The thriving field of behavioural economics has begun to codify these mental weaknesses in terms of social, cognitive and emotional factors. Drawing from the insights of psychology, behavioural economists (such as Dan Ariely, Robert Cialdini, Christopher Chabris and Daniel Simons) have explained why we buy more things at 99p rather than £1 (the left-digit effect), why we commit to memberships of clubs and other organisations that we’ll never use or attend (optimism bias), why we attribute more value to things we own than things we do not (endowment effect) and why we don’t return purchases nearly as often as we perhaps should (post-purchase rationalisation).

Knowledge of human behaviour is now being used by the giants of the web, from Amazon and Apple to Groupon and Zynga, to keep us coming back to their websites, playing their games and buying their products and services.

Amazon

Amazon has mastered eliminating small frictions, which in turn radically alters decisions and behaviour. For millions of people, Amazon is the default purchasing solution because it has all our credit card and address details on file. Amazon has removed the pain of retyping these details each time we make a purchase. This may not sound like much since many other websites also allow us to save our details, but during the few seconds in which we make our buying decisions, when we are not thinking very deeply, the barrier to entering that data seems too forbidding and we default to Amazon.

That’s not the only friction that Amazon has eliminated, they’ve created smart solutions to the problem of shipping, which has always been one of the biggest psychological hurdles to buying online. The first is Super Saver delivery, which is free in the UK if dispatching to UK locations. This option often tempts customers to add an extra item to their order.

The second, more interesting shipping mechanism is Amazon Prime. For an upfront fee of £49 per year, you get free next-day delivery on the majority of items. Knowing that one shop has free shipping compared to another, makes us less likely to shop elsewhere and because the barrier of shipping is removed, we’re more likely to impulse buy. Furthermore, because investment in shipping is essentially made upfront, we try to offset the investment by purchasing more.

Apple

If, like millions of other people, you’re an Apple customer, you may have noticed that email receipts for your purchases don’t arrive immediately after you’ve made the purchase. Whilst the delay could be related to Apple batch-processing transactions, there is an important psychological benefit to the company: the delay reduces the pain of paying and hence the potential for customers to request refunds.

The mechanism of the transaction remains the same, money is still debited from your credit card, but by not receiving a receipt immediately, the payment is decoupled from consumption and the pain of paying, however small the value may be.

It’s not all bad news for the consumer. Apple made the mistake of allowing apps to sell too cheaply or even for free through the AppStore. There’s an economic phenomenon called anchoring, which occurs when people overly rely on a specific piece of information to govern their thought-process. Once the anchor is set, there is a bias toward adjusting or interpreting other information to reflect the “anchored” information. Once a price point is set, it’s extremely difficult to displace the anchor. iPhone and iPad apps take many hours of work to design and build, but on the AppStore, the expectation now is that they can’t cost more than £4.99, whilst most should cost £0.69. The pull of free is just too strong—dragging down what people will pay for everything else.

Facebook

What has become increasingly clear is that the Facebook actively develops features that challenge our limited ability for self-control, since that is what will get us to come back again and again.

Much of Facebook’s genius revolves around the Wall: a public space that we curate but that other people can add to. Within the universe of the site, where everyone is a “friend”, you feel compelled to respond to Wall posts, to comment on others’ posts to yours and to reciprocate by writing on theirs.

We want our Walls to reflect ourselves or certain persona. It’s analogous to the way we curate our belongings, which itself is a window into our personalities.

The psychologist Sam Gosling has shown you can learn more about people from their possessions than from spending time with them. Walls are basically the same—a storefront window to the self.

Groupon

Groupon has not just revolutionised social-buying websites through offering remarkable discounts, but more importantly by removing the embarrassment of coupon shopping.

The stigma of coupon use is real and broad-based. A 2008 paper in the Journal of Consumer Research found that shoppers would describe people standing near coupon users, not to mention the coupon users themselves, as “cheap” or “poor”. With Groupon, by contrast, the social acceptability is baked into the premise – into the name, even. The perception of crowd behaviour can be a powerful motivator when it comes to modifying people’s behaviour.

