Brand Equity

Brand equity is a well known metric within the marketing world. Wikipedia defines Brand Equity as

the value built-up in a brand. The value of a company’s brand equity can be calculated by comparing the expected future revenue from the branded product with the expected future revenue from an equivalent non-branded product. This calculation is at best an approximation. This value can comprise both tangible, functional attributes and intangible, emotional attributes.

In the case of blogs and web 2.0 products, brand equity can be calculated based on a number of attributes that go beyond the traditional groupings like press hits, reputation, etc.. I would venture that a certain portion of a web 2.0 brand equity should include a percentage include links, comments, and subscriptions (both paid and RSS.)

I’ve already spent a fair amount of time examining links as a value indicator (for example, looking at distribution, or examining links as a value indicator in the Weblogs/AOL deal). While they can work to do comparisons (for example, looking at Technorati vs. Google, Google vs. Yahoo, or vs. MSN), links, in and of themselves cannot serve up any standalone value. They work as a component of calculation but cannot stand for the whole calculation itself. However, because they are part of an engagement metric (as I see it, a link represents a vote by someone that this page is interesting, and I believe others, like the folks at Google, believe the same to be true since they created PageRank as a basic estimate of a page value based on such votes) that reflects to some extent on brand equity.

Similarly, comments represent another engagement value in the sense that someone takes a certain amount of time to voice their opinion (either positive or negative) on a particular subject when they leave a comment on a site. Such engagement means that the comment writer is engaged with the web property, willing to help further the discussion through participation.

On a lower level of engagement, one would find RSS and paid subscriptions. The reason one should monitor RSS subscription as a portion of a brand equity is that those represent people who care enough to want to be reminded of changes to a site. Alternately, paid subscriptions (either to a newsletter or a web site) can represent people with a higher level of engagement as they are willing to financially reward a site and believe that the monetary value they derive from that site is in line with what they have to pay to get to the content. Alternatively, one could see declining trends in subscribers (either in RSS feeds or paid subscriptions) to be a major negative on a site and find a diminishing brand equity as a result.

The recent discussion over the move by the New York Times to start charging for access to columnists can be seen as a case in point. One could say that the Times is taking a major risk and could potentially damage the value of their columnists in the online world. The jury is still out on this but it seems that some brand equity opportunity, in such case, is lost in terms of linkage and influence, while some of it could be gained in terms of assessing the actual financial value of said columnists.

Reputational trends

I would posit that reputational trends will eventually work as part of the overall brand equity analysis. For example, brands that are stagnating in terms of reputation could be seen as losing brand equity. In terms of analysing this particular model, I would take a look at two online brands: America Online, which once was the biggest point of access to the Internet, and MySpace, a teenager community which was recently acquired by Rupert Murdoch’s News Corporation. In this case, AOL has been suffering from being seen as the anchor weighting down the Time-Warner empire after what many consider an ill-fated merger, which failed to realize any real return for investors. Meanwhile, MySpace is growing by leaps and bounds attracting a young audience very quickly. As a result, looking at the reputational trend of a business is another important metric that needs to be quantified in some way.

Integration value

We already know that there is some value to be derived from networks (what is commonly known as Metcalfe’s law and can be summarized as follows: the value of a network equals roughly the square of the number of users of that system.) but Web 2.0 brings up a new model I would call the integration value. In a future entry, I will probably try to go into more details as to how to define that value (I’m working with some people who are better mathematician than I am to represent this as a formula). While I do not yet know what that value is, I do believe that the integration value of a business will eventually be quantifiable and that Web 2.0 does give us a chance to establish that metric.

Risks

Not all metrics reflect positively on a business. Another important metric can be found in the risk analysis of a business. Such things as over-reliance on external partners can actually be measured and weighted as part of the overall evaluation of a business. While it is hard to quality the actual weight of a risk, once again, it is possible to try to put some fuzzy value on it. For each risk that has been assessed, one should figure out a size (is it a major or minor risk to the business) and assign that some weight along with a multiplier ranging from –100% to 100% as to whether the risk can be mitigated (a negative value is worth here). This can provide some helpful information and mitigation of risk and decreasing risk factors over time can be a useful set of metrics to any business.

People

Last but not least, is the people metrics. Values like productivity can provide some hard numbers on the quality of work being put out and some value should be put in for knowledge and expertise (or even reputation, in some cases, like blogs, where the people can be an important factor of the brand). However, for software business, one has to wonder whether people are really the most important asset anymore. Are they worth more than a community? Are they worth more than the integration value or brand value? What is their weighting in this new world?

