Inherent vs. Network Value and the Role of Marketing

This is long, but I believe from the bottom of my heart it will be worth the journey if you are a marketer, work at an agency, work in technology, or wonder what on earth marketers do today.

I write a lot about crafting a marketing career, since I love this profession and in the last 2 decades it has seen extraordinary change. This year I turned the lens on my own career and listened to [insert a really large number] of engineers and tech product managers suggest my life's work was obsolete or only for "sucky products." Imagine a very smart, successful Silicon Valley engineer saying something like, "With the Internet and social media, the best products don't need marketing. Look at Facebook and Instagram."

You'd think I would have flipped that engineer over my head like the Hulk with Loki in The Avengers. But I didn't. Not even close.

I listened. I really, really listened. The growth of products like Twitter without marketing is undeniable. And in the past, I've worked for amazing entrepreneurs in Silicon Valley and have seen their technology magic-making first hand. So I wanted to figure this out as humbling as it was to be the Hulk-smashed rag doll myself. As an "open source marketing hacker" (Coined by my real hacker friend. Nice), I am sharing it with you.

Two Themes of Marketing Change
In the changing role of marketing and confusion about our craft, I have boiled it down to two themes that keep coming up. First, marketers' tools--media, data, product, content and channels--are dramatically changing and integrating. Second, the word marketing is mistakenly being used too narrowly as a synonym for paid media and this largely embraced notion that the best products don't need marketing. (Yet ironically they rely on it to make money (eg Google, Facebook)).

I believe these are two of the most critical forces of change in marketing. And in the spirit of always striving for even more simplification, these aha's can go one step further into a single thought:

Marketers make meaningful value and scalable connections for products that don't naturally do it themselves--and they largely do this through products that do.

Products that market themselves 1) have value that increases for users when more peers use them and 2) create connections that automatically get the word out and acquire users in more effective ways than paid marketing. If a product doesn't literally market itself, then you need marketers.

Inherent vs. Network Value Determines the Role of Marketing
Both the best marketers and best engineers agree that the product is king. It is our common ground. So I started there. I became obsessed with the differences between marketing Instagram vs. a BMW or Facebook vs. a Tonka Truck. It became clear that the differences in these products are network effects vs. inherent value (aka non-network effect). And that this determines the role of marketing.

Here is a simple definition of inherent vs. network value:

Sources: HBR Strategies for Two-Sided Markets October 2006, Lean Startup Marketing: Driving Sustainable Growth at Normal vs. Network Effect Start-ups from Sean Ellis at Lean Startup Circle LA 2010, and Network Effects on Wikipedia.

Why does this matter? The marketing and the ability / need to invest in it vary significantly for products with inherent value, two-sided network value and direct network value. This is the real Ovaltine decoder ring, Ralphie.

Products that market themselves have direct network effects. Products that don't market themselves have inherent value (non-network effects). And two-sided network effects require both: great technology products and marketing, depending on the stage of the product and category.

Let's break it down, yo.

Marketing Products with Inherent Value
Products with inherent value tend to have fee-based business models. That allows companies to charge for them and likewise invest more in the value of the product and the marketing to get the word out, distribute the product, and serve customers. Consumers pay for these products. An iPad is a perfect example.

These products do not, however, have the ability to "market themselves." In other words eating a Cheerio doesn't naturally connect to another person who then eats a Cheerio. And there is no natural incentive, meaning the value doesn't increase for my Cheerio, if I get someone else to eat a Cheerio. This is the same for an iPad, but I wanted to use an extreme example.

If a product doesn't intrinsically have connections, marketers create them, doing that meaningfully and cost-effectively is really hard and worthy (especially try doing it beyond discounts and incentives). That's one of the reasons why marketers and agencies matter.

Marketers of these types of products use the tools of their trade to create word of mouth, piggyback off of viral platforms like Facebook, and make sure it is really easy to find and buy them (aka distribution, point of sale). Old Spice has one of the most successful digital campaigns of all time, but it has to use storytelling, humor and YouTube. Pretty cool when you stop and think that there isn't anything inherently viral about buying or using a stick of deodorant. That's why ironically some of the best digital marketers work on the least technological products.

