How Customers Define Value on eBay

I will be at the Academy of Marketing Science's yearly conference next week in Vancouver, speaking on a panel on how consumers are rendering much of traditional marketing obsolete.  Here's the quick blurb:

Forgetting The Consumer Label Altogether

This special session explores how consumers themselves are taking the notion of consumer co-production far further than traditional services marketing ever intended, and in doing so are invading each of the traditional bastions of corporate marketing strategy, from product conceptualization to pricing, and from distribution to marketing communication.

I will be talking about how eBay fits into this phenomenon in a presentation entitled "The End of MSRP -- How Customers Define Value on eBay".  The basic premise is that eBay has become the best site on the web to establish and discover the true market value of any product -- regardless of whether it exists in a catalog or not (and even if it doesn't have an established retail price).  The slides from my talk are below -- I lay out the different processes sellers and buyers follow on eBay, and how that comes together to establish product value.

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Structural Holes and online social networks

A few weeks ago I wrote about the theory of Social Capital, and how that can be applied to online social networks. Today I want to talk about a related theory called Structural Hole Theory, and explain what implications this theory can have for online social networks like Facebook and MySpace. First, a little background...

Structural Holes Defined

Ronald Burt’s theory of ‘structural holes’ is an important extension of social network theory. This theory aims to explain “how competition works when players have established relations with others” (Burt, 1992), and argues that networks provide two types of benefits: information benefits and control benefits.

• Information benefits refer to who knows about relevant information and how fast they find out about it. Actors with strong networks will generally know more about relevant subjects, and they will also know about it faster. According to Burt (1992), “players with a network optimally structured to provide these benefits enjoy higher rates of return to their investments, because such players know about, and have a hand in, more rewarding opportunities”.
• Control benefits refer to the advantages of being an important player in a well-connected network. In a large network, central players have more bargaining power than other players, which also means that they can, to a large extent, control many of the information flows within the network.

Burt’s theory of structural holes aims to enhance these benefits to their full potential. A structural hole is “a separation between non-redundant contacts” (Burt, 1992). The holes between non-redundant contacts provide opportunities that can enhance both the control benefits and the information benefits of networks. The figure below shows a graphical representation of this definition.

Optimizing the benefits of networks

I will now look at how structural holes can facilitate the optimization of information benefits and control benefits. There are several ways to optimize structural holes in a network to ensure maximum information benefits:

• The size of the network. The size of a network determines the amount of information that is shared within the network. A person has a much better chance to receive timely, relevant information in a big network than in a small one. The size of the network is, however, not dependant merely on the number of actors in the network, but the number of non-redundant actors. The utility of a network with reference to its size can be described by a function know as Metcalfe’s Law. Robert Metcalfe observed that new technologies are valuable only if many people use them. Specifically, the usefulness, or utility of the network equals the square of the number of users. The more people use a piece of software, a network, a particular standard, a game, or a book, the more valuable it becomes and the more new users it will attract, increasing both the utility and the speed of its adoption by still more users.
• Efficient networks. Efficiency in a network is concerned with maximizing the number of non-redundant contacts in a network in order to maximize the number of structural holes per actor in the network. It is possible to eliminate redundant contacts by linking only with a primary actor in each redundant cluster. This saves time and effort that would normally have been spent on maintaining redundant contacts.
• Effective networks. Effectiveness in a network is concerned with “distinguishing primary from secondary contacts in order to focus resources on preserving primary contacts” (Burt, 1992:21). Building an effective network means building relationships with actors that lead to the maximum number of other secondary actors, while still being non-redundant.
• Weak ties. In his 1973 paper entitled “The strength of weak ties”, Mark Granovetter (Granovetter, 1973) developed his theory of weak ties. The theory states that because a person with strong ties in a cluster more or less knows what the other people in the cluster know (e.g. in close friendships or a board of directors), the effective spread of information relies on the weak ties between people in separate clusters. “Weak ties are essential to the flow of information that integrates otherwise disconnected social clusters into a broader society” (Burt, 1992). Structural holes describe the same phenomena as weak ties because both emphasize the need for entrepreneurs to fill the gap between different clusters and non-redundant contacts. However, structural hole theory goes one step further and stresses that what makes the gap important is not the weakness of the tie but the structural hole over which it spans. Building and maintaining weak ties over large structural holes enhances information benefits and creates even more efficient and effective networks.

