A Framework for Planning the Future

Stratfor remains trapped between profitability and viability. It cannot solve this problem within the current revenue model. Stratfor must either develop new revenue sources or secure investment on unfavorable terms. The problem is compounded by the accelerating decline in CIS/GV revenue. Maintaining incremental growth in revenue and balanced cash flow will make it impossible for Stratfor to solve the problem of viability, retaining a core vulnerability into a time frame where the probability of failure begins to approach certainty. Aggressively acting to solve vulnerabilities increases the risk to cash flow to a point where failure approaches certainty. Potential investors will readily see the dilemma, increasing the cost of investment money dramatically and unacceptably.

It therefore follows that Stratfor must find a way to generate sufficient revenue that it either (a) can fund the resolution of its viability problem completely and move on to geometric growth in revenue or (b) mitigate the viability problem sufficiently that the cost of money will go down dramatically or open the door to strategic relations. In either event, the strategic requirement is obvious. Stratfor must fund its own growth from revenues and therefore must transform its revenue model rapidly.

The goal must be to increase revenue in 2009 at least to the level of CIS/GV revenues in 2009 while retaining CIS revenues at or near projected levels and to use this additional revenue to fund viability. Stratfor must, therefore, increase revenues from publishing in 2009 by about $1,800,000 and reinvest this money into the company. In 2010, it must be prepared to dramatically expand its revenue while solidifying its viability. In short, 2010 must be the inflexion year.

Obviously, the challenge will be to sequence investment in the company in such a way that ROI is measured not only in terms of money, but also in terms of time. The earliest investments must be small and rapidly monetize themselves, with the process feeding on itself.

Therefore, the development of a reinvestment plan and a methodology for making investments in the face of risk is the single most important innovation Stratfor must make, and the first. Since April 22, we have gone through two phases. In the first, we built reserves. In the second, we began hiring people when we had a year’s salary in hand. We followed a near-zero risk approach on the cash flow side, while enduring the risk on the viability side. We must now take a systematic and balanced approach. Stratfor needs a philosophy and model of reinvestment as a first and immediate priority. The second priority is hiring an executive team capable of growing revenue.

Until this model is in place, we can only lay out requirements and sequence, but not timing or criteria for success and failure. And these plans are subject to modification by the executives we bring in.

Institutional Sales

The single largest influx of cash in 2009 should logically come from a focus on Institutional sales. Stratfor has had substantial success in institutional sales, which now constitutes a substantial portion of publishing revenue. New institutional sales have not been pursued by design since 2005, when the institutional sales team (which had not been successful) was cut as a cost savings measure. Deborah Henson was retained with two charges. First, she was to protect the book of business we already had. Second, she was to expand our sales in the area with which she was most familiar—defense and intelligence. She was successful at this, managing the OSIS sale and renewal extremely well. But her greatest achievement was a 91% institutional renewal rate. She protected our revenue and enhanced it.

The first phase of the Institutional Sales plan is aggressive expansion in the area in which we are already successful, selling the current product. The off-loading of small renewals to customer service facilitates this, and represents the first step to revenue growth.

The second step requires a product and sales strategy. It also requires an executive able to conceptualize the new product, a sales strategy and a manner of implementing, whether by third party sales and channels, a direct sales model or a combination of the two. Hiring this person as soon as possible is indispensible for achieving 2009 goals. It would seem to me that given the critical nature of this hire, we need to employ a search firm, inasmuch as we have a poor track record as a company of hiring business executives.

While product development will be the purview of the VP of Institutional Sales, there is a basic hypothesis to explore, which is that there must be a difference between the product we sell individuals and the product we sell corporations. There are a number of reasons for this.

  1. Where DOD tends to adhere to licensing agreements, private companies are much more comfortable with piracy. So long as we deliver on the internet, a single membership can be passed around to a large number of people. Even when we detect peculiar usage patterns, it is difficult to monetize this and it places us in an adversary relationship with our customers. Differentiation—and making that differentiation available only on negotiated, multi-seat licenses—increases the argument for complying with licenses. It gives the institutional customer things they can’t get otherwise.
  1. The current pricing strategy of our individual product must be reconsidered. When it was set in 2005 it triangulated the pricing of the NY Times, Wall Street Journal and Economist. It no longer does, the price of all of these except the Times has fallen. Given our experience at $99, I believe that testing will show us that we are overpriced. If we lower our price for individuals, we will have to lower them for institutions, including DOD/IC which requires discount pricing. In order to make robust institutional pricing compatible with flexibility in individual pricing, we need product differentiation.
  1. It is clear that the current content of the individual product must not be increased and indeed, might be reduced. Particularly if we lower our price, we might need to create a lighter version of our current product as a transitional tool. At the same time, the need for viability requires that we bring on more analysts and build a monitoring system. The cost of these should be paid for from increased Institutional Sales. Put differently, the new analysts should facilitate product directed to a new market. And the new market should pay for enhanced viability.

