This is Younes from The Family.
This week on Chasing Paper, a few remarks as to why I believe it is essential for all businesses to engage in community building to create the most resilient intangible asset of their balance sheet. I’ll give a few examples before giving a list of concrete ideas regarding the role of CFOs in community building.
I love fine dining. Almost once a month, my girlfriend and I set some time and money aside to indulge in celebrated eateries, wherever we may be. As I’m no food critic - barring my occasional Instagram stories frenzy - I will spare you the culinary details to focus on one remarkable thing I’ve noticed in the financial operations of these restaurants
Sought-after chefs ask for down payments. You often find yourself forking out several hundred euros to get a reservation at a great restaurant. This should not necessarily come as a surprise. As my colleague Oussama puts it, chefs are the new rock stars and much like you would book a ticket to see the Rolling Stones, it’s normal to book in advance if you crave some René Redzepi in your plate. What is remarkable is that this principle completely upends the very harsh restaurant business model:
It drastically diminishes the main plague of the hospitality industry: no-shows. Restaurants that require a financial commitment from their clients are less likely to lose clients at the last minute, or at least if a no-show does occur they are compensated for it. This results in more predictable utilization (capacity to usage) and conversion rates (bookings to usage).
With clients paying upfront, the working capital requirements become negative, allowing restaurateurs to buy ingredients and hire staff based on their actual revenue and needs. This could have been a lifesaver for many restaurants in times like the lockdown we just lived through.
Interestingly, the main reason why some restaurants are able to ask for upfront payments has little to do with the quality of the food they serve and everything to do with the hype they are able to create. One of my favourite articles for understanding all things digital is this masterpiece by Eugene Wei, based on the premise that people are status-seeking monkeys. Being seen at or being able to access an in-demand restaurant boosts our social capital, in turn increasing demand for the restaurant, etc.
It is even possible to play around with people’s ego-boost quest - The Shed was the #1 restaurant in London for a while and it didn’t even exist.
Therefore, and weirdly, the best business advice to a restaurant owner in 2020 should not be to focus on food quality (however, please do), but to focus on community building: engaging audiences, creating higher demand and leverage to flip around the industry’s economics.
In the restaurant business, community building is a pathway to more predictable revenue and healthier unit economics. But community can also be a way to generate revenue ex nihilo: like with the parallel movement currently happening in the adult industry and in the tech intelligentsia - sic.
Adult film star turned Twitch.tv gamer Manuel Ferrara
We at The Family have long been porn observers. No, not like that (at least, not in this context). Naturally constrained by societal taboos, the adult industry has always been at the forefront of technological innovation: online payments, SEO, video streaming, VR, etc. The industry itself has had fascinating developments recently, with a company like MindGeek slowly and steadily becoming a behemoth rivalling Netflix or YouTube.
Interestingly, the rise of social media gave certain adult stars an increased followership. A community of fans, in a way. And once again, this community proved a very useful asset for those stars.
The up-and-coming website in the industry is undoubtedly OnlyFans. The paid subscription site has been signing up 200,000 users every day for the past months. And the premise on which it rests is incredibly simple: as a content creator - adult or not - your user base is an incredible asset you can monetize. Your fans will be super happy to pay to access your exclusive content, and you can make more than six figures that way. Indeed, influencers have started generating revenue directly from the community they’ve built and engaged, and coronavirus played a part in helping the movement gain momentum.
And I’m pretty sure this will be the same thing for intellectual content creators, as per this thread on Twitter 👇
Substack offers an amazing platform to commentators and thinkers to start monetizing their content by delivering it exclusively to their community. Much like OnlyFans ;) And by the looks of it, Substack decided to prove me right just today by launching private substacks.
As digital businesses are fuelled by connected individuals (a multitude, as my colleague Nicolas calls them), it is paramount that entrepreneurs and companies build tight links with their users and customers.From those links spring many financial strengths, monetization opportunities, differentiation factors and/or leverage within the industry’s value chain.
So far, this all makes sense for B2C businesses, you might think. Why do I care about community building if I’m managing, say, a cardboard packaging company or a chemicals wholesale operation? I believe there are several reasons to invest in community building even in B2B.