To achieve networks rich in information benefits it is necessary to build large networks with non-redundant contacts and many weak ties over structural holes. Some of these information benefits are:

• More contacts are included in the network, which implies that you have access to a larger volume of information.
• Non-redundant contacts ensure that this vast amount of information is diverse and independent.
• Linking with the primary actor in a cluster implies a connection with the central player in that cluster. This ensures that you will be one of the first people to be informed when new information becomes available.

Now, once structural holes are identified and the network is optimized to provide maximum information benefits, an important question is how these benefits can be used to capitalize on the opportunities in the network. Control benefits answer this question. Structural holes not only provide information benefits, they also give actors a certain amount of control in negotiating their relationships with other actors. To understand the role of structural holes in this regard, it is necessary to understand the concept of tertius gaudens. Taken from the work of George Simmel, the tertius gaudens is defined as “the third who benefits” (Simmel, 1923). It describes the person who benefits from the disunion of two others.

For example, when two people want to buy the same product, the seller can play their bids against one another to get a higher price for the particular product. Structural holes are the setting in which the tertius gaudens operates. An entrepreneur stepping into a structural hole at the right time will have the power and the control to negotiate the relationship between the two actors divided by the hole, most often by playing their demands against one another.

Where structural holes provide a platform for tertius strategies, information is the substance with which the strategy is performed (Burt, 1992). Accurate, timely and relevant information delivered between two non-redundant contacts at the right time creates an immense opportunity to negotiate and control the relationship between these actors. That is the power of structural holes, and that is why the theory is so relevant for social networks on the Internet.

Implications

The different benefits of structural hole theory makes it instrumental in the creation and development of social capital in networks. The information and control benefits described by this theory can identify and expand the intrinsic value of networks. If we want to find the value of online social networks these three constructs — social network theory, social capital theory and structural hole theory — are essential tools.

For example, if we apply these concepts to MySpace or Facebook, we quickly realize it is not the sheer number of "friends" in your network that count, it is the diversity of the people in your network that is most important. If you only have links to people in your immediate group of friends or colleagues, it will be difficult to get new information, since everyone will pretty much know the same things. This is not to say that you have to start adding random people to your network who you don't know, but it does mean that people with who you have "weak ties" will often provide you with new information and therefore more benefits than your "strong ties".

These theory also explains why eBay is such a huge success. By stepping into the structural holes between millions of buyers and sellers, the perfect tertius gaudens strategy was created, and it is arguably the best example of the entrepreneurial use of structural holes in the history of the Internet. If you think about it, every Facebook App is a tertius strategy -- some are good, some are not. But it shows that there are still a lot of structural holes out there in social networks, waiting for someone to step in and broker the deal...

References

Burt, Ronald S. (1992). Structural Holes: The Social Structure of Competition. Cambridge: Harvard University Press.
Granovetter, M. S. (1973). “The Strength of Weak Ties.” American Journal of Sociology 78: 1360-1380.
Simmel, G. (1923). The Sociology of Georg Simmel. New York, Free Press.

Conference Presentation: Customer Researchers as Health Professionals

A colleague and I will be in Las Vegas next week for the yearly AMA Marketing Research Conference. We will be presenting a session on user experience research entitled Customer Researchers as Health Professionals - How eBay Uses Research to Improve Product Health (view a slightly shortened version online here, or below).

I'll try to summarize briefly what we will be talking about. We start with a little context about how research works at eBay and where it sits in the organization, and then we go over the research strategy I head up at eBay, called Product Health. We use a variety of quantitative and qualitative user experience research methods to track the health of different eBay site areas (or key flows) over time. Below is a schematic of the different research components of Product Health, which, as you can see, aims to cover a broad and holistic view of the Product:

It is our point of view that there is no single research methodology that can tell a complete story. If you want to have a holistic view of your product and how users feel about it and interact with it, it is essential to combine a variety of methodologies together, and keep doing the research over time so that you are able to (1) accurately assess how you're doing, and also (2) identify the areas that need to be improved. The quantitative components help us understand what is happening, and the qualitative components help us understand why we're seeing what we're seeing, and how to fix it.

