For most companies, most of the time, cultivating existing customers is the key to profitability. Fred Reichheld of Bain and Company explained why focusing on existing customers should be central to any marketing strategy in his 1996 book, The Loyalty Effect. Reichheld found that the average company loses about half of its customers every 4 years but for in most cases a 5 percent increase in retention will yield a 25 to 100 percent increase in profit. There are several reasons.

New business costs more money to bring in. Depending on the study you read, marketing to existing customers costs a third to a fifth of the per dollar cost to acquire a new customer.

The longer you have a customer, the more they are likely to buy with each purchase. Loyal customers are usually less price-sensitive than others and often upgrade to higher-priced products while responding to cross-sells.

And your existing customers are also your sources for both testimonials and referrals. Dr. Robert Cialdini of Arizona State University in the US points out that this actually has a double effect. When your customer refers someone else to you, two things happen. First, and most obvious, is that someone else hears about you and what you have to sell. But the customer making the referral increases his or her own loyalty to you with the act of referral.

Remember everything we’ve said about word of mouse so far. 47 percent of users visit YouTube to see a video that a friend told them about.

In addition to posting videos that members of your target market will want to refer, encourage your customers to refer their friends and colleagues to your videos. And do other things that we know enhance your relationship with existing customers and encourage them to remain customers for a long and loyal time. Everything we suggest here should tie to the rest of your marketing and customer service strategy.

Defuse the Danger Zone

The time immediately following a first purchase is the “Danger Zone.” That’s the time when a customer is most likely to defect. There are two reasons. There’s normal post-purchase anxiety. He or she is not sure that they made a good purchase and because this is the first time they’ve used a product or service, there’s a natural, but uncomfortable, learning curve to climb.

Defuse the Danger Zone by helping your customer use your product or service or learn about how to use it. Quickbooks, a division of Intuit, is a good example of how it can be done. Quickbooks is a bookkeeping software package sold in several countries. The packages are well designed and easy to use with excellent built-in help and are well  supported on the Intuit  site and a network of approved consultants who can help a small business person.

Quickbooks’ YouTube Channel has three kinds of videos. There are entertainment-based videos designed to get people to check out the channel. There are basic sales videos that show the product in action. There are specific how-to videos that teach basic tasks and how to use the package more effectively.

The most viewed video on the Quickbooks channel is a how-to video about customizing invoices. Quickbooks’ YouTube strategy seems to be that it has videos which will get you to visit their channel, videos that will tell you about the product so you make a wise decision to buy, and videos that will help you use the product, especially in the beginning.

Support Dealers

Many products are sold through dealers who then are responsible for supporting the product. YouTube can provide an effective way for manufacturers to support their dealers so those dealers can support the end users.

Navistar makes commercial medium- and heavy-duty trucks that are sold through dealers. Those dealers also provide parts and service for the trucks. The official Navistar videos help them do both jobs. The channel has videos that dealers can use to help them sell Navistar trucks. They can either show the videos to a customer or send them a link to view the video. There are also videos about how to run a more effective dealership. Navistar has a program called “Best of the Best.” The program features top dealerships, talking in front of the camera about techniques to improve business.

Both Quickbooks and Navistar use YouTube to post videos that will help customers and dealers do things better. Companies also use YouTube to help their customers be part of the action.

Part of the Action!

The idea behind “Part of the Action” strategies is that you can build loyalty if customers are able to learn more about your product or brand and participate in your company’s efforts. Zappos is a good example.

Zappos sells shoes online. They’re noted for great and friendly customer service. They post a wide variety of videos on YouTube for their fans to see. Zappos’ videos include their commercials and also television features about the company. More interesting though, are all the videos by “Zappos TV” that show people who work at Zappos talking about what they do, pulling pranks on each other and generally being human, There are behind-the-scenes videos of some of the commercials, as well.

None of the videos on the main Zappos channel do anything that seems intentionally designed to achieve that social marketing goal of creating a community of supporters. In fact, Zappos one effort in that direction seems to have had rather poor results.

Zappos made a special effort to solicit testimonials from their loyal customers. They only received a few videos. They might have done better to use the tactic others have used of creating a contest that rewards a YouTuber for the best Zappos commercial. Zappos used to have more channels with different types of video in each. They’re consolidating videos into two channels so it will be easier for their customers to find. They’re attempting to cluster YouTube activity around their brand. That’s one of two basic strategies when it comes to building business from existing customers.

