Friday, November 28, 2014

Interest and Engagement

The reason that interest and engagement are often blurred into one another is that they do, in fact, have a number of factors in common.

First, the willingness of an individual to give interest or maintain engagement in a task is largely a comparison of effort to benefit.  It is as simple as a causal relationship: If I do this task, then I shall gain its benefit.  This is followed by the assessment of whether the benefits of a task in question are worth the effort that remains to be expended in order to complete it.  A person can be immediately disinterested in starting a task if the equation seems unfavorable, or they may disengage even having started if they reach the same conclusion.

The benefits and efforts of a task are often difficult to gauge.  In the business world, each benefit and effort is monetized to reduce the equation into the simplistic mathematics of money and a "return on investment" is calculated for an array of options, to be considered or compared.   This practice is flawed in that it fails to consider anything that cannot be monetized - from the perspective of a business that cares only for the sums of money it will spend and receive in the short term, this gap is unimportant - but from the perspective of an individual (employee, customer, or other stakeholder), money is often a factor of minor importance.

In our private lives, we make the same assessment in a more qualitative way: we do always not seek to make money for doing something, but to gain pleasure, emotional comfort, intellectual stimulation, and other functional or psychological benefits that do not translate into dollars and cents - nor do the "costs" of undertaking a task monetize so easily: how much is half an hour of "spare" time worth, or what is the money value of doing something a bit boring or unpleasant for that amount of time?

Coupled with this effort-benefit analysis is the level of risk (the likelihood that the effort will indeed produce the benefit expected) and the opportunity cost (other things that could be done with the same amount of time and effort that would achieve a greater benefit).   All three of these judgments contribute to becoming interested in a task that has not begun as well as remaining engaged in a task that has already commenced.

While interest and engagement are similar in that an individual assesses whether achieving a benefit is worth the effort, the manner in which effort and benefit are considered differs greatly between the time before a task has begin and when it is in progress - and failure to recognized those differences leads to inefficiency, ineffectiveness, and even counterproductivity in designing the experience.

Friday, November 21, 2014

Theory of Moral Sentiments

My study of motivation has taken me even further afield, into the realm of philosophy – specifically looking to Smith’s Theory of Moral Sentiments – only to find that this is not at all a different field, but a different perspective on the same one, in a broader and more general context.  The behavior of consumers is merely a subset of the behavior of human beings, and in that regard Smith has a great deal to offer that, while not focused exclusively on customer behavior, is nonetheless applicable.

Foundational to Smith’s system of morality is the notion that actions are undertaken to achieve an outcome – and that the outcome is (or ought to be) the improvement of one’s own condition.   Even when a person acts in the interests of others,  it is always essentially self-directed in that we seek for ourselves some benefit that is derived from benefitting other people.

This notion translates well to customer behavior and the profession of customer experience: the customer purchases a good or service as a means to accomplish an end – it is in some way of benefit to himself (or his household, or some group of people he means to benefit) – and the clearer the connection between the desired benefit and the means to achieve it, the stronger the motivation.

The customer experience professional is meanwhile motivated by self-interest (increasing revenue to the firm he serves, and which in turn employs him), and enabling the customer to obtain the benefit of the products our employers provide is merely a means to that same self-directed end.

This is important to keep in mind, because some professionals get lost in the world of the customer – which can be a means to greater effectiveness (because success often requires understanding and advocating for the interests of that world) provided that the primary self-directed motive is not altogether forgotten.    It cannot be denied, and should be explicitly embraced, that our ultimate motive is to sell product – in greater quantity and over a greater period of time - and delivering an exceptional customer experience is a merely means to that end.

This dovetails nicely with Smith’s theory of morality – in that very often unethical behavior is not predicated on a desire to do evil, but in the desire to do good, but without the long-term perspective.  To be moral sometimes means accepting less benefit now to gain more later, or even to take on obligations that we find unpleasant in the short term to gain a greater long-term reward.

My sense is that companies are often hindered by the very same short-sightedness – that in seeking to make the most profit right away, they lead themselves to ineffective and sometimes unethical actions, when the consideration of their mission over a broader scope and a greater length of time would keep them on the “right” path, both morally and functionally.

But that may be another matter, and likely has been and will long continue to be a theme of my meditations in this area and others.

Monday, November 17, 2014

What is Creative Thinking?