We also spend some time talking about a synthesis project we did, where we pulled together the results from all the different Product Health research components, and used the insights to come up with 5 guiding principles for product development, which we believe translates pretty well to any e-commerce organization:

• Build Trust. Be responsive to customer needs for security and service. Ensure the quality and accuracy of the information available on the site. Build responsibility and accountability in the online community.
• Simplify. Streamline and clarify processes, navigation, site performance issues and fees that can make the customer’s experience unnecessarily complex and impact commerce.
• Be Relevant. Design an experience around how people naturally explore, evaluate and purchase items. Provide relevant, quality information that supports this experience.
• Provide value. Align buyers and sellers with a common means of determining item value fees. Treat sellers as “paying customers” who deserve value-added service for the fees they pay.
• Connect people through commerce. Leverage areas on the site to connect people with common interests through commerce.

We feel that this is a great example of how user-generated insights gathered in a methodologically robust way can drive product strategy and resource allocation effectively within an online organization. So, anyway, if you happen to be in Vegas next week, come check it out!

Jesse James Garret on usability (and eBay)

The web site e-consultancy recently conducted an interview with Jesse James Garrett, the man who coined the term 'Ajax' and president of Adaptive Path. It’s a great interview and I wanted to highlight some of the things he said. First, on usability…

Usability doesn’t really get at the psychological and emotional context of use. Usability will tell you, from an ergonomic perspective, what people can do with a product, but there is lot more to making a product successful in the marketplace and making a product feel successful in people’s minds. Often, we find that clients come to us, thinking they have a usability problem, but it turns out that their products are pretty usable. The reason that the product is falling short is it is not satisfying an emotional or psychological need.

That is a philosophy that I wish can be top of mind for all designers and researchers -- what's cool isn't always what's best. You have to start by understanding the underlying user needs -- that's why I firmly believe in continuous user research throughout the design process. (I do think that very successful products can be created through genius ideas outside this formalized process -- iPod anyone??? -- but I'm referring to us normal people who need a little more help along the way to make our products work well...)

Then, on a question on if he agrees with a recent survey in which respondents rated Amazon, eBay and Google as the top 3 international sites in terms of usability, Jesse said the following…

It’s interesting to see Amazon and eBay so high on the list, because I think Amazon was delivering a really terrific experience a few years ago, but have found themselves in a land of diminishing returns in the design choices they are making.

If you compare the sheer number of navigational elements on a present day Amazon page with the way it was just a few years ago, they are just starting to load these pages up with features. I think the reason they are doing that is that they are trying to squeeze every drop of revenue they can out of these pages, but I think the overall usability is starting to suffer. It’s becoming so baroque - all of the different features and components they have loaded onto these pages.

eBay has almost the opposite problem, in that because they have this enormous community of people, the sellers, that depend on eBay for their livelihood, there are a lot of people that have really invested in how the site functions. eBay has been slow to change, because they haven’t been able to make changes that would appease this audience of millions of people that don’t want to see the site change.

My take on it is a little different... I think that if you ask regular Internet users about the usability of a site, they don't think of usability the way we do. They immediately jump to "how useful is it to me." And if a site is useful to them, i.e. it fills that underlying user need we talked about earlier, they will figure out a way to use it and make it work for them. This is not to say that bad usability doesn't matter -- good usability is essential for the sustainability of a site that fulfills user needs effectively. They go hand in hand and can't be separated. The point is that the value propositions of eBay and Amazon are so clear and so significant, and the sites so useful, that if you ask users about usability, they will immediately make the connections to these brands in their minds.

eBay and its user experience adrenalin shot

This is an exciting time to be working in user experience at eBay. You will see some major changes across the site in the coming months, and we are all extremely excited about the UX improvements this will bring to the eBay experience. Over the past few quarters eBay has shown a renewed energy and focus on user experience and this permeates through all levels of the company. In the Q2 earnings call, CEO Meg Whitman made the following remarks:

As you have correctly pointed out, making improvements to the user experience is one of our main strategic priorities. Let me tell you about a few of them.

