Pignerol Antoine recently asked some questions about VRM and I thought I’d answer them publicly.

Is VRM really different from social CRM ?

Yes, although exactly how depends on how you define social CRM. Based on my understanding, I would suggest that VRM is first and foremost about providing value for the user with any vendor, as opposed to using social networking tools with a particular vendor. VRM is vendor agnostic and silo-adverse. The goal is to catalyze the development of tools for individuals through protocols and standards that let them work with any vendor seamlessly, without loss of functionality or services.

Does VRM work with a CRM ?

Sure. A CRM is a company-centric system. Every company should pay attention to its customers and CRM is currently the best-of-class thinking on the enterprise-side for how to do that. Different VRM services act on behalf of the individual, yet still require connecting to enterprise systems. For things to be seamless, VRM services should marry into CRM services for fulfillment.

Can VRM be implemented in all kinds of business?

Yes. Any business can support VRM services and be compliant with general VRM principles. Ultimately, it will be as easy for a small company to be VRM compliant as it is for a small company to run a blog or a wiki today. That takes some level of technical sophistication, but it is within grasp of any company that wants to invest a small amount of effort using freely available open source tools. Eventually, VRM will be available in the same way.

What’s needed for VRM to work ?

We need to work through electronic marketplace issues from customers’ perspectives, with attention to the full power of relationships, finding consistent ways to create new value through the network. For the Standards Committee, that means a public conversation starting with users and requirements. Once that is vetted in an open source manner, we can explore particular implementations. We believe that with a well defined, high quality requirements specification, service providers will emerge to deliver those services.

As customers are looking for lower prices, don’t you think that Personal RFPs are gonna cost more for customers (because they are personalized offers) ?

Two things here. First, I don’t think customers are just looking for lower prices. They are looking for better value.

http://blog.joeandrieu.com/2008/03/07/pricing-markets-and-demand-vrm-style/

One of my favorite examples of this is Shopatron’s business where they sell everything at 100% manufacturer suggested retail price, no discounts, no rebates:

http://blog.joeandrieu.com/2007/01/19/shopatron-redefines-vendor-relationships/

Second, the personal RFP is designed to eliminate transaction costs in the marketplace. Currently, product and vendor discovery is slow, expensive, and uncertain. That means buyers waste time and vendors waste advertising and lead generation dollars seeking the right match between needs and solutions. Any time transaction costs are reduced, you have an opportunity for better prices.

At the same time, Vendors will be discovering ways to provide more value to customers and the net result could easily be that customers will end up paying more for enhanced services or products. Ideally, this will mean that commodity products continue to drop in price while value-added customizations are welcomed by buyers and voluntarily paid for at a premium over the commodities.

What do you expect from VRM?

I expect it will take longer and be more work than any of us would prefer. However, I think that the concepts behind VRM, and hopefully our work developing standards and catalyzing working solutions, will enable a fundamental shift in the marketplace. As Doc Searls has said more than once, the industrial revolution is over: industry won. There is an incredibly powerful legacy of using computers and networks to help companies make more money (and create more value as they do so). Unfortunately, companies tend to think for themselves first, often to the detriment of overall economic benefit.

I see a world where every individual is engaged and empowered to get the most out of their relationships with vendors–vendors of all sizes. In that world, not only are individuals and vendors each getting and creating more value directly, the entire economy is operating at a higher efficiency as less money is spent on wasted advertising and product development and more is spent on fulfilling verified demand. This would supercharge Adam Smith’s invisible hand and provide a significant increase in aggregate global wealth for everyone. It takes the benefits of the zero-distance network and extends it efficiently into the domain of user-driven commerce.

Bart Stevens recently suggested a breakdown on the potential economic impact of VRM, based largely on a post by Steve Rubel arguing that $1B is wasted in online advertising today.

First, I anticipate the Personal Datastore to become a design pattern that underlies other VRM services, rather than a service by itself. In fact, a PD isn’t really a PD unless it enables VRM services explicitly… Personal Datastores aren’t just online storage like Amazon’s S3.