For many jobs, and in many instances in life, creative thinking is considered to be a critical skill – yet no-one who uses the phrase seems to be able to explain exactly what they mean by “creative thinking.”  The definition is hazy and subjective, and after some consideration I have the distinct sense it will remain so - but what I've stumbled across while studying the topic might lend some clarity.

Mental Modalities

In a very basic sense, the mind works in three modes: mnemonic, perceptive, and creative.   They are generally distinguished by their temporal quality:
  • The mnemonic mode contains thoughts of the past.  We call upon memory to remember experiences and stored knowledge that was gained before.
  • The perceptive mode contains thoughts of the present.  We analyze the sensory data we are receiving in the moment to perceive what exists in the present time.
  • The creative mode projects thoughts into the future.   We leverage our imagination to conceive of what might exist in the future.
In that sense, all people are capable of thinking creatively.  If you can imagine what you will be doing this afternoon or think about what you might be having for lunch, your mind is working creatively.  Only the severely mentally impaired are completely incapable of creative thought.

The Degree of Difference

In common conversation, the phrase “creative thought” does not connote merely the ability to think about a possible future, but a possible future that has a significant degree of difference from the reality of the past or present.

By definition, you are still thinking creatively if your answer to “what will you do tomorrow?” is “the same thing I did yesterday, and the same thing I am doing today.”   But people regard such a statement as boring, mundane, and uncreative.  What will impress them as creative is an answer that suggests something unlike the past and present.   They are not considering whether a thought is creative, only whether it is novel.

And so, the quality that people are attempting to describe when they speak about creative thinking is not merely the projection of the most probable future based upon the recent past, but the imagination of an improbably future that departs significantly from past experience.  Only when you do that will they consider you to be creative.

Too Much of a Good Thing

While people consider it “creative” to envision a future that departs from the experience of a past, the degree of difference tends to fall within a narrow range.   The future you envision must be significantly different, certainly, but it must remain within the realm of plausibility.

A person who expresses wildly implausible ideas that seem to have no basis in known reality and seem impossible to achieve is not considered to be a creative thinker but eccentric and impractical.  Their ideas are removed from the reality of the past and present by too great a degree to be considered possible.

But until a thing is done, who is to say whether it is possible?  The greatest minds throughout history have been regarded with scorn and derision by those who could not accept their ideas as plausible.   Granted, for every great inventor, there are quite a few scatterbrains whose ideas truly are nonsense, but only once a thing has been accomplished is it possible to tell one from the other.

All Things Considered

All things considered, whether a person regards you as a creative thinker has as much to do with themselves as it does with you.   That is, when a person assesses someone else's creativity, it is generally in comparison to his own.

If the ideas you express seem like nothing new or different to them, then they will consider you as uncreative.   If the ideas you express are as different or slightly more different to known reality than their own, then they will consider you to be a creative thinker.  And if the ideas you express are so far removed from known reality as to seem implausible, you’re eccentric.

Perhaps the only objective standard is of the completely uncreative mind: if your idea of the future is no different from the past, then it may be fair to say that you are uncreative. But otherwise, it is a very subjective assessment: how much creativity is enough and how much creativity is too much?   There can be no firm and objective standard.

So, Am I Creative?

Because other people compare you to themselves, they are not a good reference to determine whether you are a creative thinker.   They can be counted on to reliably tell you if you are more or less creative than themselves, but whether that’s good or bad depends on how mundane, creative, or eccentric they happen to be.

And so, as in many instances, you’re better off setting your own standard according to the success or failure you routinely experience.
  • If you have difficulty coming up with new ideas, and most often fall back on a proven but laborious solution, then chances are you could benefit from developing creative thinking skills.   
  • If you are constantly coming up with ideas that you eventually discover are completely impractical, then perhaps it’s time to dial back a bit on the creativity and rely more on established principles.
  • If you find yourself somewhere in the middle, relying on convention sometimes, discovering new and practical methods at other times, and occasionally chasing rainbows, you’re likely in the sweet spot.
And all of this should be considered in the aggregate.  A person cannot and should not be creative at all times – the established methods of doing things often become “the established methods” simply because they work very well and the mental effort to try something different is misspent.  But sometimes, you’ll discover that a new wheel works better and it’s well worth reinvention.  And of course, there is the occasional starry-eyed blunder, for which you’ll simply have to forgive yourself.

