Tuesday, November 30, 2010

The Persistence of Brick and Mortar

The holiday shopping season is upon us, and the same question seems to come up in every conversation: "who goes to a store anymore?" Given the number of cars in the parking lots of most stores, and the traffic congestion around most retail clusters, the answer seems to be "quite a few people, actually."

This got me to musing about the brick-and-mortar retail industry, which e-commerce pundits have repeatedly declared to be a dead or dying channel, citing a few instances in which online commerce has effectively killed off brick and mortar (travel agencies, record stores, video rental). And yet, brick-and-mortar merchants persist.

It stands to reason that the advantages of the channel are still valued buy a significant number of consumers. And with that in mind, I've been musing on what those advantages might be - and have come up with a fairly good list:

  • Immediate Possession
  • Convenience of Browsing
  • Inspection of Physical Goods
  • Total Cost of Goods
  • Customer Service
  • Payment Flexibility
  • Privacy
  • No Spam
  • Merchandise Returns
  • After-Sale Support
  • Customer Experience

Granted, some of these qualities are arguable, and many of them could be argued either way based on factors such as customer preferences, the item in question, or the vendor in question - and this may bear further reflection at a later time. I could probably write a blog entry on each of the items in the list but for the present one, my intention was simply to do a quick brain-dump of some of the factors that might lead a customer to prefer a brick-and-mortar outlet to online retail.

Friday, November 26, 2010

Does Satisfaction Guarantee Loyalty?

I noticed an interesting statistic today, that 80% of "new" customers reported that they were "satisfied" or "very satisfied" with the seller or brand that they had just left. This flies in the face of conventional wisdom, that a satisfied customer is a loyal customer - after all, if their experience was satisfactory, they should have no reason to switch. The eighty-percent statistic also seemed hyperbolic, so I did a bit more research.

From what I was able to find in other sources, the statistic might be exaggerated, but probably not by much. I found a dozen or so references, and most of them were in the range of 60% to 80%, though they defined "satisfaction" in various ways, so I doubt that there can be an agreement on a precise number ... but all the figures I saw were very high.

There is a fundamental difference between the two, which seems entirely rational: satisfaction pertains to the attitudes about a past behavior, whereas loyalty pertains to the attitudes that will influence a future behavior.

And so, a customer who reports being "satisfied" is reflecting on a choice he made in the past and is being asked, in effect, if that choice was an error. This might be a part of the reason that ratings and reviews are overwhelmingly positive, and tend to be egocentric (see my previous note) - as such, an individual who is asked whether they are satisfied is likely considering how the rating reflects on their judment, not their actual satisfaction.

Granted, this is highly speculative, and I don't expect one could develop a survey question that would avoid that bias to separate "real" satisfaction from alleged satisfaction. But even if ego were taken out of the equation, it remains likely that customers would remain generally positive about past decisions, as it's a reflection of known facts: they can be certain that the product they purchased did (or did not) satisfy their need and that the experience of dealing with the vendor was pleasant or unpleasant. It is known.

Loyalty, meanwhile, depends on the unknown, and requires greater speculation about possible future conditions. When a similar need arises in the future, the customer may have doubts that the present supplier or product will meet their needs in the same way. Or perhaps the nature of their needs will be different due to the situation in which they will be when the need arises. Or perhaps they will become aware of additional alternatives they might have preferred had they been available in the past.

Since loyalty deals with future conditions that are not known, it is unlikely that it can be measured, except by monitoring purchasing behavior - and even then, it is only past behavior that can be observed. You cannot assess whether a customer will be loyal, only that they have been loyal thus far, following a pattern that can change at any time.

But neither can satisfaction accurately be gauged by a survey question. It will always be influenced by the conditions under which the buying decision was made in the past, and it is highly likely to be skewed by the desire to escape the embarrassment of admitting a mistake.

And so, to say that a customer "reports being satisfied" with a past purchase means little to nothing. The (objective) fact that the same person has purchased steadily is more telling of their level of satisfaction - and at the same time, past behavior cannot be taken as a a guarantee of future behavior.

In the end, I don't think that customer satisfaction can be dismissed altogether. A person who has a rotten experience is probably less likely to repurchase from the same vendor, and a person who's had an excellent experience is probably more likely to purchase. So there is some connection, though not as strong as many seem to assume.

My sense is that each purchase of a product presents a unique buying opportunity and a unique buying decision, and the notion that "this brand has satisfied my needs in the past" is one of many factors that drive their decision at each instance in which they find themselves in similar circumstances.