Dell and IBM chose different ways to integrate YouTube into their marketing. The different choices reflect their different challenges.

Dell once had a reputation for superb products and customer service but over the years that reputation eroded. Thousands of customers were frustrated dealing with Dell’s outsourced technical support operations but what caught the public’s attention was the flaming laptop. By late 2006, Dell had already issued recalls for over 250,000 laptop batteries because of the possibility that they might catch fire but when someone posted a picture on the net of a laptop bursting into flames, the computer maker recalled over 4 million batteries.

It was a public relations disaster. Dell put together a strategy to rebuild its brand image. They set up a special web site. They got involved in several social media sites. The YouTube part of the strategy builds on YouTube’s strengths. Dell set up a channel called DellVlog, built around a vlog (video blog). The vlog gets fresh posts most business days and addresses new product releases, news, and similar topics. The most viewed video and three of the five most discussed videos all relate to gaming.

Dell invites commentary. They ask you to “join the conversation” but there’s not a lot of conversation here, mostly because YouTube is better at sharing video than sharing opinions.

What’s more important is that the vlog fits into Dell’s overall strategy of being visible, sharing information with customers, and soliciting comment as a way to re-build reputation. It ties in to the other efforts. Dell’s choice has been to have a limited number of channels with a mix of videos because the company wants everything to tie back to one corporate identity.

IBM has gone another way entirely. Instead of a single or a limited number of YouTube accounts and channels with a basic corporate theme, IBM has chosen to have multiple accounts and channels with each one concentrating on a limited range of things. Most are the work of a single individual. Some concentrate on a particular product. There are interviews with IBM people and with customers. There are ads. And there is coverage of conferences.

IBM’s thrust seems to be to give customers multiple options for videos so they can choose what they watch. The approach is similar to what IBM did in the early days of the web. Then they allowed IBM people anywhere to put up sites as long as they followed a few rules. The rules, in turn, were encapsulated in a “No Excuses Toolkit” that included approved graphics and copy for the “official” parts of the site.

Keeping your existing customers and deepening your relationship with them is an important way to profitability. YouTube can be part of your strategy for dealing with existing customers. Remember to build your YouTube plan around video and select videos that improve and deepen your customers’ experience.

The Social Media Era

The coming of Web 2.0, the continuing development of tools from the Web Era and the rise of social networking sites has brought us to the Social Media Era. It presents a major new set of challenges and opportunities. According to a study released in February 2008 by US-based TNS, 85 percent of US executives said that “reading and analyzing social media to understand unfiltered consumer perceptions would have the most impact on the future of their businesses.” 65 percent of non-US executives agreed. Their excitement grows from the fact that social media give marketers opportunities to gather information that is unfiltered and behavioral. Marketers will also be able to intertwine advertising, product development, research, and loyalty building.

A Social Media Example

For several years, Target has concentrated on selling US college students the furniture and other goods to fill up their dorm room. Every year, as the students head back to school, Target has sponsored dorm room design contests and offered special collections of merchandise. This is a big market. According to the National Retail Federation, dorm dwellers spend an average of $1,529 to get their room in shape.

In 2007, Target added a social media twist with a promotion on Facebook. They called it the “Dorm Survival Guide” and offered college students advice on designing their dorm room, living in a dorm, recipes etc.Target’s approach was to use the space as a place for dialogue and to soft-pedal pitches for their various wares. That attracted more than 7000 visitors and increased sales in the stores.

That was one benefit for Target, but it wasn’t the only one. Through dialogue with the students, Target learned about needs, wants, and preferences that it would have been almost impossible to get any other way. The Facebook page sold product and acted as a giant focus group.

YouTube in the Social Media Era

Target’s Dorm Room project delivered a combination of promotion and research that is the hallmark of marketing using Social Media. YouTube, as a video sharing site with social media characteristics can deliver similar benefits but in a different way.

Contests that ask YouTube users to create commercials for your product or service are excellent ways to find out what people in your target marketing think of the product. There will be a winning video, of course, but there will also be lots of information about what people think are the key characteristics of your product and what benefits they see as most important.