First is to improve the finding experience, what we call Finding 2.0. You can see that we have actually done some work in something we call DefMatch, which is a relevant and algorithmic search engine that, based on your prior searches on eBay and what we know about other people who search for those same items, can get you to the items that you’re looking for faster and better.

Finding is only one of the many improvements coming down the pipeline, but I wanted to point that one out because it reminded me of something I read in the abstract of a recent talk by Peter Morville:

At the crossroads of ubiquitous computing and the Internet, the user experience is out of control, and findability is the real story. Access changes the game. We can select our sources and choose our news. We can find who and what we need, when and where we want. Search is the new interface of culture and commerce. As society shifts from push to pull, findability shapes who we trust, how we learn, where we go, and what we buy.

That is why Finding is such a big deal for eBay and any online company. With so much information out there, helping users to find what they are looking for not only becomes more difficult, but users are also becoming more sophisticated, expecting Web sites to do their thinking for them. If they type in "Apple", they expect us to know if they want an iPod or a Macbook. It is our job to figure out how to make that happen.

Speaking of Peter Morville and eBay... the challenge of findability is even more difficult at eBay because we deal with so much user-generated content and non-catalog items. In Peter's words:

Last month I had lunch with user experience managers at eBay. We discussed the challenges of designing a marketplace in which buyers and sellers game the system. For example, sellers have learned to increase sales by misclassifying individual components as complete systems. They know that users who search for mountain bikes may also buy accessories they don't know they want or need. And, while the resulting clutter can be frustrating, hardcore buyers enjoy the thrill of the hunt that eBay affords. They don't want the search to be easy.

But these are great challenges, and I'll say again that it is an exciting time to work here -- there is so much good work happening all over the company, and all I can say is that August is going to be a great month. Oh, and feel free to head over to eBay Sneak Peak and check out what's coming...

Social Networking approaches for e-commerce Web sites

I came across this pretty cool ethnographic research study on cell phone usage that is also relevant to how we think about community on the Web.  It’s interesting both from a methodological and a findings point of view.  It’s a pretty short deck, so check it out:
http://sfaapodcasts.files.wordpress.com/2007/05/sfaa-2007-metcalf.pdf

This from the authors:

When we talk about the "user experience" the main emphasis is often on an individual's experience with a particular technology. Even with a purported social technology, for example a social networking site, we still tend to create for the individual's interaction with the site (how does someone find their friend, how do they access this site easily from a mobile device).

However, designing for sociability means thinking about how people experience each other through the technological medium, not just thinking about how they experience the technology. The emphasis is on the human-to-human relationship, not the human-to-technology relationship. This is a crucial difference in design focus. It means designing for an experience between people.

Of course designing for an experience between people doesn't mean ignoring the interaction with the device, but it calls for taking something else into account. That "something else" is often another person or people. How do we, as developers of communication technologies, make the communications more interesting, more exciting and more stimulating for the receiver? How do we help our users meet the needs of the other people in their social network? How do we create a shared experience that is equally compelling for all participating parties? When we begin to think like this, we truly start to think of designing social software, social applications, social media.

A lot of e-commerce web sites seem to be scrambling to figure out how to deal with the social networking phenomenon, and in my opinion there are a lot of knee-jerk reactions going on.  E-commerce sites shouldn't try to become social networking sites.  They should leverage their commerce platform to connect people to each other.

A great example is Facebook apps.  eBay has a brand new Facebook application that allows users to connect their eBay profiles to their Facebook accounts.  You can see others' watch lists and even add items to their list if you think they might be interested.  It's also another avenue for sellers to showcase the items they have for sale.  By using its commerce platform to integrate into an existing social networking site, eBay is building on its strength as an online retailer and plugging into an enormous network without re-inventing the wheel by trying to become a social networking site unto itself.