Second, I think the $1 Billion number is far too small. Steve is only estimating the CPM costs for display ads that are literally missed by users during eye tracking studies. That’s an intriguing number because those ads truly are wasted… there isn’t even any brand exposure because the ads are not even seen. It’s like paying for ads in a magazine that is never opened by a real reader.

On the other hand, there are still plenty of ads that are seen by the wrong people and CPC ads that are clicked on by the wrong people. Note that for the “right” people, those ads arguably generate useful brand exposure, so they aren’t wasted.

When advertising starts with the advertiser, it inherently wastes money, as it inevitably buys placement in ineffective or misaligned media. By now it is an old chestnut that advertisers waste half their budget–they just don’t know which half. Sometimes advertising is an investment in exploring potential markets… the goal is the data gained in the test marketing, which isn’t entirely a waste. Other times advertising is educational outreach where the goal isn’t so much to trigger a sale, but instead to introduce people to new products and services. Sometimes this is called demand generation. And that still leaves a vast amount of waste, buying media (offline or online) that just doesn’t perform or create any value. The potential savings in these areas is not only missing from Rubel’s analysis, I’d wager it is far more than $1 billion.

The huge potential of VRM is to turn these models inside-out, by providing a scalable pipeline directly into the product development and sales divisions of capable firms. Instead of Vendors guessing what people want, VRM services can cost-effectively tell Vendors what people truly do want. If the product is available, the sales team can enable purchase and delivery. If the product doesn’t exist, the Vendor can create it if demand is sufficient.

This new paradigm is exactly the shift from Attention to Intention that Doc and I have been advocating. The Attention game is the world of traditional advertising, where the industrial manufacturer competes in mass media to get the attention of the right consumers in order to generate demand for their products and services. Given that attention, they seduce, cajole, and entertain in hopes of winning new sales.

The Intention game, on the other hand, starts with explicit requests from the user to fulfill actual demand. Sometimes that intention will be nascent, needing further exploration and discovery. But eventually, for the segment of the population that finds something they want or need, that intention shifts from educating oneself about available options to seeking specific satisfaction, that is, buying a solution. Because intention starts with the user’s commitment to take the relationship to the next level, it immediately takes a vast amount of guesswork and wasted advertising out of the equation.

This guesswork and wasted advertising is probably closer to $100 billion/year, but that’s just my gut feeling. And that number only addresses the loss side of the equation, that is, the money we save by not wasting product development and advertising dollars. It ignores the value of products and services that today languish as innumerable missed opportunities–missed because companies have no way to efficiently gauge true market demand. There are undoubtedly services and products that exist–or could be profitably offered today–which fail to reach customers because we don’t have a suitable mechanism for connecting the right customers with the right companies. This potential to close the gap between potential sales and unmet demand, is simply too large to estimate.

The Cost-Per-Action/Pay-for-Performance business model of Affiliate Marketing is likely to continue to transform the ad industry, significantly reducing billions in unnecessary expenses, including the $1B wasted on unseen display ads in Rubel’s analysis.

It won’t be until we transform explicit intent into new offerings and new sales that we unleash the vast potential that is VRM.

Economists often talk of markets as price discovery mechanisms, and the freer the market, the more efficiently those prices can be discovered. In fact, in the absence of all transaction costs, free markets assure the efficient allocation of resources, regardless of initial distribution—that’s the core tenet of Law & Economics as proven by Coase ’60. Of course, we can’t ever actually get rid of transaction costs completely, but that’s ok. The lower they go, the more efficient the market, the better the overall utility of the economy.

But let’s not confuse making markets more efficient with making everything about pricing. Only in the simplest commodity markets is pricing ever the sole factor. Whether you focus on relationships and conversations or the 20^th century model of brand-driven differentiation, there are lots of factors that influence a transaction at least as much, if not more, than price.