It may not all be pretty. General Motors ran a contest on YouTube asking for commercials for one of its Sport Utility Vehicles. It received a lot of “hate commercials” with tag lines like “if you hate Mother Nature.” Pretty or not, the contest commercials gave the company information about how the brand is viewed.

Contests are useful ways to gather information for sifting later. They also require a lot of work and investment. The simplest way to use YouTube for social marketing is to conduct the equivalent of a direct marketer’s split run tests. Movie studios are already doing this on YouTube. Movie trailers are among the most popular types of video on YouTube. 19 percent of users say that they’re “very appealing.” They’re also an important part of marketing a new movie release. YouTube is a flexible and inexpensive place to test the appeal of different trailers for the same film.

The principle is simple. Run different trailers that you’re considering for your film. Monitor which ones get passed around and generate the most views. Check out the comments to see what users are saying.

This same principle will work to test advertisements or promotional ideas. You can fine-tune your YouTube videos, too. Once you know which videos work best, try tweaking the titles and thumbnails and tags. See which changes generate higher view counts. You can do even better if you use YouTube’s new Insight tool.

YouTube Insight provides a detailed view of whether and where a video is popular. The tool gives marketers information about where and when a video is watched. In the US this is broken out by state. Outside the US, results are currently presented only by country.

Using Insight, a marketer can discover geographical or temporal patterns that suggest when and where to use a specific advertisement. Rock bands, who are often the lead users in YouTube marketing, are already using the tools to decide where to tour.

YouTube will certainly develop new tools for marketers as part of a strategy to monetize the site. Companies that market on YouTube will develop new ways to use the site to gather information as well as sell product. The exciting news is that we are just at the beginning of the Social Media Era and just starting to imagine the possibilities.

Google’s ownership of YouTube is important for marketers. Google brings three key strengths that will further improve YouTube’s marketing attractions.

Google is highly business oriented. At the time when Google announced the purchase of YouTube. Google executives declared that one of their key objectives was to “give professional content owners more opportunities to get their work out to a wider audience.” Google was started with the goal of being a successful business and the founders have consistently acted with a business focus. Google will therefore act to make YouTube more valuable to advertisers and more profitable for them.

Google has excellent development capability. The company has made its mark developing algorithms that deliver content to searchers and searchers to advertisers.

Google has lots of money and patience. Google CEO Eric Schmidt has described monetizing YouTube through ads as “the holy grail.” Finding it means trying different forms of advertising. Google intends to leverage those strengths.

Here are some of the ways in which we believe Google will further improve YouTube for marketers:

Google will find new ways to grow its audience. This will happen by raising the quality of content to attract more viewers to the site for longer and by multiplying the number of ways to access the site.

Improving the quality of content will happen progressively through agreements with owners of desirable content. The agreement with Lions Gate, announced in July 2008, is an example.

YouTube will also expand its viewing audience by being available on more devices. That includes mobile phones, iPods and critically importantly,  home TV. In the US, TiVo, the provider of technology and services for digital video recorders (DVR), announced in March 2008 that it will offer access to YouTube videos directly from the TV via a TiVo DVR. IPTV is very likely to be the next revolution in consumer technology and YouTube will be a major beneficiary when it arrives in early 2009.

Google will find new ways to deliver ads. So far this includes pre-roll and post-roll ads and “in-the-chrome ads” placed in the frame around the video. According to C-net, so far “the company is happiest with in-video ads that are embedded across the bottom of the video area itself.”

There’s bound to be more. Since August 2007, ads have been placed in a transparent overlay at the bottom fifth of the video window on material licensed from media companies. Product placements in videos have been appearing since 2007 as well. Tests of other possibilities are ongoing.

Key Point: Google will continue to introduce new ways to serve the needs of marketers and content providers to the benefit of both.

Google will develop new service offerings for marketers. For example, in May 2008, Google introduced a service called “Buzz Targeting.” The service uses an algorithm to locate videos that are about to “go viral” by monitoring blog traffic, IMs and email. Ads will be overlaid on the bottom fifth of viral videos supplied by YouTube partners who then share in the ad revenue.

Google will develop sophisticated analytics for marketers who use YouTube. Analytics is a Google strength. The company already provides analytics for web masters and participants in other programs. And it’s started to do the same for marketers using YouTube.