The nature of these factors merits more consideration at a later time - but for the present topic, I'm left with the sense that measurements of satisfaction are neither as reliable nor as accurate as they are purported to be, and merit a bit less consideration than I've given them in the past.

Monday, November 22, 2010

Fewer Customers = More Profit

I read an interesting case study today, one that defies the common belief that, in order to increase profits, a company must constantly grow its market share. The company in question (whose name was withheld) slashed its customer base by 60% and more than doubled its bottom-line profit as a result. How is this possible?

The answer seems entirely reasonable ... the company dumped customers that were not profitable to serve. Fundamentally, it analyzed its customers in terms of the amount of revenue it received, then cross-referenced this against the amount of cost undertaken to acquire and support each customer. As a result, its customer base was split into four groups:
  • High-revenue/low-cost (12%)
  • High-revenue/high-cost (9%)
  • Low-revenue/low-cost (33%)
  • Low-revenue/high-cost (46%)
Naturally, the high-revenue/low-cost is the most desirable of the groups, on which the greatest amount of income is made for the least expense. In the case study, the company felt that it didn't need to do anything more than it was already doing to retain a steady stream of income from these customers.

I balk at that suggestion, as it sounds to me like it's advocating taking good customers for granted, and concluding that paying any more to provide them with better service would not result in an increase in revenue. But I have to concede that it makes sense - and there is a logical point at which a customer is buying as much and as often as he ever will, and additional effort to get him to buy more is pointless. There wasn't sufficient evidence to suggest whether that held true, but my sense is that there was probably a potential for increased profitability with a bit more effort for some percentage of these customers.

On the opposite end of the scale are the low-revenue/high-cost customers. These are customers who will only buy if offered a deep discount and/or require a (costly) effort to get them to buy at all. Even once you've sold them, you have to undertake a similar effort to get them to repurchase. And when you take these costs into account, the company was actually taking a loss on many of these customers - paying more to get them to buy than the company made from the sale. And so, the company stopped trying to get their business.

The high-revenue/high-cost customers were evaluated on a case-by-case basis. These were "primadonna" customers who brought in a lot of business, and felt entitled to volume discounts, special handling, rush service, and all the other "perks" given to high-volume accounts. The problem is that, in some cases, the high revenue was gobbled up by these perks, and some of them were costing the company more to serve than it made from their orders. After careful consideration, about a third of these customers were dumped, just by cutting off the perks (which means that the other two-thirds remained, and that the perks weren't really necessary to retain their business).

The low-revenue/low-cost customers became the focus of the company's marketing efforts - specifically, in determining why these customers were not buying more goods more often, and attempting to coax them into the high-revenue/low-cost category, provided that the amount of effort it would take to win their business would not make them a high-cost customer as well. In terms of investment, these customers gave the company the most additional revenue per dollar spent.

So in the end, the company decreased its customer base to a little more than a third of what it had been - but in doing so, it evaluated the profitability of customers and retained those who generated the most revenue for the least expense. The result was a smaller customer base, but one that was more stable, and a leaner and more prosperous organization.

And as to the customers who cost more than they were worth, the company found that it was better off without them - and if these customers took their business to the competition, so much the better. While it wasn't their intention to saddle competing firms with low-grade customers who would erode their profitability and level of service to their existing ones, it would be a natural side effect.

What's more, the low-revenue/low-cost customer for one firm is generally a regular (high-revenue/low-cost) customer of another, who occasionally buys elsewhere. If the firms that regularly serve these customers are saddled with toxic waste, they are more likely to shop around for a new "regular" vendor, and their top considerations are the firms they've done a little business with on the side.

This last conclusion is largely speculative, and there was no clear chain of evidence that the primary company gained more good customers for having dumped its bad ones on the competition - though it's an entirely plausible notion.

Thursday, November 18, 2010

Ethical Marketing

The core principle of ethics in marketing is simple enough, and appears in virtually every textbook on marketing ever written: the function of marketing (advertising, salesmanship, promotion, etc.) is to help people to identify and obtain products and services that serve their needs.

This notion has been taught for decades, and most will pay lip-service to it, but it's very rarely put into practice. Some have consciously abandoned this ideal, others continue to cleave to it even though their actions are patently incongruous. As such, it's no wonder that no-one seems to be able to get relationship marketing "right." It's based on an ethical principle that is not understood or accepted.

Relationship marketing - in fact, marketing in general, be it sales, promotion, advertising, or whatever - is meant to begin with human needs, and then finding ways in which they can be served. But in practice, marketing often begins with a product or service, then seeks to find a way to convince people they need it.

