Thursday, July 12, 2018

Bad Ambassadors

The desire of brands to win advocacy is a generally good thing – it causes firms to think beyond the one-time sale, to providing a product that leaves customers so satisfied that they will not only repurchase but also advocate to other prospects in favor of the brand.   However, like any good thing, it can be done to excess – and at some point pursuing advocacy for the sake of having advocates becomes harmful to the brand.

The consumption of a product is for its functional benefits – but the consumption of a brand is often for non-functional benefits.   I add “often” because some brands are valued for their reputation for quality in terms of functional benefits, but in most cases products are commoditized: the offering of one brand is no better or worse than the next in terms of its functional qualities, such that the only difference is psychological.  This is generally true of most crowded markets where product offerings have become commoditized.

One of the chief psychological benefits is social recognition: Brand X and Brand Y are functionally indistinct, but are associated with certain social groups.  “We” use Brand X and “they” use Brand Y.   So the distinction between the brands is social identity – belonging to one group rather than another.   Hence a person chooses the brand that aligns with the identity to a group to which they wish to belong, and shuns the brand that aligns with any group whose membership is mutually exclusive to the desired group.

And therein lies the problem: when a brand is selected by a group that is considered undesirable by its existing consumers, the alignment of the brand becomes unclear: is it still aligned with “us” or is it now aligned with “them”?  And if it is no longer “our” band, then there is no longer any value to being associated with it – and possibly value in distancing from it because it is no longer in line with the identity of the desired social group (and is in line with the identity of an undesirable social group).

Where the undesirable group has selected the product of its own accord, there is very little that a brand can do to regain its esteem: brand exists in the mind of the customer.   If the brand decides to go with the flow, to embrace the new breed of customers it has attracted, it can remain viable, though the character of the brand and the qualities of the market it serves will undergo a dramatic transformation – in effect, the brand will have changed markets.    If the brand resists the flow, rejects the new breed of customers and attempts to retain its loyal market, it may find that it is fighting an uphill battle.   Success at this will be very difficult.

However, it is very often the case that the brand initiated this selection: it marketed to the undesirables in an attempt to grow its market, foolishly believing that its loyal customers would remain loyal even when the brand became adopted by the undesirable new customers.  It seems to be counting ambassadors, failing to recognize that not all ambassadors are good ones.  This is suicide.

Thursday, July 5, 2018

Putting People Before Profit

At a recent event, one of the attendees stood up and proudly shared a very dubious success story:  he had been listening in on a phone call in which one of his company’s service representatives was dealing with a customer who was closing an account, and the rep spent about fifteen minutes with the customer to talk them into keeping the account open with a one-dollar balance in case it would be needed again.   In the speaker’s opinion, the rep had done a wonderful job of saving the account.

Not everyone applauded at the end of his story – maybe three-quarters of the audience – though there is no telling how many of them thought the story truly represented a laudable success or were just clapping to be polite.   It is to be hoped that most of them recognize that what this fellow was praising as a success story was not at all a good thing, and a sign that the company is paying attention to the wrong numbers.

In case it isn’t obvious, the value of a one-dollar account is negligible.  At current rates, a dollar of capital might earn five cents worth of revenue while incurring about three cents in expenses, leaving the company with a two-cent gross profit every year the account remains open.   If the account remains open for fifty years, it will earn one dollar and, after G&A expenses, add a couple of dimes to the company’s bottom line.  Meanwhile, the fifteen minutes of CSR time likely had a fully-loaded cost of around 15 dollars.   Net loss, fourteen dollars, even if you don’t discount the value of future revenues for inflation.

The reason the speaker thought this incident to be a success is because he’s thinking of one statistic: the number of customers the firm has.  It’s likely because he’s being managed to do so – incentivized to grow and retain the number of customers without paying attention to whether the accounts he’s getting and keeping are at all profitable.   The more such accounts he creates and saves, the more his company loses rather than gains on the bottom line.   It's counterproductive performance, and the sign of a siloed and blindfolded culture in which each department thinks of its own goals regardless of their impact on the organization as a whole.  