Starbucks is another great example. A cup of coffee isn't intrinsically viral when you use it, nor does it increase in value if 5 other people buy a cup of coffee next to me. However, Starbucks uses branding and the halo effects of people's social nature to make that coffee better if I can share it with someone else, have a comfortable environment to do that, conveniently locate their stores on every corner, and use an amazing app. That's marketing. People are inherently social and they want amazing experiences. Starbuck's isn't trying to conjure or trick consumers. They are sincerely trying to enhance the experience and validate the consumers' value-to-price mental math.

"Product managers" are a type of marketers at these companies. They are artists and scientists of the rigor needed to craft and sell fee-based value propositions: product, price, placement (aka distribution), promotion, partners, and people (aka service) and cost, customers, channels, and competitors. As the saying goes, it is hard to compete with free. So marketers have to become customer care ninjas.

Semi-exceptions to inherent value products that don't need a lot of paid marketing are unbelievably remarkable products and usually with scarcity that creates a fear of missing out. The products are created by some of the best Product Managers / Marketers in the world. So investing in an amazing product can get a critical mass of people talking.

But somewhere, somehow people have to be made aware of it in the first place and that's marketing. That's usually why the marketers of those crazy-good products start with the Press and influencers. Here are some iconic examples. Think hot toys at Christmas time (eg Tickle Me Elmo first appearing on Rosie O'Donnell before Christmas), product launch announcements (eg Steve Jobs revealing the Mac), or bling on the Red Carpet (eg designers at the Academy Awards). That is a form of marketing, too. PR people and PR agencies are marketers.

Has anyone noticed Jack Dorsey, the founder of one of the most successful non-marketed products in recent history Twitter, just started running traditional television advertising for Square? The value of my Square device does not increase if 5 other people are using Square devices, too. It also doesn't naturally cause another person to get a Square device when you use it. Square needs marketing to raise awareness and catalyze a critical mass of people talking.

Marketing Products with Direct Network Effects
While this concept started with the telephone, the true power of network effects and viral marketing baked into a product is a more recent phenomenon: Facebook, Hotmail, Google, Twitter, YouTube, plus more. You get the picture. Instead of investing in media to get the word out, these companies invest in the product. Product is king, because if they create a killer product it will market itself. Interactivity with other people actually makes the product more valuable and even better for me as a user. I am incented to recruit more users. Twitter is a perfect example. It wouldn't be very useful or fun it it were just me. Facebook, too.

The reality is that these business models tend to be free to the end user--all of them actually--so these companies can't afford to spend any money on marketing to get the word out or acquire new users. This free-ness is also how they get such viral-ness, because the barriers to spread are so low. The only exceptions I could think of for direct network effect products that aren't free are MMORPGs (Massively Multiplayer Online Role-playing Games) like World of Warcraft where special gameplay unlocks with more players.

The irony is that while these products don't advertise themselves, they all rely on advertising business models to make money to invest in the products for their free users. Therein lies the fascinating symbiosis between direct network effect products and inherent ones. Cool right?

Even amazing marketers are needed at network effect companies like Facebook, because they need to help the non-network effect products get viral marketing, especially if and when the attractiveness of online ads decreases. There is incredible space for innovation here and it hasn't played out yet. Not just selling, but helping non-network effect products get viral spread of their message. And can you create a network effect through a marketing campaign?

For me this is the most exciting frontier of marketing for customers. This is where the crazy cool change is happening. I love BBH's Three Little Pigs for The Guardian UK, Droga5 and Bing's Decode Jay-Z, and American Express's Small Business Saturday (full disclosure I used to work at American Express). Inherent value and technology network effect products mashing up for the benefit of customers.