I think it makes more sense to think of markets as “value” discovery mechanisms. It just happens that the industrial age conflated price and value, so the distinction was often ignored. When we have efficient markets, everyone has the simplest, fastest way to find the highest value we can, including price, quality, aspirational expressions, relationships, and moral or ethical congruence (such as being “green” or animal friendly).

So, there are at least two distinct ways VRM can help reinvent the market. First is providing a more efficient value discovery mechanism, in part by reducing transaction costs. That is, helping us find the good stuff more easily, more quickly, and more cheaply. Second is by helping to define new avenues for creating value, through richer, more meaningful relationships, better service, and greater customization in product and service offerings.

One particular false hope for VRM that I don’t want us to get distracted by is the illusion that by moving power from Vendors to Customers we can force better prices. That’s a win-lose game that is actually wasting resources trying to shift the line of marginal value towards the individual. It doesn’t result in any new value in the system and yet it increases transaction costs. This is clearly a net loss for the overall economy.

A related architecture with a much more satisfying win-win outcome is aggregating users to define & document demand in order to encourage vendors to fulfill that demand. This isn’t about market power, it is about market validation.

Eventful’s Demand service does this by letting people state their interest in having a particular event in their neighborhood. Like a petition, this demand is aggregated and presented to the event organizer to get them to actually bring the event to locations with the most demand. This not only helps bring the product to the individual, it helps the performers understand and meet market demand. This type of demand discovery actually creates value. There is more profit for the performers—or they wouldn’t bother doing the extra show—and end users get to go to an event they otherwise may have missed. This is such a VRM-style win-win that I have asked the founder of Eventful to join the conversation.

I’m looking forward to seeing how we might build on Eventful’s approach.

Rarely does presentation of statistical data make me say “wow” out loud.

This did. Hans Rosling talking about the state of the world: third world, health, wealth, changes over time. Great data. Great presentation. Worth thinking about.

In addition to the impactful visualization of the worldwide transitions in wealth & health since 1960, Hans also makes extremely clear the dangers of averaging over too large of a data set. I can only begin to highlight how critical that is in understanding the future of the web, search, and Internet services.

Centralized views of the world, such as those underlying Google’s PageRank and the Semantic Web, presume too much about finding the “one true answer”. For Google, it means trying to find the “best” results for a simple keyword query–for some verson of “everyone”. For the semantic web, it means trying to connect all the meta-data and data on the web to provide one true verson of reality that can be reasoned over. And yet, we know that trying to make all of the people happy all of the time is a recipe for failure: it can’t be done. Hans makes this clear in terms of dealing with the ails of the world: poverty and life expectancy. Planning for HIV in the top quartile of Africa needs to be profoundly different than how we deal with it in the bottom quartile.

So beware of average approaches. Beware of universals.

Instead, find the solution that is properly contextualized, preferably customized for each individual.

That’s the direction of VRM (Vendor Relationship Management), by the way. Figure it out for the individual user first, then find ways to use technology to scale efficient solutions. Averages need not be applied. Monolithic approaches to marketing and product development need not apply. Micro-focus at a mega scale.

Tip of the hat to Noah Brier for the Hans Rosling presentation at TED.

Jim Bursch gives an interesting analysis of his economic model for mindshare. MyMindshare is Jim’s company, a marketplace for buying and selling attention, or as Jim calls it, mindshare.

I’ve criticized MyMindshare’s premise before because it looks a lot like PayPerPost, which remains, IMO, a shill engine in a world where authenticity matters more than the price you can get for selling out. (This I still believe, despite Jason Calacanis’s latest transformation on the topic during his interview with Ted Murphy, Founder / CEO of PayPerPost.) Ted argues that blogging is entertainment and we don’t see upfront disclosures in movies when product placement deals have been struck. I find that wanting. Blogs work, IMO, because they tap an authentic voice, in high contrast to the polished productions of major websites and modern radio, TV, and film. That authenticity is what makes the blogosphere work. And when it breaks down, as in the Kathy Sierra case, it gets really ugly. Ted’s entire business model is about hawking that authenticity to the highest bidder.