One of the tired cliches of business is that people are a business’ most important asset but, in a world where educated labor is available at cheaper and cheaper price points as a result of globalization, what is the value of an individual to a Web 2.0 business. While few people are key, is it true of all employees? Those are difficult questions to answer (and I will not attempt to, to be honest) but here, people are becoming an important metric in the sense that their presence could be both a positive or a negative.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Metrics — Soft Metrics. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

Revenue

One of the easiest metrics to measure, in terms of assessing the value of a business, is the revenue lines and other items, such as profit and loss (also known as P and L), which one can cull from balance sheets. While the raw numbers, in and off themselves have some value, it is important to look at distribution. On the revenue side, distribution could be spread across a number of areas: for example, a site could receive some advertising revenue (both through an internal sales force or via an advertising network like Google Adsense or Yahoo! Publishing Network), derive revenue from paid subscriptions, receive dollars for syndicating content to another source, or manke money from a number of other areas. Some Web 2.0 companies are deriving revenues from the sale of product or services related to their free (advertising supported) offerings. Others might be looking at the sale of data they gather from the interaction people have with their services. For example, I remember seeing a company, a while back (and the name escapes me), which sold corporation some tracking mechanism based on what people in the blogosphere were writing about the corporate client. This type of data mining will probably become increasingly relevant and pernicious in Web 2.x and I believe that it will become a major source of revenue for quite a few companies. However, those companies will have to be careful in their offering so they do not ostracize their audience because another hard metric is…

Traffic

Since the onset of the commercial internet, traffic has been one of the hard metrics relating to internet businesses. The reason such metric is of import is that, when looking at the web as a medium, the parallel to other media make it easier to grasp for marketers. As a result, discussions of page views, eyeballs, visitors, and sites generally exist around the time advertisers decide whether to make a purchase on a web site.

While the boom and bust of Web 1.0 has shown that pure page counts does not a business make, there is still some value to be derived from such numbers. In Web 2.x, audience participation is a mjaor factor of success and it is the lock-in of certain audiences that lends certain Web 2.0 companies some credence. As a result, one should carefully consider visitor counts and site numbers when evaluating the market potentials of a web business.

The visitor count (and its other metric the visitor growth data) can provide some insight into the value of a particular community. For example, when News Corp. bought MySpace, it not only bought a tool but also a community (and one that is growing at a pretty quick pace). Or when Ebay bought Skype, it bought a substantial number of users along with some tools for VoIP. Whether those can be monetized remains to be seen but a concept of integration value will be attachable to those metrics.

Also of import is the unique site count. The reason for this is that it gives more data as to visitor concentration. If a community comes primarily from sites in a particular country, one has to ask whether the value of that business exists only in that country or whether it can be internationalized. Alternately, a wide distribution and a slower growth in site count could mean that a web business has matured to the point of not being able to extend its reach any further (it could be that the business has reached all its potential audience already and therefore will not grow much beyond its existing position) As a result, an analysis of site distribution can provide some important value when trying to evaluate a business.

Another important traffic metric, in the current world, is RSS subscribers. One could argue that subscribers are generally more motivated customers in that they have taken a step towards getting to know a site a lot more. An RSS subscriber is someone who is developing a relationship with a site, as opposed to more casual visitors of a site. There may be some added value in the level of engagement such a user would have. Some of the way one could potentially derive some value out of this type of user is in defining focus group to get an idea as to what attracts certain types of users to the site. Another reason to track RSS subscribers is that, according to several studies (Pew, Yahoo), RSS subscribers tend to be in the early adopter camp and reaching such individual could be the key to the initial launch of a successful product.

Output

Another useful metric to track is the output of a site. In terms of a blog, the output can be seen as number of entries per day. In terms of Web 2.x business, the output could be seen as number of page or remixes created through user interaction. In a recent post on his blog, Fred Wilson mentioned the following metrics tracking he and his partner are doing on their investments:

In the case of Indeed, we like to watch the number of searches per month.In the case of Delicious, we like to watch the number of postings per month.

In the case of Tacoda, we like to watch the amount of behavioral data being captured in the TAN network.

These can all be seen as a measure of output for the different companies. Of course, the output is different based on each companies approach but it does provide some info.

Trends

While Fred chides me for trying to assess some values based on links, he mentions how he and his partners are approaching the metric:What we do is use these numbers to monitor our investment thesis and make sure the opportunity is playing out the way we think it will. And we use them to find places where we need to work harder on the service to make it better. And we use them to show new hires, new partners, and new investors that the business is on a solid trajectory.These are actually values relating to trends, which is the most important thing when tracking hard metrics.

Growth patterns are really what most of this data should allow one to divine. One’s ability to judge such patterns (and assess whether they are headed in the right or wrong direction) is the difference that will make or break many a business. When looking at all this data, looking at it in a closed fashion (ie. a slice of data in time) does only do it justice when trying to assert a baseline. However, baselines in and of themselves are not that interesting. The real interest really lies in the trends to evolves over time against those baselines.