Groupon also uses time constraints to further influence behaviour. Consumers have one day to decide whether to buy a coupon. Usually, when we don’t buy something, we have the opportunity to go back and buy it later. But with Groupon, our choice becomes explicit. If we don’t buy the coupon now, we’ll never be able to buy it. Presented with that choice, many customers will consider how much they might regret the choice not to buy. And because people hate feeling regret, they become more inclined to buy it now. Amazon do a similar think by alerting the buyer to the fact that there are only n-number of items left, whilst “bricks and mortar” stores such as Zara regularly update their clothes range to drive demand.

Lovefilm

Lovefilm’s business model is based upon the simple premise: people hate late fees. With the traditional video shop model, customers had a simple choice: accumulate late fees or return the unwatched film. Added to this, traditional shops often only stocked a finite amount of “blockbuster” movies. Lovefilm not only resolved the late fee issue by allowing customers to return films whenever they wanted, but also created a long tail of films; and exhaustive collection from which each customer could assemble a queue.

In practice though, Lovefilm customers end up watching fewer films than they might have expected. Why? One reason is that Lovefilm forces us to choose based on what we think we want to see in the future; and we’re bad at predicting our future habits. This isn’t bad for Lovefilm since it is based upon a subscription model, so it saves on postage whilst boosting profits.

The future for Lovefilm will be in the streaming business, much like Netflix does in the US. With streaming, consumers will no longer need to predict what they want to watch in the future. Instead, watching films becomes an on demand service; we’re paying for the right to watch any film at any time, regardless of whether that is what we end up doing.

Twitter

Much like with Facebook, users want to display a self that is somewhere between their real-life self and how they would like to be perceived, which creates a substantial motivation for constant monitoring and updates to their status list and Wall.

Perhaps the most addictive feature for both Twitter and Facebook is that it allows us to enhance our status relatively cheaply, in a way that was not possible 5 years ago, whilst also providing the ability to share; we get tremendous social capital from being seen as generous and as someone whom other people mention.

Zynga

People become emotionally invested in things they’ve built or created. This emotional investment leads people to value their own possessions or creations irrationally high. The longer the emotional investment, the higher the value. Dan Areily dubs this the “Ikea effect” in honour of how your rickety Swedish bookshelf seems perfect after you’ve put hours of frustrating work into assembling it.

This emotional investment is exactly what Zynga uses to great success with FarmVille, CityVille and other social games. Once someone takes a little time to start building a farm, they become invested in maintain it and hence value it more highly. The more complex and time-consuming the task, the more we fall in love with the creation (assuming the appropriate level of reward) and the more we become engrossed in the game.

The compulsion to create is reinforced by social interactions. Much of the action in these games is about reciprocity: people give you useful things and you’re expected to respond in kind. Reciprocity is a powerful motivator. When someone does us good, we want to return the favour; in FarmVille that translates into spending more and more time playing the game.

Further reading:

• Journal of Behavioural Decision Making – Mixing virtue and vice: combining the immediacy effect and the diversification heuristic
• Journal of Consumer Research – Stigma by Association in Coupon Redemption: Looking Cheap because of Others
• Journal of Marketing Science – Zero as a Special Price: The True Value of Free Products
• Snoop: What Your Stuff Says About You by Sam Gosling
• Foundations of Human Sociality – Measuring social norms and preferences using experimental games: A guide for social scientists by Colin Camerer and Ernst Fehr (PDF 150KB, pp.40)

Human beings are social creatures–not occasionally or by accident, but always. Sociability is one of our core capabilities, and it shows up in almost every aspect of our lives as both cause and effect. Society is not just the product of its individual members; it is also the product of its constituent groups. The aggregate relations among individuals and groups, among individuals within groups, and among groups forms a network of astonishing complexity.