In March 2008, Google introduced tracking software on YouTube that provides video viewing information. The information includes when and where the video was viewed. Some information is only shared with paid advertisers and partners. They can learn, for example, how many viewers watch 25 percent, 50 percent or the entire video.

YouTube today offers you a dual challenge. It’s already a market and marketing venue that you can exploit, so you have to understand the YouTube of today. YouTube is also developing in ways that will make it more attractive still to marketers and to more marketers in the future. YouTube Revealed contains a wealth of information to help you meet both challenges. We’ll start by looking at who uses YouTube today.

Thanks to academic studies of the way consumers adopt innovations, we have a good idea of how YouTube will develop over the next few years. We think that YouTube will follow the patterns and timelines of the consumer adoption of technological innovations such as the internet and television. The basic trails are well-blazed.

Consumer adoption of technological innovation moves from younger to older people. Young people adopt or grow up with innovations. As they age, the proportion of older people in the total population using the innovation increases. You can count on the user base for YouTube to get older until it is more like the total population.

Consumer adoption of technological innovation moves from urban to rural locations. In the case of YouTube, that is likely to be an infrastructure issue. The number of broadband connections will need to increase in rural areas before the number of YouTube users will increase but you can count on the YouTube user base to become more evenly distributed geographically.

Consumer adoption of technological innovation move from more affluent to less affluent households. In countries where broadband is not subsidized that means that YouTube use is likely to move down-market as more broadband connections become affordable. You can count on the YouTube user base in the future to more accurately reflect the income distribution of the countries where you do business.

Consumer adoption of technological innovation moves toward the mainstream at a predictable pace. It takes most technological innovations about fifteen years to move from first public trials to a saturation point. If YouTube follows a similar pattern, saturation will come around 2020. But there’s a more important point to pay attention to for marketing purposes.

The adoption curve for most innovations is an S shaped, or Sigmoid, curve.  The log phase of the curve, the part with the most rapid growth, usually begins around two years in and lasts until the midpoint is reached.

Using our dates from YouTube history, the upturn should have been around early 2007. But the YouTube curve turned up earlier.

If we use videos viewed as a guide, the fast-growth phase for YouTube began in the first quarter of 2006 when usage was almost doubling every month. That early turn was the result of two things. First, YouTube was an elegant service, a simple solution to a mass market problem. Second, the enabling technology, broadband connectivity, was already in place for many affluent households.

If you’re a marketer, what’s most important is that the time from the introduction of YouTube to the midpoint on the adoption curve is likely to be seven years. That means that by 2012 at the latest the mainstream adopters will be onboard in the US and the UK. In other countries, that date may move slightly in either direction depending primarily on the prevalence of broadband connections.

That gives you a window of less than two years to gain some early-mover advantage.

Key Points: However, be careful, just because you have video doesn’t mean it’s good or meaningful to the people in your market. Either modify it so it is, or don’t use it.

Key Points: Just because it’s easy to do, doesn’t mean it’s the right thing to do. Check everything you intend to post on YouTube to make sure it represents your brand and moves your mission forward.

YouTube is at the center and at the forefront of some key trends that affect the world of marketing. The three most important are increasing bandwidth, user-generated content and social networking.

1. Increasing bandwidth in developed countries is what makes video viewing on the web and video sharing possible. According to a study by Gartner, published in July 2008, "Consumer broadband penetration worldwide will grow from an estimated 323 million in 2007 to 499 million in 2012."

As a practical matter, Gartner’s projections contend that broadband penetration of the consumer market will be above two thirds of households in almost all developed countries by 2012. For YouTube this means substantially bigger audiences, increased sharing and a substantially higher level of user-generated content.

1. User-Generated Content (UGC). This is an area where YouTube is at the forefront. Not only is the vast majority of the video on YouTube generated by users (29 percent of them have uploaded a video within the last three months) but commenting and rating are key activities that constitute content and simultaneously help determine the viewing performance of the associated videos.

1. Social networking sites are obviously amongst the hottest internet properties today. YouTube is a part of it in a unique way.  The purpose of social networking sites like MySpace or Facebook is to help people connect with their friends and to find others with whom they have something in common. But YouTube is not a social networking site.

Jon Gibs, senior director of media for the market research firm Nielsen/NetRatings follows the social networking sector. He says of YouTube: "You don’t create a buddy list and share your buddy list, but you do have consumer generated (or at least consumer-added) content. You have tagging around that, and you have conversation around that, and you have association between elements. To me that’s social networking."