Unfortunately, MyMindshare is following a similar path. Jim’s latest article dives deep into his economic argument for the rightness of his cause. To his credit, he makes a lot of sense. Why shouldn’t users get a piece of the kickback that normally goes to publishers in the CPA (cost-per-action) marketplace? On its surface, it is a straightforward question that deserves an answer. Jim’s economic breakdown of the supply and demand curves of mindshare is spot on. But the issue isn’t about economics.

It’s about emotions, relationships, and authenticity. Money changes everything in that context.

Advertisers, brand marketers, and salespeople have known for thousands of years that people buy with their emotions, not with their calculators. Sure, microeconomic theory is a decent framework for evaluating the rational influences of pricing on decision making. But its foundation is based on rational behavior in the marketplace. There are so many examples where that assumption proves false that it is amazing the assumption leads to any insights in the first place.

People pay more for Macintosh not because it is more efficient, but because the brand makes them feel good. We subscribe to public radio not because we lose access if we don’t–the radio service is free–but because we feel better about ourselves and our world when we support a cause that we care about. So, let’s start our critique of the economics of mindshare with an observation that even when spending our money, we act irrationally and emotionally.

It gets even more intense when we turn our attention to taking money for our actions. In modern western culture, we value free will and choice, and we judge character based on both. How we live our lives makes a statement about who we are. Because of that, we pride ourselves on making choices based on our innermost truths, on noble, higher ideals. We fight for freedom, stand up against injustices, and dive headlong into romantic pursuits of our noblest calling: love. It matters that we choose our way of our own free will. We cherish more those things we do simply because we want to, compared to those things we do because we are paid.

Think about that.

Getting paid for doing something cheapens it. We value it less.

It cheapens it because when you do it for its own sake, the effort or outcome itself is worth the time and energy. When you take money for it, it means that the effort or outcome wasn’t enough on its own. The first case demands a higher valuation. The latter, a lesser.

The only way getting paid doesn’t cheapen the work is if you are a professional, or aspire to be a professional in that field. Then, you are judged on your merits as a professional. Getting paid to be a ringer on a company softball team is offensive. Getting paid to play professional baseball is an honor.

And that’s where both Ted and Jim miss the mark.

In Ted’s case, he’s either cheapening the act of blogging by robbing it of its authenticity or he is creating a class of professional bloggers, who should be judged by professional standards. There is a potential third way if his bloggers adopt the positioning as professional entertainers, but the PayPerPost system isn’t ramped up to promote entertainer-bloggers.

In Jim’s case, he’s either cheapening the act of surfing by robbing it of its authenticity or he is creating a class of professional link clickers.

What?

Professional link clickers?

It’s crazy. And useless. It adds nothing fundamentally enriching to our economy, especially as those buying the links are looking for authentic shoppers, not professionals looking to make a buck. Now, there is a chance that the economics of certain products actually make it worthwhile for advertisers to advertise directly to that class of people who are professional clickers. Maybe if I have a product geared directly towards those individuals, then it might be profitable for me to target them, but I don’t see this as the market focus for MyMindshare.

The problem with paying folks for clicks or posts is that it robs the action of its emotional authenticity. And that’s what advertisers are paying for. When someone actually cares enough about a topic to post about it without compensation, that means something. When someone actually cares enough to click on a link even when they aren’t being paid to do so, that means something. Both make clear statements about the emotional and intentional disposition of the actor. And it is when we have people in an emotionally favorable disposition that we have the greatest chance of engaging them in a positive exchange. That’s what advertisers want.

Let’s take Jim’s and Ted’s position argument to its logical, yet politically incorrect extension. Instead of dinners, dates, flowers, gifts, and attention, why not pay our love interests directly in cash? After all, time is money. Gifts cost money. At the end of the day, all that $$$ invested in courtship could just be transferred directly to the ultimate recipient, without all those middlemen like restauranteurs, candy makers, florists, and jewelers getting a piece of the action. Let’s disintermediate those middlemen and go straight to the end provider.