The firm likely has enough good customers to keep it afloat – it can afford to take some losses.  But this is also a myopic perspective.  Every dollar in expenses incurred to retain unprofitable accounts is a dollar in interest that should be spent on retaining the profitable ones (or a quarter in interest, if the firm keeps the rest for itself).   I checked his company’s interest rates , and they are far below the market leaders – so much lower that it doesn’t make financial sense to do business with his firm.    Chances are, the cost of maintaining unprofitable accounts is at least part of the reason.

How many good and profitable customers are leaving his firm, which cannot pay to retain them because of the losses taken to retain unprofitable ones?  One can only speculate.   The truth is kept well away from the public, and perhaps is even unknown to decision-makers at the company, who continue to watch and press upon their employees to chase a growing head-count without consideration of whether the “heads” are worth having or how long the firm can sustain itself in this manner.

Thursday, June 28, 2018

Defending the Routine

Everyday life is boring and uneventful: people follow their well-worn paths and make little progress through small and safe steps, avoiding risks and anything that is out of the ordinary for them.   And as dull and boring as it seems, we are creatures of habit – and like being creatures of habit.  We will defend our humdrum lives against the incursion of anything that might change the status quo.

While we seek to minimize risk, we do not seek to eliminate it entirely.  We recognize, at times, there is a need to take unusual risks to make unusual progress.  It is not always acceptable to continue along the path of small and safe steps – but instead to take a calculated risk where there is a chance of loss but the potential to make greater than normal progress.

This is not something that most people seek to do often – an unusual level of risk is not part of daily life, and it is not sustainable.   Take any risk often enough, and the odds of failure will eventually play out: the risk-taker will lose, and if he has staked too much upon the chance, his loss will leave him unable to continue to take chances.   He will be physically, financially, or psychologically crippled and forced to change his habits to return to the mundane, until such time (if ever) he is able to recover the ability to step outside of the safe and the usual again.

And while there is an attraction to risk, our appetite for actually participating in a risky proposition is actually quite small.  We often satisfy our desire for risk indirectly – literature, film, spectator sports, and even history provide the vicarious thrill of seeing someone else take risks, attempting to empathize with the risk-taker rather than stepping into the actual role.  

For most people, most of the time, entertainment and fantasy is the extent to which they will engage in risky action.   For the armchair quarterback, his daily life is not at all affected by whether his favored team won the match – though he finds emotional rewards in witnessing this simulacrum of action.   Even if he has placed a bet on the game, it’s seldom enough that winning or losing will make a difference in his life afterward.

This considered, attempts to modify behavior in a significant way – to cajole an individual into deviating from his usual practice – is a very difficult proposition, and the prospects of success are limited if the consequences of gain or loss are significant.   

Thursday, June 21, 2018

Customer Loyalty or Customer Apathy?

In my research into customer loyalty, I’ve come across an interesting paradox: that customers who state that they are not loyal to a brand and even those who feel dissatisfied with its products intend to purchase the same brand the next time they have a need.    It’s not just an unusual few who respond this way: the majority of those who are dissatisfied intend to repurchase the very brand with which they are not satisfied. The percentages vary by product, but it tends to range between 65% and 85%.

In some instances, switching costs can be prohibitive.    There are financial costs, the need to learn to use a slightly different product, the effort and time of identifying a replacement, added difficulty to obtain it, and so on.    Even a less expensive brand may be more costly to use when the fully-loaded costs of acquisition and utilization are considered.

There are also the psychological costs of switching, not the least of which is the humiliation of admitting that the previous decision to purchase an existing brand was a terrible mistake.   Many people will doggedly pursue a course of action they know to be wrong, or repeat it, simply to defend their self-esteem for having made the decision to pursue it in the first place – and the magnitude of this humiliation is even greater when it is an item that is conspicuously consumed, such that others will recognize the change and take it as an admission of a poor decision.