The difference between ethical marketing an unethical marketing can be witnessed when a seller is presented with a prospect who does not need their product. In such a situation, the ethical marketer backs away from the prospect, realizing that the product or service isn't of value to them, and seeks out prospects who might need it.

The unethical marketer will attempt to pressure the prospect (who, at this point, is more accurately considered to be "the mark') into purchasing it anyway, and there are any number of ticks that can be used to get the mark to pay for something that is of no appreciable benefit. There are a myriad of tactics for doing so, which largely boil down to deceiving the customer into thinking that they need a product so that you can get them to buy things they don't need.

In that sense, relationship marketing is an attempt to get back on the right track: to seek to understand the customer, that you might become more familiar with his needs, that you might offer him solutions to them (even if it means creating a new product or service). But in many instances, it seems to be going off-track: it begins with gathering information about the customer, but the information is used as a means to more effectively deceive them into purchasing an unneeded product.

This is largely the fault of old-school metrics: the success of marketing is measured by the number of products sold, rather than the number of needs met. The two are not synonymous: as taking the former approach places emphasis on pushing product, regardless of whether the prospect has any need for it. The latter acknowledges that there is a certain amount of need, and does not place emphasis on selling any amount of product over and above the amount of need that exists for it.

All of this seems somewhat abstract, so an example might help to concretize it: consider the example of a company that has developed a highly effective antivenin for all north American snake bites - which would be a boon, in that present antivenin requires the precise identification of a species. Given that about 8,000 people a year receive venomous bites (and for purposes of trivia, nine to fifteen die), the maximum amount of need is 8,000 doses per year.

If the supplier is perfectly ethical and perfectly effective in identifying the source of need, they will seek to sell 8,000 doses per year - exactly enough to fill the need that exits. A supplier can still claim to be ethical in selling more than that amount, in order that hospitals and clinics might have it on hand in case they need it, admitting that they are unable to predict with much accuracy when the need for it may arise.

If the supplier instead sets a goal to sell a specific number of doses, without considering the need, it will find itself in unethical territory (intentionally or unintentionally). There might be any number of "reasons" that could be offered for setting a sales goal of 100,000 units when the actual level of need is far less - but in the end, the "reasons" are merely excuses for unethical behavior. The motive is no different than that of any con-man or swindler: to sell as much as possible, even if customers don't need the product.

And this is precisely where marketing fails its stated ethics, to serve the needs of the customers. It's said that a good salesman can sell ice to an Eskimo - and this is the goal that seems to drive behavior. But from an ethical perspective, a "good" salesman would realize there is no need to be served, and offer that customer a different product for an actual need, or seek to offer his product to those who could derive a benefit from having it.

Sunday, November 14, 2010

Redefining Quality

An odd question was stuck in my head - so naturally, I had to do the research and put it to rest so I could think about other things. The question: why doesn't anyone seem to sell "Grade A" beef anymore? It used to be all over the place, and now, all that supermarkets seem to carry is select, choice, and prime. The answer I found is a little disturbing, but worth considering in terms of quality of service and the value of brands.

Simply stated: the USDA changed he grading scale. It used to be "Grade A" (good) was the top grade of meat, "Grade B" (standard) was a lower grade that could still be sold raw, and "Grade C" (utility) was meat that had to be cooked and canned immediately in order to be sold for human consumption. There are lesser grades, mostly for pet food, but A, B, and C were the three kinds that might turn up in a supermarket.

Some time ago, they changed that to a new scale: prime, choice, good (later renamed "select"), standard, commercial, and utility (again, plus lower grades for animal consumption). The first four grades are safe to be shipped and sold raw, and the last two must be cooked and canned. That would seem to imply that the quality of supermarket beef has improved, being as there are now three grades above standard rather than just one. But that assumption is entirely wrong.

As it turns out, "prime" beef - which consumers have been convinced is an ultra-premium grade that only high-end restaurants and specialty markets can get hold of, meets the same standards as the "Grade A" beef that once was readily available anywhere. Meanwhile, "choice" and "select" are the equivalent of "Grade B" beef that was the low-end of meat that could be legally sold raw. And today's "Standard" beef? It is the equivalent of what was once "Grade C" or "Utility" beef, which couldn't legally be sold raw before the standard was changed.

And yes, this may seem a bit like hyperbole and sensationalism, feeding into the food-phobia of the present day, but here's a link to the research - the comparison of current grades and former grades is illustrated on page 41.