Clay Shirky, Here Comes Everybody, 2008

Unlike real-world friendships, The Web has affected the number of relationships you can have and maintain and the intimacy of those relationships, enabling us to create different types or groups of friends. The astonishing complexity that Clay Shirky identifies is suddenly made infinitely more complex and abstract through digital media.

We now have communication tools that provide the flexibility to match our social needs and as a result are discovering new ways to make friends. These tools — better known as social media or social software — provide us the ability to share, cooperate with one another and indeed take collective action, all outside the traditional clubs and groups to which our parents would have been acustomed. These tools have had a profound affect on how we distinguish or describe friendship.

An online friendship is better described along a spectrum defined by the actions people take and how we feel about them.

Mike Arauz (permalink)

Mike Aruz identifies 7 stages of online friendship in the above visual. These are:

1. Passive Interest — This is the easiest level of engagement. It asks the least of your friends, and achieves the least commitment from us. But, it’s the crucial starting point. I follow my curiosity to you, I’m interested in what I find, and I choose to pay attention. This stage is epitomised by repeated visits to profiles, blog readers, and the so-called fans and followers.
2. Active Interest — This is when I care enough to let you know that I care. It’s a small step, but a big opportunity for you to identify key members of your audience who are candidates to move along the spectrum. We don’t yet expect a response, we’re just letting you know that we’re listening. This is commonly experienced on Twitter, where you can respond to my tweets, even if I’m not actively following you. I can then decide whether you’re worth looking up. It’s really the starting point of a conversation; Hey I’m interested in what you have to say, you may be interested in what I have to say.
3. Sharing — At this point the audience member starts to become a fan. You and your work become part of my identity as I use it to talk to my own friends about what interests me. I also have made myself more valuable, because I am now partly responsible for the spread of your ideas. This is typified by retweeting comments and links, using social bookmarks to save useful web pages and posting references and content to my own websites and social network profiles.
4. Public Dialogue — This is the first phase that requires action on your part. I have either demonstrated an Active Interest or have Shared your work with my own friends. You foster a relationship by responding to my interest in a public forum such as Twitter and to some extent Facebook. By doing so, you make the rest of your friends aware of my existence, and welcome me to the group. This is signalled by @replies in Twitter, referrals in a blog post, references posted on other [important] websites and profiles.
5. Private Dialogue — At this step, we begin to transform mutual interest into mutual trust. This really is the “major hurdle” that has to be overcome for a “digital friendship” to really mimic those found in the real world. We are willing to share thoughts, ideas, experiences with each other directly. We trust each other with direct access, which has increasing value in an increasingly always-on world. Direct messages on Twitter are just the beginning. At this stage we freely exchange private contact details such as mobile phone number and email address, which allows us to take the conversation beyond the social networks and into a more intimate realm.
6. Advocacy — At first glance, Advocacy looks a lot like Sharing. But, the crucial difference is that Advocacy means that I am making an explicit recommendation of you to my friends. I am in effect putting my reputation on the line for you; there is the implied understanding that with this recommendation comes the obligation not to let me down. It’s too easy now to simply share, all it takes is one click on your bookmark tool bar. Choosing to actually say, “This is important. It’s worth my friends’ time. And I’m willing to risk my own reputation to convince my friends to check it out.”
7. Investment — The pinnacle of online friendship. This is the most difficult achievement to recognise or quantify. But it’s the most important because it represents the willingness of your friends to take action on your behalf. Investment may not be entirely altruistic since your wins may become my wins. It’s a little like the self-propagating “old boys” or alumni network, which, while sometimes seen in a negative light, are successful in maintaining and extending relationships.

Some people have several hundred Facebook friends, thousands of blog readers and tens of thousands of Twitter followers; I’m thinking more @stephenfry than @whatterz here! Where these relationships were once considered merely an audience, they are developing into what people are now considering as friendships. I’m not so sure friendship is really the right choice of noun quite yet, since offline interactions are still important, but people who can cultivate meaningful relationships online have a lot to teach not only other people, but brands who are trying to figure out how they fit into the world of social media.