Sales. All things being equal, people buy from their friends or from vendors they hold in high esteem. Applying community building recipes to your prospects and customers will yield great results: you are talking to them like individuals, trying to solve their problems and bringing value to them. Why wouldn’t they buy you?
Industry leverage. Having good relationships with your customers or end users can help you in negotiating with your distributors / suppliers. This is rare but not unheard of: a lot of presbyopic people prefer Varilux when buying multifocal lenses, giving its manufacturer (Essilor) good leverage on distributors and prescriptors.
HR. Employer brands thrive on culture, and how you treat customers is a central piece of company culture.
PR. Brand recognition is never a bad thing and helps overcome crises.
All of these are the reasons why I believe community is one of the most important off-balance-sheet assets you can have.
There remains an important question for CFOs: If community is an important asset, what is our role towards it?
It’s definitely not by accounting for it in the WeWork way. Cooking the books based on the supposed engagement of your community is a misleading thing, unless you derive actual revenue from it or can justify any premium/discount added.
I believe community is a strategic, operational metric rather than a financial one. And so, the related questions are strategic:
How strong are our company's bonds with a customer / user?
As a CFO, you could be helping your teams find a way to expand, upsell or increase revenue from each user, as well as closely monitoring churn and repeat rates.
What’s the mix of loyal, neutral and peripheral customers / users?
Metrics like Net Promoter Score give an indication of this mix, but you can get creative (see what Superhuman has done)
Are we securing (enough) revenue from our community?
You can help your teams find one way or renewed ways to monetize community and observe revenue at aggregate and individual levels.
How can we use community to improve our leverage within industry?
Can we bargain with suppliers or distributors thanks to our community, or does it help us retain some kind of competitive advantage?
How can we use community to improve our leverage in financing operations?
In financing rounds as well as in M&A operations, a larger community often means a higher premium on price paid by investors.
What are the investments we need to make to retain community bonds?
Perhaps the most important part of the equation is what you must do to retain this community. Increasing marketing spend and hiring community managers are far from sufficient. I tend to think users remain happy with a brand that (i) has a genuine, candid, simple story told in a unique way, (ii) uses a comprehensive and coherent branding (tone, logos, lingo) across platforms and (iii) remains innovative in its space so as to prevent users flee from its service. All of these require long term investments and are highly strategic decisions the CFO and executive board must consider carefully.
I am convinced community compounds over time, much like interest. So take interest in your community ;)
In the papers 🗞
This section discusses finance-related readings I enjoyed recently.
If you’ve been following stock markets lately, then chances are you’ve been as baffled as I am by the soaring NASDAQ and relative optimism compared to the gloomy economic outlook. This Bloomberg opinion proposes a simple - probably too simple - framework trying to make sense of it all: stock markets are forward-looking, so they discount the company’s future earnings in perpetuity. Plus there’s an interesting focus on a business fuelled by its community: Kylie Jenner’s Kylie Cosmetics.
Following my edition on Finance Hacking, one of you readers sent me this very thorough article on what the author calls the Finance-as-a-Service landscape. CFOs are slowly but surely replacing their old tools with new, more capable ones, and it’s a great thing to witness.
Pepsi and Kraft Heinz have started selling directly to consumers. Did anyone say “build a community”?
Payment in Kind 🎁
If you enjoyed, share this newsletter and make sure to subscribe if you haven’t👇
And for this week’s pop culture reference, I’d like to share a personal disappointment. I was supposed to be in Marseille, France last week-end to see local rapper Jul light up the Velodrome stadium. Needless to say, coronavirus got in the way and the event will only take place next year 😢
The reason why I’m mentioning this at all - other than catharsis - is that I believe Jul is the epitome of online community building.
A rapper with very basic melodies, instrumentals and lyrics, he was and still is mocked by almost every rap amateur for his barely existent command of the genre’s codes. Still, he managed to find a niche audience and grew his way up to the top of the charts with a simple recipe: authenticity and hard work (he’s about to publish his 20th album in 6 years!). He’s super engaged with his community and casts an image of utter genuineness, which is one of the keys in community building. Also, he’s now the best-selling rapper ever in France, after he broke the longstanding record of MC Solaar. Et mercé la zone ! Again, your community is a precious asset.
Obviously, like any rapper, he has tons of songs talking about cash. Here’s the most recent one.
Until next week! ✌️