A differentiated institutional product allows for flexibility in individual pricing, a product more marketable to institutional customers, and will mitigate both revenue and viability requirements.

It is absolutely critical that Stratfor continue to sell what it is good at and noted for: analysis of the international system. Differentiation should be based around deepening of this offering rather than moving into other areas (domestic politics, markets, etc.). It would appear to me, but requires systematic validation, that while our current product is too thick for individuals, it is too thin for institutional use.

In our current product we address each day what is most important in the world. This means there are entire areas of the world that we rarely address, such as Latin America or Poland, that are of great interest to institutions. Put differently, some institutions are interested in Stratfor’s global perspective, but most institutions either have clear regional focuses or have a need for more in depth analysis and possibly information.

Institutional Stratfor would offer daily coverage of its AORs, offering:

  • Daily analyses of events in each region.
  • A flow of sitreps on the region.
  • Data on the region (economic, political, military) secured from third party sources for free or low cost.
  • An interactivity option, resembling our GV option.

The Institutional sale would be per seat and potentially per region rather than as a package.

The important point of this is that (a) the cost of new analysts will have to be borne anyway (b) the monitoring system must be reestablished anyway to free analysts for efficiency (c) data acquisition and implementation would be an IT problem primarily and optional (d) we already have trained briefers to serve as the kernel of the GV option, if we decided to move with it.

This is a proposal in need of an executive and market validation, not a plan in itself. But it is a plan that fits into the requirements of corporate growth and flexibility as well as one that would appear to promise revenue fairly quickly.

Hiring the head of Institutional Sales therefore is the highest priority of the company.

Individual Members

The single most important task to be undertaken in the first quarter of 2009 is a study of pricing of the individual product. There are two reasons for this. First, a rational pricing policy on individual sales is essential for positioning the corporate product. Second, and perhaps more important, we do not know that we are maximizing revenue at the current pricing structure. Indeed, there are so many price points and terms currently that it is almost impossible to coherently display them all. The current pricing structure is NOT irrational nor is it arbitrary. It derived from extensive experience with readers and examination of responses to changed pricing.

It would be erroneous in the extreme to argue that Stratfor has not studied pricing, literally on a week by week basis. Nevertheless, it is not clear that we have achieved on optimal individual pricing strategy, particularly in the context of what I would argue should be our corporate strategy. A recent successful experience with offering a $99 price to dormant free list members would seem to indicate serious study should be devoted to this, along with the problem of managing older members andwhether we should reduce the price, and the possibility of creating a new membership level to lower the price, at least as an interim measure.

Immediately examining and testing the pricing question in first quarter 2009 is essential. I would ask Aaric to make the creation and implementation of a test plan his highest priority.

Enhancing Dashboard Performance

The first principle here is “Do no harm.” Online sales and renewals are the backbone of the company, and nothing must be done to jeopardize them. While this plan calls for a degree of experimentation, the experimentation must always be done with this dictum in mind. Therefore, we are risk averse in the Dashboard, and seek first to optimize, and second to innovate.

Let’s consider each element of the dashboard:

Free List

The free list provides a stable and predictable flow of revenue using the current cycle which culminates with two campaigns against the free list a week. Logic would argue that growing the free list would be a primary strategy, since the returns for that have been predictable. The weakness of logic is magnitude of effort versus magnitude of return

There are therefore two steps to be taken in enhancing Free List performance:

  1. Identifying methods for increasing the yield from new free list members, and resuming growth. Obviously, this is partly a question of creating a superior pricing strategy. But it also not clear that the current method of campaigning to the free list is optimal. Certainly it has appeared to hit its limits, with growth coming incrementally or contingently.
  1. Increasing the growth of the free list requires resources that might well be devoted to other efforts. I would certainly recommend for now that this not be a priority, but that the current Weekly to Free List to Paid list model stay in place until other matters have been addressed.