What this comes down to is a trick played on consumers, who would generally not accept "standard" or "utility" beef in their supermarkets, but will buy the exact same quality of meat if it's labeled "select" or "choice." In fact, most supermarkets advertise the fact that all the beef they sell is at least "select," and charge a premium for a choice and prime.

I wonder why this hasn't gotten out before now. With all the organic, free range, natural hubbub, the degradation of food standards would seem to be of greater concern. My sense is, if word gets out, there will be a lot of explaining to be done, and a loss of trust in the institutions that are supposed to protect consumers, but instead seem to be conspiring with producers to deceive and cheat them.

In the interests of fairness, it's probably worth noting that cleanliness in the food industry has greatly improved over the past few decades, and that it's probably entirely safe to consume beef of a grade that would have been a bit dangerous twenty or so years in the past, and that consumer insistence on having the very highest grade possible, even when lesser grades are entirely serviceable, is something that merits charging a premium for squeamishness.

But in the end, I'm still left with a sense of resentment about the entire affair: that rather than seek to improve a product to a standard that's higher than the authorities require, the industry lobbied to have standards lowered and redefined in order to make products appear to be "prime" or "choice" without doing anything to improve the actual quality of the product.

It's probably the easier route, and almost certainly the cheaper one, but it seems to me a violation of trust that will, over time, erode consumer confidence across the board rather than strengthen loyalty to the producers that are willing to do more for the consumer.

And to end on a brighter note, there does seem to be some effort underway to "brand" food items that were once commoditized. Chances are, consumers don't know the name of the producer of the meat they consume, and generally don't care - beef is beef - but in future, the degradation of industry standards will add value to branding, such that customers can purchase and become loyal to a specific producer, or a specific vendor, who holds themselves to a higher standard.

Wednesday, November 10, 2010

Burned Customers

As vendors tune in to the notion of relationship marketing, the focus seems fixed on the future - and while I accept the notion that the past cannot be changed, no use crying over spilled milk, and so on, to completely ignore past interactions with a prospect or customer is to overlook barriers to forging a future relationship that must be addressed before the relationship has any chance of moving forward.

The list of individuals a company has "burned" is of little consequence to the mass-media marketing approach: it's generally accepted that a mass-broadcast message is going to reach a large portion of people who are not going to be receptive to the message - whether it's because they have had a negative experience with the advertiser, they find the advertisement itself to be offensive, or do not have the need for the product or the means to purchase it.

However, a one-to-one marketing approach, enables communication to be tailored to the individual (through live sales representatives, telemarketing, direct mail, and new media), companies have the ability to control what they communicate (and decide whether to communicate at all) to each person they intend to reach.

At that level, campaigns can be segmented to the key audiences: to eliminate those who are not prospective buyers, to seek to gain the business of a qualified process, and to seek to improve the relationship with an existing customer, with an eye toward expanding breadth and frequency of purchase.

The list of burned customers should not be lumped into the individuals who are not prospective buyers. Because they once purchased from the advertiser, it's clear that they have the need for the product and the means to obtain it - and as such, they should be considered as attractive a market as any other qualified buyer.

And it's worth noting that not every former customer is a burned customer: some of them have simply taken their business to another provider who, at least for a time, offered a better price or desirable features that were unavailable with the original provider. There's much to be learned from former customers - but that's beside the present point.

Burned customers are an entirely different species: they weren't lured away by a better offer, and I suspect that in many cases they have accepted an inferior one, because their motivation was not to seek out a better relationship, but merely to get out of a bad one.

My sense is that winning back a burned customer is a topic that authors and theorists avoid because it's a very touchy situation, and very difficult to negotiate when you're starting from a disadvantage. But it's also my sense that, if you can get this "right," restoring your relationship can do much for your overall reputation.

At the very least, making amends with a burned customer will decrease their incentive to spread negative word-of-mouth, but it's also akin to a service recovery, and I suspect that if you can manage to win back a burned customer, they will become a very good customer and a staunch advocate.

I'll keep my eyes out for an article or book that examines this phenomenon. I've not seen one to date, and I expect that, since companies are new to relationship marketing, there are still many low-hanging fruit among the population of customers they have not yet burned. But as the practice expands, and the crowd of prospects who aren't already engaged to a competitor becomes thinner, there will be greater interest in pursuing this segment.

Saturday, November 6, 2010

Bank 2.0

I've recently added study notes on a book entitled Bank 2.0 - which, in spite of being written from a European perspective by an author who's a bit overenthusiastic and has a penchant for exaggeration and distortion, is definitely a worthwhile read.