Marketers also come into play in mature direct network effect categories with lots of competitors. This transition from no marketing to marketing can be confusing and messy. These products may have had mammoth growth without marketing, and they don't have business models to fund marketing or the folks around who know how to do it. But they find themselves needing to pull new levers to continue growth and customer retention. Many of the first and most successful forays into marketing are usually through partnerships. For example, Google as the default map app on iPhones. Another example is the browser wars in the 90s. Others companies try premium models. Think Skype. Or they reinvest advertising model revenues into traditional levers for their free products to grow. Think Google's Chrome television advertising funded by their advertising business model.

Marketing Products with Two-Sided Network Value
These types of products are chicken and egg. You need scale on one side to create value for the other and vice versa. The network effect kicks in when you hit critical mass and there is demand / pull marketing from one side to the other. Think eBay buyers and sellers. The more buyers there are the more sellers want to come there and vice versa. These "products" tend to be fee-based (eg a percentage fee in the transaction between buyers and sellers, insurance between patients and doctors), which allows marketers to invest just enough to hit that network effect moment. For quite some time, the network can then market itself.

However, at a certain point if there are too many doctors and not enough patients, too many men and not enough women on the dating site, or too many sellers and not enough buyers, for example, you may need to do marketing to get the network back into balance. Too many sellers is actually a bad thing for a seller on eBay. It means more competition. So the value is in the buyers, not necessarily more sellers. eHarmony might be expanding into new markets where they don't have a critical mass yet like Europe. You probably can't totally rely on the network effect value proposition to attract new users, since that is the whole point. It is out of whack!

That's where the marketers come in! The real magic happens without relying on deals or bounties. The best marketers can and don't need to 'buy' engagement, which is often expensive and unsustainable. They find real value and know how to convey it in a meaningful way.

To get the network back in balance, marketers will:
+ Offer something of inherent value (eg a new product feature or benefit). For example, Etsy is offering better check out tools for sellers. That has nothing to do with a network effect. Amazon offers free shipping. Again, nothing to do with a network effect. United HealthCare provides continuing education credits to doctors. Ditto.
+ Create a viral or remarkable marketing campaign
+ Embed distribution in partnerships
+ Brace yourself, try to create a direct network effect so that they see value in more peers...

The I'm-At-Risk-of-Sounding-Academic Part
This gets even more intriguing when you really look at two sided networks companies that have created direct network effect value. In other words, can two sided network effects actually also create direct network effects on each side so they don't need marketing? My own career keeps attracting me to two-sided network effects. They fascinate me.

Market-makers feel like a good place to fish. It is easy to see the two-sided network effect between buyers and sellers. But how have they created direct-network effects with just the buyers (eg it gets more valuable to buyers to have more buyers) or with sellers (eg it gets more valuable to a seller to have more sellers?). That isn't naturally intuitive and is potentially even the opposite. So what have companies done to counteract this?

For consumers/users, examples are:
+ smarter recommendation algorithms (eg Amazon)
+ group buying discounts (eg Groupon)
+ reviews (eg Yelp)
+ benchmarks (eg Mint)
+ micro-investing (eg Kickstarter)
+ co-creation (eg Threadless)

For sellers/providers, examples are:
+ benchmarks (eg Google analytics)
+ developer forums (eg PayPal)
+ scale (eg Amazon Web Services)

I believe creating direct network effects at two-sided networks is another frontier of marketing. It has to be as marketers strive to decrease media investments. Figuring this out is for the marketing ninjas. Amazon has always been one of my very favorites to learn from. They create network effects and they aren't free. But they are also having to heavily market the Kindle and are using TV ads.

The Wrap Up
Blanket statements like all products need marketing or products never need marketing are silly. It depends on the nature of the product and its life stage. I believe understanding this dynamic is critical to being a kick@ss marketer today. This will help you know the marketer and agency's role and make it more accessible to others so you don't sound like a jargon-head. Here are visual notes to answer the question of what is the role of marketers today. One more time with feeling:

Therein lies the fascinating and exciting symbiosis between network effect and inherent value products. Figuring this out is what makes a career in marketing amazing today--and hopefully creating great stories, meaningful value, and remarkable experiences for people along the way.