This article also appeared on Forbes.
I work with a lot of startups and somewhere around year three, their business plan usually includes some flavor of ‘make a bundle selling data’. Like a new year’s resolution to ‘go to the gym and look like Thor’, this won’t happen. If it did, it might do more damage than the pocket change it’s likely to bring in. Not selling data also applies to large companies, not just startups. There is a better way…and a handful of exceptions to the rule.
Why Not Sell, Sell, Sell?
- Reputation. Selling anonymized data isn’t that lucrative because it’s rarely actionable. If it doesn’t help the buyer sell more lotion or pancakes, they won’t pay a fortune for it. However, personally identifiable information (PII) can be valuable, but it leaves a trail. If the buyer proves unscrupulous or sloppy, it can permanently alienate customers and cripple your brand. This is especially true for software companies, where the entire relationship is digital. Think how many customers of US tech companies wanted to run for the hills (of Europe), when NSA cooperation was leaked. That kind of trust is hard to rebuild. Maybe impossible.
- False profit. For most companies, selling data is, at best, a side dish. I worked for several huge financial services companies. At one, I was able to launch several successful data businesses. At another, we discussed “the value of our data” at every meeting but were never able to unlock it. At least not so it made a cameo on the P&L. And we’re talking mountains of consumer shopping data. With anything less, it’s better to be known as the company that protects customers and maintains their trust.
- Opportunity cost. Selling data is like working for someone else. You’ll get a paycheck, but you’ll never get rich. Essentially, you’re helping someone else build their business instead of figuring out a way to use that asset to build your own.
Build Enterprise Value Instead
Yes, “enterprise value” is an irritating buzzword some useless strategy consultant might leave behind. When it comes to data, it can actually mean something.
Data is not an asset, it’s an opportunity. A pile of collected information dares its collector to deploy it usefully, not unlike ingredients on Top Chef. Selling those ingredients is the least interesting option. Dare I say, a cop-out. It’s the chef’s job to cook up something delicious.
If the information is truly valuable, entrepreneurs must challenge themselves and their teams to use it to improve their business – and keep activity on their own platform, whenever possible.
What are the ways to build enterprise value?
- Measure and improve customer service performance and response time
- Enhance your product/service by continually monitoring usage
- Enter new business categories or service new types of customers that can benefit from insights you can generate
- Drive sales and marketing by understanding why and how customers use your product
- Create a self-service platform for others to transact using insights gleaned from your proprietary data (or in combination with external sources). Google and Facebook ad-platforms are the Holy Grail examples of this. Another is Salesforce.com’s business app marketplace.
- Create API’s to access and use your data to build an ecosystem of apps and companies reliant on your nucleus. This is the strategy that built Twitter and allows every social network to stay relevant through third party tools. It’s also what enables the mass distribution and embedding of services like Google Maps and Amazon inventory. For a full overview, I suggest checking out APIEvangelist.
In life, there are no absolutes. Sometimes, selling data is a viable option. Here are a few of the exceptions:
- Your company (or division) is explicitly in the data business. This comes with the expectation that data will change hands. Plus in most cases, data brokers operate behind a curtain without a public brand to maintain. The reputation risk is entirely with the buyers and sellers.
- Data exchange is critical for a reciprocal partnership that will drive enterprise value. Even here, it’s important to focus on higher orders of value – providing insights, not raw data.
- It’s a last resort. Microsoft recently invested $15M in Foursquare, a startup struggling to stay relevant as check-ins dwindle or move to Facebook. Microsoft recognized the usefulness of Foursquare’s location data and Yelp-lite reviews, so they placed a small bet.
- Scale + market power. There are companies that collect so much useful data, they couldn’t possibly use it all organically. Even as raw material, it has tremendous value. Typically, these companies are quiet about selling it, but absolutely do. While they’re exposed to the same brand-damaging possibilities, companies that do this are typically monopolies or have significant barriers to entry. They can ride out reputation bumps like an SUV driving over bubble wrap. Many cable/mobile companies, banks, and airlines wear this crown. Even Target had the scale and market power to quickly ride out its recent data breach. Most smaller companies wouldn’t.
I’d love to hear about your experience with data sales in the comments below.