If you’re already working with video on the web, an online editor is fast, easy and free. In theory, these services could bring video editing to people who would otherwise never engage in it. People already engaging in video editing can benefit from automatic software updates and the sharing made possible by online communities.

Here’s a brief look at some of the services out there in the ether.

JumpCut

Jumpcut, acquired by Yahoo in 2006, lets you upload video, photos, and audio, or import from Flickr or Facebook, and edit using a Flash interface. Jumpcut is the most developed of the editors, allowing you to add a long list of effects, transitions, and captions to the videos. It also incorporates fine grained control of trimming and audio levels (uploaded background audio and voice). The complexity of the interface makes it great for detailed edits and mashups, but borders on being too heavy an application for the internet.

Checkout the Jumpcut website.

Eyespot

Eyespot is a fully featured editor like Jumpcut. It has a drag-and-drop interface that lets you upload video, photos, and audio and then add transitions, effects, titles, and music. The editor isn’t as attractive and easy to use as Jumpcut’s, but Eyespot offers a good deal of free media sets from partners like The Colbert Report, Public Enemy, and Dreamworks Pictures. Eyespot’s white label editor is becoming available on more and more sites, with the NBA being a prime example.

Checkout the Eyespot website.

Cuts

Taking a slightly different tack, Cuts is a great example of a Web 2.0 “mash-up”, where two online applications are merged. In this case a video is taken from YouTube, MySpace or Google and you cut, loop, add preloaded sound effects, and insert captions to enhance the original. Editing is straightforward, consisting of changes to the sound, caption, and navigation levels for the video. Every edit can be re-cut, embedded, and emailed. In the future, Cuts will be expanding into simple editing for digital movies and TV shows.

Checkout the Cuts website.

Motionbox

Motionbox is best known for deep tagging videos, but they also have an editor that is ideal for trimming your Motionbox content and joining the videos together.

Checkout the Motionbox website.

Photobucket

Photobucket leverages the most recent Adobe Flash tools. Unlike other services, users can “mash up” video clips with audio files and photos, and add effects and transitions.

Checkout the Photobucket website.

So why the big deal?

Software is moving from being packaged, where you develop for a particular operating system and put it in a box, to being developed and distributed over the internet and being designed to run across operating systems. That’s where all the innovation has moved to. Software isn’t as OS-specific anymore, it’s moving to rich internet applications. It’s a sea change in how software in general is being built.

Adobe’s Kevin Lynch on AIR’s Open-Source Road to the Desktop.

What is Adobe offering?

Adobe hasn’t developed a cohesive online suite like Google Docs and Zoho, but they are developing a series of applications that will, given time, challenge for position.

Buzzword

Buzzword, originally developed by Virtual Ubiquity, is a web-based, highly collaborative word processor built on Adobe’s ubiquitous Flash platform. This online editor really excels in “what you see is what you print” (WYSIWYP) functionality. Unlike the slightly clunky Google Docs and Zoho Writer, using Flash allows Buzzword to handle page layout in a way that is not possible with HTML. Buzzword also offers online collaboration via its sharing feature, which, like Google Docs, allows users to invite others to read, edit or comment on documents in realtime. Buzzword stores files online so that they are available in a single repository for document collaboration. Work is underway to support Adobe AIR to allow for offline work.

(click on the images for more detail)

You can find more information about Buzzword on the Adobe Labs website.

Share

Share is a free web-based service that makes it easy to share, publish and organize your important documents. Each document you upload to your Share account is assigned a unique website address. To share a document with someone, select the document you want to share, enter the person’s email address and an optional message, and set whether the files will be publicly accessible or restricted only to the recipients. Recipients will get an email with a link they can click on to download the document. You can also link to your documents, or embed flash previews on your own website, blog or wiki. This concept is not new, with Scribd and Issuu being an alternatives.