Engagement trends

I would assert (and will probably receive many a flame for it) that the value of web 2.x business is going to lie partly in what I would call the “engagement trend line”, which I see as a value derived in part from several engagement metrics. On a weblog, those metrics could be broken out as follows: RSS subscribers, click through from those subscribers to the blog, comments posted to that blog, and links towards that blog. Yet to be defined, however, is whether Metcalfe’s law of network effect actually does have an impact on all of those.

Tomorrow, I will look into the soft metrics, which are harder to measure but, for now, I’d like to ensure that the discussion goes on so please either post your comments in the discussion area or comment on this on your own blog.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Metrics — Hard Metrics. You can follow him on twitter here or receive his weekly newsletter by subscribing here.

The series is going to be broken down into five main chapters. Today, I’m going to go over the basics of measurement and who needs them. Day 2 will be about hard metrics (aka. the measurable ones.) Day 3 will delve into soft metrics (ie. the ones that are harder to measure.) On day 4, I will try to weight all those values out in order to get some types of basic formulas for measuring web 2.0 performance. An finally, on day 5, I will review what I expect to be a fair amount of commentary being made in the blogosphere about the previous four entries.

So let’s dive in.

Why Metrics?

The first question people would probably ask is why bother? After all, things are different now and trying to assign any types of metrics is a fool’s errand, isn’t it?

Well, not quite. In my experience, the talk about things being different now is no different than the initial talk that existed in the early 90s when discussing the fundamentals of e-business. At the times, screams that the rules were different were used to gloss over some structural issues with certain business. at the end of the day (or the end of the bubble), many realized that the rules were not so different after all and that traditional business models could be adapted to the web space.

It is my contention that the rules of Web 2.0 are fundamentally the same as the rules of business in general. Models relating to valuation of business have been relying on some objective measurement as well as a few subjective ones for years and I would venture to say that most of the data we need is in front of us.

There are objective numbers (things like traffic and revenue) and some more subjective ones (things like reputation and integration value) but all and all, there may be a way to measure web 2.0 business and assess them in a somewhat dispassionate light. Web 2.0 models are inherently based on some level of integration (mash-ups, remix, or whatever you want to call it) and the value that can be derived from that so I will also try to figure out what those levels are.

But one also has to be careful, as metrics are not everything, and to consider them as the only tool in an investment strategy would be foolish. What I am attempting here is largely to figure out what kind of goalposts we are looking at.

Who needs Metrics?

In my mind, metrics are a fundamental of any business, no matter where in the business one lines. Just thinking about the role of metrics within a traditional start-up, one can think of the metrics that apply.

For example, management needs to have some metrics in order to impact strategic planning and development. Some of the areas in which metrics would play a role for the management team would we comparative analysis to competitors in one’s space (is our business losing or gaining speed against competitors?), management of investments (whether to take external investments, reporting to one’s investors), exit strategy (is the market at peak? is the offer we’re getting valuing our business at a much higher value than we think?)

The finance office, of course, will be very involved with any types of metrics relating to the financial performance of the business but also to its burn rate and its ability to attract or retain external investors. The business development team uses a number of metrics to attract and retain partners by demonstrating the value of the business to those partners, showing them that they will gain certain measurable advantages. Sales team also use metrics to demonstrate how buying one’s product (or advertising against that product) is good for the client’s business.

On the more geeky end, development teams can put metrics to their code, using some data points to assess whether one’s design is solid enough to scale. Metrics can also be used by the development community to ensure that bugs and/or features are prioritized properly to maximize value to the business. And in the operations room, metrics are being used to assess capacity against certain system and figure out when/where to buy new hardware to ensure that the business can continue to grow without seeing major capacity issues. Proper metrics can also be used to assess whether certain bugs are causing more problems than others and should therefore be fixed by developers first.

Meanwhile, outside a company, investors are using metrics to assess the performance (growth or decline) of the company and judge return on investment. This can have a huge impact on whether one’s investors decide to invest in future rounds or pressure management to make some changes (and sometimes those changes could include changing the management itself). Partners use numbers to assess the advantages of partnering and judge how much they can negotiate in a deal. I have, in the past, seen situation where solid ownership of a particular customer segment, for example, have managed to get very large companies to agree to very favorable terms for a small start-up. Had those metrics not existed, the start-up could have found itself at a disadvantage.

Advertisers also use numbers to assess alignments with the target publics they are trying to reach and to assess whether a certain advertising campaign has met the goals it was supposed to.

So numbers are sitting at the core of every segment of a business and it is important to understand their value in order to assess whether they can help or not. Tomorrow, we will start delving into those numbers and work on figuring out some specific ones that can be used to measure the value of a business.

Tristan Louis is the founder and CEO of Keepskor and writes the influential tnl.net weblog, where this was initially posted under the title Metrics — Introduction. You can follow him on twitter here or receive his weekly newsletter by subscribing here.