Of course, that just isn’t acceptable in our society, because paying for it cheapens it. The only alternative is to be a professional and whether illegal or not, treating your love interest as a prostitute is usually a relationship ending move. It demonstrates a complete moral and emotional bankruptcy. In fact, the topic itself is so distasteful, it was a challenge for me to include it in this post. That same distates resonates with and taints the PayPerPost and MyMindshare business models.

From what I’ve seen, Jim and Ted seem like upright, straightforward guys. They see an opportunity in the marketplace and are busting their butts building a business around those opportunities. I respect that. It takes courage to quit your day job and bet it all on your own startup. They have also both been extremely straightforward, willing to engage the community and make their case. There’s no slight of hand, no intent to decieve, no scam or fraud involved whatsoever. For that, they deserve credit. Their business models, however, leave me with an unsavory taste in my mouth. I don’t know if either business case is “fixable”, but I do wish them both the best in building successful, honorable ventures.

There’s been a lot said about the new Attention Economy and a lot of interest in generating value from “Attention Data.” The enthusiasm bubbles up from excitement about a new abundance to reach the conclusion that Attention is now the scarce resource that smart people will use to create wealth in our post-mass-media, post-mass-production world.

The problem starts with the excitement about a “general abundance” in our newly digital world which Wired famously referred to as The Long Boom in 1997, but we eventually realized was just the Big Bubble. The problem of the New Attention Economy then expands beyond simply a new “Economics of Abundance” with a hubristic assertion that Attention is the secret ingredient for future success, complete with calls to invent an entire new “Attention Economics.”

Unfortunately, Attention is only limited because time is limited. Its value is ephemeral at best and annoying at worst.

We each have just as much Attention in any given day as we have conscious, waking hours. It’s just a function of time. Simultaneously, Attention, once earned, has fairly lightweight value. It can be earned by a distracting but ineffective advertisement and does not in itself indicate anything other than a first-order stimulus response. Put flaming letters flying across the sky, I’ll probably look up at it and pay Attention for a moment. But that doesn’t mean I’ll do anything in response.

So Attention not only presents nothing unique in terms of scarcity, its value is intrinsically frail. That isn’t an exciting basis for a new economy.

Abe Burmesiter over at Abstract Dynamics has a different take on why there is no new “Attention Economy” (worth reading in its entirety):

Somewhere on the edge of academia circulates the idea that economics is defined as the “study of how human beings allocate scarce resources”. It’s a definition that doesn’t show up in most dictionaries, but it has a stubborn persistence…

It’s a curious distortion to make economics strictly a study of scarcity, and like the textbook chaos theory case it starts out as a rather minor disruption. Scarcity is after all essential to the generation of price and value, and economists hold those processes dear to their hearts. There is of course more to economics than just studying scarcity, but it’s not exactly an alien concept. What’s curious is what happens when non economists start latching onto the distortion, what’s curious is when scarcity meets attention from three different directions.

Michael Goldhaber, Richard Lanham and Georg Franck, all more or less independently converged on a phrase, “the economics of attention” in the past decade or so. At the core of their thought (which varies widely in quality) is the observation that in a time where information is becoming, in Goldhaber’s terms, “superabundant” what is scarce is attention…

The first irony is that if economics was really just to be about the distribution of scarce resources it wouldn’t even be about money. For money is about as far from a scarce resource as there is. It can be printed out by any government and by a skilled counterfeiter too. Or it can be generated by any group or organization with enough clout… Money is anything but scarce. The problem is not there is not enough, but that it circulates with a damaging inequality.

Goldhaber and Lanham though don’t seem really want economics to be about money anyways though. They’d much rather refocus it all around attention. It’s an act of overstatement that probably does them far more harm than good. They get to make exaggerated statements about the need for a new economics, perhaps it makes their observations seem bigger, but it also makes it far easier to ignore them. They might want it all to be about attention, but quality and accuracy still have a bit of value left in them. Someone is going to make a career pulling attention scarcity into the wider economic stream of thought, but it just wont have the extreme ramifications the attention lovers vest into it.