(click on the images for more detail)

You can find more information about Share on the Adobe Labs website.

Photoshop Express

Adobe Photoshop Express is an online Rich Internet Application (RIA) where you can polish, sort, store, and show off up to 2GB of photos. Furthermore, you can crop, rotate, smudge, tweak, twirl, pinch, correct — or any combination you like — the images. The tool isn’t like its more powerful offline sister, it is more like the photo editing website Picnik. What’s interesting about the Adobe offering, is the fact that Photoshop Express comes with 2GB of free storage for your photos, which makes it less of just an online tool, and more of an online service. The 2GB trumps Picassa‘s current 1GB.

(click on the images for more detail)

You can find more information about Photoshop Express on the Adobe Labs website.

Brio

Brio, currently in Beta, is a personal web-conferenceing service that enables you to instantly communicate and collaborate using your own online meeting room. Brio offers screen-sharing, full multi-party video, VoIP, teleconferencing, whiteboarding, chat and shared notes; all via the browser.

To start a meeting, just go to your meeting room and invite others to join you at the same URL. As the host, you will need to download a small Brio add-in in order to share your screen. Meeting attendees will not need to download any software unless they will also be sharing their screen. There is no need to schedule meetings in advance.

(click on the images for more detail)

You can find more information about Brio on the Adobe Labs website.

Integration and Offline Access

Although each of these tools work independently of one another, using different sign-ons, it is a very real possibility that Adobe will adopt a similar route to that of Google, Microsoft, Yahoo and Zoho and integrate their online products into a single cohesive unit with one sign-on; the Adobe ID.

Plans are already afoot to integrate the Buzzword and Share tools, both of which sit naturally together. What would be more interesting would be the integration of Photoshop Express with these tools so that you can, for example, edit images embedded in a Buzzword document.

The Future

Adobe has stiff competion from the offline, desktop applications. This is where AIR enters the picture. Adobe said, as far back as September 2007, that they would create a version of Buzzword in AIR. This has yet to be envisaged, but the rumblings from Adobe suggest that this development is still in the works. Bringing Buzzword to the desktop would be an extremely significant step, making it a very real alternative to desktop word processors.

All that is required now for Adobe is to implement a spreadsheet and presentation application. Whether they buy in these tools, or use their existing skill set is the question. On current form, and if the acquisition of Virtual Ubiquity and its Buzzword product is an indication, Adobe are likely to be keeping a keen eye on existing technologies being developed by third parties. For example SlideRocket is a viable contender for presentations – built in Flash and with an AIR client; the user interface even looks similar to the above products. Or there is blist for spreadsheets that again is built on Flex/Flash technology.

Keep an eye on Adobe Labs for their latest developments. You will notice developments in areas such as RSS with myFeedz, colour theming with Kuler, and a competitor to Microsoft’s Sharepoint and Google’s Sites called JamJar.

A decade later it was the turn of a much-evolved AOL to speculate with the purchase of a small and upcoming social networking website, Bebo, for $850m (£425m). This has raised a number of eyebrows since AOL has been a struggling web-portal after its merger with Time Warner, added to the fact that the real value of social networking has yet to be realised or understood.

Both deals in their respective decades offer to the casual observer a paradox of the Internet revolution. Whilst both email and social networking have the premise of being the next big thing which aides revenue generation, it is dangerous to assume that each service can standalone and generate revenue in its own right. Webmail, now over a decade old illustrates this perfectly. Microsoft, Yahoo!, Google and AOL all have their respective webmail services with advertisements stratefically placed to entice the user to click through, but these are a small part of the bigger networks. The offer of email, free archiving, address book and calendar is cheap to deliver, but its primary purpose is to keep the user engaged with the brand and its associated websites, making users more likely to visit the affiliated pages where advertising is more effective.

