less willing to pay for the review information.

In short, the paradigm of subscription was very accepted by older Americans, somewhat acceptable to the baby boomer’s children (Gen X), and not of much interest to the baby boomer’s grandchildren (millennials). That is not to say that the company was losing money or that its’ hybrid model was failing. The concern was that the company was experiencing less growth in its revenue (all the baby boomers have been born, that “generation,” population is fixed, aging, and not a route to growth; the Millennial generation is expanding daily).

In a larger context, what does the Angie’s List experience teach the rest of us? Well, if no one has told you yet, it turns out that Millennials are different. They have interests and issues that drive their consumption of service and goods. The way they consume news tends to be from social media rather than traditional news sources, according to the American Press Institute. The way they perceive the working world is also different. And business is likely to evolve in order to accommodate their perceptions. Their population is still growing. Their purchasing power is growing. And the way they perceive and consume will therefore affect us all.

This will be true in a variety of ways. Any service provider, professional or business owner will need to pay attention to this demographic and where it is leading us all. I recently had a conversation with a savvy businessman who evolved through the paper to digital shift. He lamented that a website used to be the critical expense for his business as the Internet's influence began to take hold in the 1990s. He says that now, as critical as the website remains, his work on social media platforms has become as critical or more so. Asked why, he explained "young people do not visit websites unless they see the link on" social media. 

The lesson here is simple. There will be shifts in what is effective and productive. This will be true in hiring and managing. It will be true in how we compile and convey information. We cannot make the world cease to change, but if we are to survive in it we will have to learn to accept and harness this change.  

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