For the past few decades, banks have been laggards in adopting new technology, and have generally shunned the Internet and mobile channels as being fraught with risk, and required customers to yield to the terms and procedures set by the industry in order to obtain service.

Given the increased competition in the industry and a loss of consumer confidence as a result of the recent financial fiasco that resulted in a global depression, much has changed - and much more will change.

The author's vision of the future is overly ambitious in its anticipation of radical changes in the near term: a global economy in which currency issued by nations is replaced by independent virtual money systems and the abolition of not only physical currency but also physical artifacts such as payment cards. Some of these notions fall into the category of "tried and failed," others seem highly speculative - but much of what the author suggests seems entirely plausible, possible, and even likely, though on a far less aggressive time-table than he suggests.

While fascination with technology seems to take center stage, the book describes a change in the relationship between financial institutions and their customers: a complete reversal of power in which stodgy institutions that long maintained the license to dictate terms of service, by virtue of their control over the availability of credit and investment vehicles, must now yield to a customer base who demands service, no longer sees the traditional institution as trustworthy and infallible, and is willing to take their business elsewhere if service does not result in their complete satisfaction.

While less glamorous, this is far more fundamental and revolutionary than the technical gimmickry that tends to take center stage in discussions of future trends.

Tuesday, November 2, 2010

How Bureaucracy Crushes Innovation

The notion that bureaucracy crushes innovative ideas is nothing new, and the notion that a small company with little administrative process can easily out-maneuver larger organizations with greater resources is generally accepted or presented as an apathetic excuse for lack of progress so often that it's become virtually axiomatic. But how does this happen?

My sense (and sadly, my experience) is that great ideas occur even within the confines of heavily bureaucratized organizations, but are crushed before they can come to fruition, largely because of the internal politics. And to escape from yet another abstraction, by "politics" I mean the conflict among priorities among various parties within an organization.

To run through the process:

An innovative idea generally occurs when an individual stumbles across an idea for an improvement to the product, generally driven by notions of quality. The stimulus for most great ideas, I believe, is focused on the needs of the customer, and geared toward some facet of the product that makes it better for the consumer - whether it's the design of the product itself, the way in which it is distributed or marketed, or the way in which the customer is supported after the purchase.

I want to underscore the notion that it is an individual who comes up with the idea. While teams, groups, and departments may contribute to an idea and "help" to develop it, cognition and discovery take place in the single mind of a single person: there is no collective consciousness that causes multiple people to come up with the same idea simultaneously - one person has an idea.

And this is the first stumbling block: the individual communicates the idea to others close to themselves: their boss, their team, their department. At that point, the idea is developed - some people will help to improve the idea itself, some people will compromise the idea to forward their own agenda, some will contribute just to be part of the action.

This is not necessarily evil: those who seek to jump on the bandwagon may be motivated by the desire to undermine the idea, or to claim credit for it, but to assume this is the primary motive of every such person is overly pessimistic. In a healthy team culture, the motivation is simply to help a colleague, and the people who seek to contribute, whether by suggesting ideas of their own or providing a critical perspective, have the intention to improve the idea.

If the innovation survives this first test, it's the presented to others who have the authority to provide resources to develop and implement the idea. Typically, these are the accountants and financiers, whose sole agenda is to determine whether the notion makes sense from a monetary perspective: will it generate a profit? To be worth investment, there must be a return: either by increased revenue or decreased expenses.

Neither is this necessarily evil: the difference between a business and a charity is that the former seeks to make money for its investors. The greatest idea, one that makes the product an ideal solution to customer needs, isn't worth pursuing if the business is going to lose money (or make less money) on every sale because the costs exceed the benefits.

If the innovation survives the accounting tests, there is then a period of development, which includes both the planning stage and the execution stage. This is a minefield for innovative ideas, where there are a multitude of people, each with their own agenda, who will see any new idea as a bundle of opportunities and threats.

And again, this is not necessarily evil. For example, an operations manager might be concerned about the stability and security of the operation for which he is responsible - the resistance to innovation is not necessarily an ignorant fear of change, but often a more rational and calculated concern over the impact of the new development to the existing operation.

And finally, the idea that has made it this far down the belt-line is launched, them managed by operations staff, where the watchwords are "faster" and "cheaper," to which "better" is very often sacrificed. Unless the innovation is for an efficiency improvement, the additional effort necessary to execute upon a new idea is regarded as an inefficiency to be reduced or eliminated. And while the idea might be implemented as intended, over time, changes made to improve efficiency may undermine its effectiveness.

As such, these conflicting agendas tend to crush innovative ideas, or modify them to the point where they no longer achieve their intended results.