In short, thinking about Attention may be intriguing, but it isn’t going to be the foundation for a new economics. It isn’t going to reinvent how we do business or how we work as a society.

So, despite others’ feverish efforts to the contrary, I’ll go on the record as stating unequivocally, 2007 will not be the year of the Attention Economy. Neither will 2008, 2009 or 2010.

For my money, I’m betting on Intention, VRM, and ComplexSearch.

I discovered an interesting innovation in economic theory today, called Nomad Economics.

I’ve always felt that the market acting as an aggregate of individuals–the “invisible hand” setting prices–is pretty amazing. It can be a hyper-efficient tool for simultaneously setting value and assigning resources for maximal economic utility. But there are also some huge flaws. Not only are there several well-known market failures–such as monopolies and the management of public goods–but even the underlying assumption of “rational behavior” is clearly false. We are all guilty of acting irrationally from time to time when it comes to money.

One of the basic ideas behind Nomad Economics is that between the “invisible hand” of neoclassical economics and the “large entity dynamics” of socialism and marxism lies a range of “renegade” economic actors that explain a lot of relevant interactions.

Abe Burmeister writes that

Renegade economics objects are a class of entities that lies between these two poles. They are larger than individuals, yet smaller than governments (or at least the larger ones) and far more concrete than “society”. Corporations are renegade economic objects. So are social networks. Markets themselves (but not “the market”) are renegade economic objects. So is money itself. Non profit corporations are renegade economic objects too, as are open source software projects. Terrorists groups are often renegade economic objects, and perhaps the “military industrial complex” is too. Closer to home families are renegade economic objects and cities, neighborhoods and other urban concentrations are too. There is a whole world of these things, and it has just begun to be explored.

Fascinating stuff. In his book, Abe goes into much more detail about nomad economics –it is much more than just about renegade objects–and how it fits into/works with neo-classical market theory.

The fascinating thing is how Abe’s work could be so hyper relevant to figuring out the next phase of Search.

The net is not only accelerating and expanding the scope of classic market dynamics–making the invisible hand that much more adept–it is also giving rise to activities that don’t fit into classic economic theory, like the “gift economy” of open source software. Pay-Per-Click advertising has radically transformed most online–and many offline–business models, fundamentally shifting how we think about marketing and customer acquisition. It not only sped up our ability to perceive the Attention economy, it tells us immediately how Attention converts into sales and profit when we track our PPC into our shopping carts.

Yet, when Bill Gross first launched PPC with GoTo.com, it was practically dismissed out of hand. It was crass to let money decide the best Search result. The purity of Google’s page rank seemed most holy and just in comparison. But the genius of PPC is that it is a real-time market. It is the invisible hand, using market dynamics and the magic of market pricing to identify the most likely best result for users’ Attention. It’s brilliance was pure Adam Smith.

And yet, there is still something to be said for those PageRank results. Anecdotally, I find myself using the “organic” results from Google far more often than I do the paid ones. Sure, when my intent is to purchase, I’ll often use the sponsored links. I know those folks are offering me products or services. But much of the time, my attention wants to be spent on non-market transactions. I’m exploring or learning or just hoping to be entertained. In those cases, my highest estimated Return-On-Attention will be from websites that have nothing to sell in the classic sense and hence will never be part of the PPC marketplace.

That’s pretty interesting. While we have the worlds largest, fastest real-time market for converting attention into revenue, a huge portion–perhaps the majority–of that attention seeks out non-market resolution. Seems to me that there’s more going on here than the invisible hand.

Check out Abe’s work. If he can give us a few new ways to think about how to make the most of our attention, perhaps we might just be able to think up some new ways to improve Search.

I’ll have more to say once I’ve digested his book.