Wednesday, July 30, 2008

The Importance of Scale

I'm struggling through a busy patch at the moment so posting has been light recently. My wife and I are gearing up for our move to San Fran later in the year (we currently live in NY), so there is a lot of stuff to sort out - not least of which is shifting a cat 3000 miles.

So I am taking a moment to post about something that I have been increasingly coming across - the importance of understanding 'scale'.

And by 'scale' I mean things that scale on some type of exponential curve. The Long Tail describes the scaling process inherent in the aggregation of markets for certain types of goods. The ubiquitous 80/20 rule describes the typical scaling of customer revenue. And in Clay Shirky's book, Here Comes Everybody, he points out that in social interactions, these Power Laws (as they are called) are everywhere. This is a Power Law:

While Power Laws have been written about extensively, I don't think they are well understood. Mostly because, as human beings, we live in a very linear world. We're not good at understanding things that scale exponentially. Power Laws are all about extreme scaling. Mostly though feedback and multiplier effects.

A good example of this mis-understanding is the Sprint campaign that was widely criticized on blogs and social media sites. One of the criticisms leveled at it was the auto-response email you received if you tried to email the CEO (who gave out his address at the end of the TV clip). It's a fair criticism. A personal appeal from the CEO doesn't feel very personal if you get a canned response back. But it's not surprising. On the graph above, Sprint occupies a position near the steep part of the curve. It has millions of customers. The CEO can't have a conversation with each one of them.

I heard people comment that Sprint should have just hired more people to respond. And that if smaller companies can do it, why can't they? Customer numbers follow a power law - the more customers you have, the more you get, the more you spend on getting more, etc. Social media tactics - two-way conversations, dealing with customers as individuals, having tailored conversations, etc. - don't work as you climb that curve. They can't. You can't add resource to deal with those conversations at the same rate as you acquire customers because you can't add resource exponentially and stay in business.

A lot of Social Media pundits talk about the 2-way nature of conversation these days not understanding that what works for a 100 person outfit is not going to work for a company ten times larger with 1000x the customers because of the way customer numbers and resource scale. Joseph Jaffe's Delta Skelta debacle is a good example. As is the Target example.

In Jaffe's case, he's right to want to claim compensation for what happened to him, but wrong for thinking Delta can somehow treat him differently on the merits of his individual issue. He's probably one of a few 1000 people they need to deal with on a weekly basis. A simple policy for his situation is the most efficient way to deal with it. A full-blooded, tailored conversation for his individual needs is not. The fact that he got a direct response from Delta is more a reflection of his standing in the blogging community than his value to them as a customer.

Now I'm not saying that having a canned email or a standard policy letter is 'good' - in the sense that it is the best type of customer interaction. It's not. All I'm saying is that it's a realistic response to this issue of scale.

Shirky makes this same point when talking about weblogs in his book:

As is normal in a power law distribution, most writers have few readers. Such readers and writers can all pay similar amounts of attention to one another, forming relatively tight conversational clusters... As the audience grows larger, into the hundreds, the tight pattern of 'everyone connected to everyone' becomes impossible to support - conversation is still possible, but it is in a community that is much more loosely woven... Once writers start getting more attention than they can return, they are forced into a width versus depth trade-off.
Essentially, as reader numbers scale exponentially, the blog writer has no hope of increasing their 'attention resource' in a similar way. You can't add attention exponentially. You don't have enough of it to start with!

The Sprint CEO knew this before he set out. There was no way he could have a conversation with everyone who saw that ad. Hence the canned email. And to be honest, he was silly to try. He held out the promise of such an interaction knowing he could never deliver. That's not a great tactic.

Companies like Sprint and Delta and other large entities that exist on the steep part of that curve need to get away from this notion that they can profitably sustain 2-way conversations with their customer base. Companies that exist further down the curve absolutely need to keep those conversations going.

Where 'scale' starts to be an issue, other types of strategies need to be employed. Social media holds out huge promise for self-sustaining group collaboration by customers - initiated by companies. Company as enabler makes much more sense than company as sounding-board.

Sounding-boards are only good to rant at. There is no future in being a sounding-board.

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