For instance, I am a fully signed up member of Google and access their email, chat, documents, analytics, webmasters, adsense, adwords, calendar and checkout applications, etc, some of which have advertising and all of which support the core Google search pages through branding. A similar example can also be said of Yahoo!. I again frequently use Yahoo!s MyBlogLog, Flickr and Upcoming services, which serve to re-inforce the Yahoo! brand and web portal.

Social networking will become a ubiquitous feature of online life, but that does not mean it is a business.

From whence came webmail now comes social networking. The implicit values of social networking services such as MySpace, Facebook and Bebo have been increased by the big internet and media companies such as News Corporation, with their purchase of MySpace for $580m (£290m) in 2005 and Microsoft’s $260m (£130m) investment for a 1.6% share in Facebook, in late 2007 (valuing it at an enormous $15bn/£7.5bn). But valuing these online services so highly does not mean that there is a valuable revenue model; Facebook’s revenue for 2007 was a mere $150m (£75m). Sergey Brin of Google also admitted that the monetisation of their Orkut service and social networking in general was proving to be problematic (they also have a contractual agreement with News Corporation to offer advertising on their MySpace service).

Facebook has also been met with criticism and difficulty when trying to monetise its service with a project called Beacon. Facebook’s idea was to inform users’ networks whenever an item was purchased therefore creating what is in effect a recommendation system, or algorithmic word-of-mouth. Users rebelled and privacy advocates shouted loudly, the service was axed and Mark Zuckerberg, Facebook’s founder, was left to apologise for an innovative idea badly implemented.

Whilst social networking does have oportunities to make money, it is unlikely that it will be pots and pots of money. The value of the service, however, is not monetary, but as its genre suggests, it is social. We have already seen how people can connect to past and present friends, but a social networkings strength is in its ability to forge new relationships, business or personal. Social networking has made explicit the connections between people, which has lead to a whole ecosystem of applications built on their APIs which allow users to interact.

But should users really have to visit a specific website to be social?

I often comment that there is something profoundly wrong when people are forced to spend their lives updating their profile to keep in touch with their so-called friends. What happened to the good-old-fashioned telephone? Why don’t people simply arrange to meet up and go for a drink to keep in touch? Of course, with everyone’s increasingly busy lives, it is possible to argue that posting a tweet via twitter, posting an article on a blog or updating your Facebook profile, allows you to continue a real relationship with your friends, whilst not actually needing to see them every Friday or Saturday night. This is a good thing, right?

Another problem presented by today’s social networks is that they are an enclosed ecosystem, at least to users. Whilst Facebook and LinkedIn, in addition to a whole host of others, have provided APIs for developers to encourage them to interact with their services (this has been particularly successful with Facebook) the same cannot be applied to users. The various social networks, until recently, have been reluctant to allow users to pass data between competing services, afterall, this data is core to the success, or indeed failure, of a site. This is understandable since the networks’ huge valuations depend on the sites maximising revenues and page views, so they need to maintain a tight control. As a result, keen Internet users maintain a plethora of online accounts.

2008 will see a change in how people access social networks.

The opening up of social networks, lead by Google with their Open Social API, is set to bring about an evolution in this medium. This change is following the historical standardisation of popular services. First it was email with webmail, which in the early days was restricted to individual ecosystems, for example AOL and CompuServe, then it was instant messaging, with individual services provided by Microsoft, Yahoo!, Google, AOL and Skype.

Further developments include the Data Portability Working Group, whose mission is to put all existing technologies and initiatives in context to create a reference design for end-to-end data portability. In short, allow users to move their data around competing services. Others are pushing OpenID; a plan to create a single, federated online sign-on system that people can use to access many websites.

The opening of social networks is likely to accelerate thanks to the first tentative, yet bold, steps made by webmail; the first social network. As a technology, webmail has become old fashioned, but its younger sybling, the social network will revitalise not only webmail, but online communication and advertising. Through social intelligence, marketers and advertisers will be able to target adverts for items that we are more likely to want. This will not only boost the users online experience, but provide a more targeted revenue stream.

The fight for social networking dominance has been running for several years now, but it shows no sign of letting up.