We continue to count on Free List revenue. We must preserve Free List revenue. We must not build the company on assumptions of Free List revenue.

Paid List

The paid list represents a special case of existing paid members being offered multi-year, pre-paid memberships. Given that the discounts offered are less than projected attrition in this class, if we waited to renew them, aggressive renewal policy is absolutely rational. Every publication hopes for multi-year subscribers, and the fact that between 22-24 percent of our subscribers choose to pre-purchase both builds the liquid value of Stratfor and guarantees ongoing membership. It should again be noted that many new paid members opt for a multi-year membership, so that the issue here is not simply campaigning to our paid list but our multi-year membership strategy.

The issue is not whether we maintain multi-year campaigns, but what we do with the revenue? Currently, payments are being fed into operations, which has been the case for years. There is risk here but I would argue that so long as the percentage of multi-year members stays at or below 25 percent, through 2009 retaining the paid list campaigns as part of operating expenses cannot be avoided. The math doesn’t permit us to abandon it. A crisis will not occur until growth in this area outstrips the rate of growth in headcount, at which point this view must be revisited in the context of a much more urgent discussion on Stratfor’s condition.

As Stratfor revenue grows, multi-year memberships should continue to be pursued aggressively, with the point of when they reach 25 percent as the time for reconsidering the strategy. So long as Stratfor uses this money for operations, rigorous monitoring and controls on this variable need to be in place. This strategy should be pursued until last quarter 2009, when increased revenue will allow us to consider not whether we want multi-year members, but how to manage the revenue—whether to escrow or use it as investment capital.

The long term health of Stratfor can in one sense be measured by whether increases in multi-year members remain within current parameters.

Walkups

Walkup sales have shown the most promising pattern over the past six months, and logic and industry practices argue that this should be the primary focus for increased sales within the context of the dashboard.

This should be divided into two parts:

  1. Intensified effort and speed on the current project underway to increase conversion rates on the dashboard.
  1. In parallel, a study of strategies to implement methods to increase traffic to the website, the strategies to be implemented as soon as increased conversion rates are established.

Stratfor needs to hire an individual with extensive experience both in driving traffic and maximizing conversions to implement this. This should be the focus of 2009 on the dashboard.

Partnerships

No conclusions can be drawn from the current partnership with John Mauldin. Indeed, given the failures experienced with literally all other partners, there is no reason to conclude that partnerships as currently envisioned is a viable element in the company or in the dashboard. Business relationships are certainly an important element, and partnerships should be subsumed in the broader category of business development to be discussed later.

Recharges

The question of recharges is really the question of the role in sub-year licenses (monthly, quarterly, bi-annual) in our pricing policy. No plan on this is possible without a plan on pricing.

However, given best practices on the web, we will assume that we will be continuing some pricing of this sort. Therefore, the condition of our database that cannot provide us accessible and accurate data on the state of this class of member is unacceptable. Immediate work on this problem, including outsourcing if necessary, is essential if we are to measure and understand this dashboard.

Individual Renewals

There are no recommendations for improving our performance in this area. While we renew about 80% of our members in terms of cash, it is difficult to see that increased effort focused on renewals will yield returns.

Conclusion on Dashboard

The dashboard is now the primary source of revenue in the company and it will remain of vital importance. However, the goal should be to transfer the focus from Free List to Walkups, while working to improve the performance of Free List. Paid List should operate as it is operates unless it breaks out of pattern in either direction. Partnerships should be transferred to a separate Business Development Unit.

Everything done here depends on a reexamination and potential reimplementation of our pricing policy.

Business Development

Stratfor is an isolated company. It may well trace some of its success to that trait, but it will not sustain it to become viable, profitable and valuable. The sales and production model have done reasonably well in this isolation, but they have not scaled. Our current strategy not only doesn’t provide for geometric growth in sales, but doesn’t allow us to effective leverage our output or our productive capacity. In this our position is similar to small software companies in the 1980s, automobile manufacturers in the 1910s and so on. We are in a period of destruction in publishing and downturn in the economy. We are doing well in both which is an excellent sign. We are well positioned to lead among the vast array of new publishing ventures that we will see later in 2009 and 2010. We must also position ourselves to prosper in the period of consolidation behind it.