Even so, Gibs describes YouTube as "a video-sharing site with social networking tacked on." That’s a good way to consider the marketing power of YouTube and it’s an important one.

The true social networking sites are the converse – users can add video but the video (typically user-generated snippets of films, TV shows and comedy clips) is generally secondary to the "friends" motif.

YouTube will increasingly become a more hospitable environment for marketers. If you have a good video, like the Sephora videos, they can carry your brand message without conflicting with the purpose of the site. YouTube today is uniquely positioned as a marketing channel on the net. And we have a good idea of how it will develop in the months and years ahead.

Online purchases are only the tip of the iceberg. Many people who shop online are likely to buy offline. According to a 2007 study by eMarketer: “for every $1 in online sales, the Internet influenced $3.45 of store sales.” Our survey found that 37 percent of YouTube users have purchased something offline that they saw advertised on YouTube.

In general, the purchasing demographics of YouTube follow those for the internet as a whole. With the exception of teenagers, younger people are more likely to purchase online than older people. Men are more likely to purchase online than women. The commercial action on YouTube isn’t limited to consumers. 25 percent of visitors to YouTube have used the site for business. About half of them do so regularly or at least occasionally.

From our research we identify that YouTube’s commercial usage breaks down into three main categories. Almost half of business users are looking for more information about a subject that will help them commercially. 45 percent are seeking information about products or services to purchase and 28 percent are checking out the competition.

YouTube is already a market that you can exploit. There are some key trends that YouTube is part of and that will define what YouTube will become.

Marketers using YouTube benefit from the commercial infrastructure that is already in place on the internet and the extent to which people around the world have become accustomed to shopping online. According to Nielsen Global, as of February 2008, 875 million people worldwide have bought something online. Buying is strong across many countries.

“Among Internet users, the highest percentage shopping online is found in South Korea, where 99 percent of those with Internet access have used it to shop, followed by the UK (97 percent), Germany (97 percent), Japan (97 percent) with the U.S. eighth, at 94 percent. Additionally, in South Korea, 79 percent of these Internet users have shopped in the past month, followed by the UK (76 percent) and Switzerland (67 percent) with the U.S. at 57 percent.”

This matches up with the numbers we see on YouTube. 91 percent of YouTube users have purchased something online. 63 percent have done so within the last three months.

When it comes to direct buying influence, the numbers are lower but remember we’re considering the influence of a single site so the statistics are impressive. 35 percent of YouTube users have purchased something online that they saw advertised on YouTube and 30 percent have followed a YouTube link to make a purchase. These figures are almost certainly depressed since users include a sizeable proportion of teenagers who do not have a credit card to make online purchases.

In some ways it’s the classic Silicon Valley success story, complete with garage. Chad Hurley, Jawed Karim, and Steve Chen became friends when they worked for PayPal where Karim was one of the founders. In early 2005 they were at a dinner party to which many people had brought their camcorders. Conversation turned to how hard it was to share videos with others using the internet. That inspired the friends to set off to Hurley’s garage to write some code that would make online video sharing easy.

By February they were testing their system online and receiving a great response. The response was strong enough that in November YouTube received $3.5 million in venture capital funding from Sequoia Capital. Millions of people seem to have been waiting for YouTube.  When the site launched officially, in December 2005, it already had more than a million short video clips. Later that month visitors were uploading 8000 clips a day and viewing 3 million.

By April 2006 visitors were watching 35 million videos a day. The company received another round of funding from Sequoia Capital: $8 million to expand sales and marketing efforts and build-out the data centers. In October, Google agreed to buy YouTube for $1.65 billion in Google stock. At that point YouTube visitors were downloading over 100 million videos a day. The purchase was finalized in February 2007.

Speaking at the Library of Congress in June 2008, Professor Michael Wesch of Kansas State University described the impact of YouTube. "YouTube produced more hours of video in the past six months than the three major networks have produced since 1948."

Clearly, YouTube is an important force on the internet and in digital media but as Professor Wesch also noted, the vast majority of videos on YouTube today are short, amateur videos of three minutes or less. YouTube today is not what YouTube will be in a year or three years. The changes are driven by some powerful trends and will follow predictable patterns; Understanding them will help you get out in front of the curve.