There are also matters of prioritization: rare and lucky is the man who only has one problem to solve and everything else in his life is absolutely wonderful.   So a person may recognize the need to switch brands, and even have the desire to do so, but there are other things that are of greater priority for them – addressing their dissatisfaction with this particular purchase is not the most pressing matter they have to deal with, so they continue to accept partial success while they devote their time and resources to dealing with bigger problems.

There is also the threshold and tolerance for pain, both physical and psychological: a person may recognize something as a problem, but consider it to be a mere nuisance and not worth the time to deal with it.  Because it is not causing them enough pain, it is not worth dealing with.   As a rule, people don’t seek to fix small problems – they may complain, but unless the problem is serious, they are not motivated to invest effort to address the issue.

There is also the fear of change in general.   Even an unsatisfactory product experience is a familiar one, and there is doubt that a different product will actually yield an improvement.   What is unknown is unproven, and arouses suspicion – that it may be no better and possibly worse that the known imperfect solution.   And so, it’s more comfortable to deal with the devil you know rather than face the risk of making matters worse by changing routines.

I expect the precise reasons for “loyalty” to brands varies greatly by the product and its use – but the factors I’ve considered likely come into play to some degree for any dissatisfied customer.  But most importantly is that the statistics and these supporting reasons make it clear that loyalty cannot be taken for granted – or more precisely, apparent loyalty cannot be taken for genuine loyalty.   It may simply be apathy.

Thursday, June 14, 2018

The Pseudoscience of Irrationalism

In my studies of economics, I find myself stuck in the industrial era: the foundational works, which were generally written in the mid-nineteenth to mid-twentieth century.  I keep looking for more current information, considering the economics of the present day, and I am constantly disappointed by the quality of modern “scholarship,” which seems takes the opposite approach, giving further testament to the utter wrongness of the binary fallacy.

Specifically, there seem to be many unqualified scholars who play upon the obvious flaw of classical economics: that it is optimistic.  The classical economists took as a premise that men act intelligently at all times, with full awareness of circumstances and their own long-term self-interest in mind.    So the present-day economists switches to the opposite extreme, taking as a premise that men act unintelligently at all times, with no awareness of circumstances and no consideration of their long-term self-interest.

The problem with both schools of thought is that they suffer from binary thinking: all or nothing, always or never, black or white, with nothing in between.    The presumption is that if something is false, then its exact opposite must be true – which is childish, primitive, and utterly wrong.

Of the two camps, I still gravitate toward the classical – they are not perfectly correct, but they are mostly so.   Man is not a perfectly logical creature with flawless perception – but he is a generally logical creature with fairly accurate perception, in the modern day more so than a century ago because of the accessibility of information.  He is not a hapless fool, but can be fooled.

When an individual is seeking to pursue a personal goal, he tends to act consciously and deliberately, applying his reasoning to the best of his perception and intellect.   Very little is accomplished accidentally – though much is done imprecisely, with imperfect knowledge and imperfect reasoning.

The more challenging the circumstances, the less chance that imprecision will result in success.  If a person is to succeed in high-stakes situations, and to do so routinely, it must be by the application of his best knowledge and reasoning.   And for those who do not think for themselves, they are more likely to mindlessly emulate the success rather than the failure of others.

On a societal scale, the success or failure of a society is merely the aggregation of the success or failure of those individuals of which it is composed.   Hence a culture that fails to apply knowledge and reasoning is not sustainable, and will invariably fall to one that is superior in those regards.  But again, these are generalizations: we can recognize that imprecise or even improper action may sometimes lead to success, and the intelligent man recognizes that this is an exceptional situation whose occurrence is improbable.

And this is likely the proper reaction to the black swan: to recognize that it is an exception, an unusual occurrence that cannot be denied – its truth must be accepted.  But this does not mean that the appearance of an exception disproves a theorem, and it should certainly not serve as the foundation for a diametrically opposed school of thought, or an approach that is based on unusual circumstances.  

Such things are best relegated to the side-show: a curious novelty of no particular significance in the long run.    And this, I expect, is the fate not only of the theories, but the theorists as well.