Each person must ultimately decide the level of creativity that is most suitable to their own experience – the level that produces sufficient amount of success without too much wasted effort.  A person who has achieved that may confidently comfortably consider himself a creative thinker, and disregard what others have to say, though it seems more likely that it will be an constant area of self-improvement and adjustment.

Wednesday, November 12, 2014

Innovating from a Clean Slate

A common approach to improving a product – whether a physical good, a service process, or some combination of the two – is to begin with the product as it currently is, identify problems that create customer dissatisfaction, and solve those problems.   It is an entirely sensible practice, and one that is capable of making many small, incremental improvements to a product – but it utterly annihilates any possibility of making significant and revolutionary improvements that will create innovative improvements that amaze customers and leave competitors far behind.

The reasons for this are straightforward:
  • The as-is/to-be practice makes the assumption that the “as is” state is generally acceptable and needs only minor adjustments, so nothing revolutionary is ever considered
  • The same process tends to identify many small problems that are easy to address, so people spring to action to make “quick wins” while the bigger and stickier problems are ignored or unaddressed.
  • Where physical products and service procedures are already similar across firms in a given product category, all firms that use the as-is/to-be comparisons see the same problems and derive the same solutions, ensuring that products remain commoditized
Revolutionary improvements require revolutionary thinking, which is a different process to examining and making minor adjustments to what is known.  Innovation on this level requires clean-slate thinking, going back to the very basic assumptions about the problems that customers are facing and the ways in which products provide solutions.

As an example, consider the process of learning a foreign language.   The traditional approach to teaching language is incrementally building vocabulary and syntax: the student learns a number of words and follows models for how they can be arranged into sentences.   This model has been used in both academic courses and professional training, and is highly ineffective: it’s hard to learn a foreign language because it is not taught very well.

For many years, there was not much improvement in teaching methods, because education providers focused on improving the parts of their pedagogy without reconsidering the entire system of teaching.   That is, those who sought to improve instruction came up with different sets of vocabulary words, tailoring courses to business discussions or the common problems of international travellers – but learning vocabulary was still a matter of rote memorization of the names of things and actions out of context.  Likewise, it was recognized that classroom education (having to be in a certain place in a certain time) was inconvenient, so lessons were recorded into books, tapes, and videos that could be portable and consumed at the learner’s convenience – but the method of teaching was still the same.

These incremental improvements addressed specific inconveniences of the learning process, but kept the process the same – and the process, itself, remained broken.  As such, learning a foreign language remained a difficult and time-consuming process, and one which most people who had a desire to learn another language chose to avoid entirely, giving up on achieving their goals.

Solving this problem, and revolutionizing the language-learning problem, required stepping back from existing practices to ask the question, “how do people best learn to speak a language?” and to consider, simply enough, the manner in which a person who moves to a foreign country learn the language without classroom instruction.

Considered in that manner, it becomes obvious that people do not memorize lists of words in isolation, but learn words that they hear in the context of everyday life.  This goes both for vocabulary (how a given thing is called) as well as syntax (how an action is described in a way that identifies who is performing it and when).   The core problem, which the system ignored, was the manner of learning, not the content of the lessons.

If I’m not mistaken, the first company to solve this was Rosetta Stone, whose courses did not consist of memorizing vocabulary words and conjugations, but instead provided users with the context of a situation in which words were used and modeled the process of remembering language in context, comparing different situations, and assimilating language as part of the communication process.  And it was wildly successful because it solved the real problem.

And again, the real problem had nothing to do with the performance of parts of the as-is process of teaching, but with the nature of the process itself.   So long as education designers focused on improving the parts while ignoring they systemic problem, no significant progress was made.  They had to start over from a blank slate.  And because their competitors remained mired in incrementally improving a broken process, Rosetta Stone constituted an amazing leap forward.

The same is likely true of a great many products, to the extent that “new and improved” has become something of a joke.  Whenever a product bears that label, customers are dubious that the improvement is significant – they often have to search for what is new and different, and are often disappointed by what it is.  A “new and improved” detergent may have a different scent, and “Version 11.1” of a software product adds features that they have no use for anyway.  

Customers have become so jaded to this practice that in order to get their attention, a product has to launch under an entirely different brand to convince them that it is really different – and even then, there is the tendency for this fact to become known and for customers to spread the word that “new brand” is exactly the same as “old brand” (even if there are some minor differences).  Novelty cannot be faked.

Starting over from a clean slate is an exceedingly difficult process because the certainty of current practices and the fear that something different will not work out inexorably bring people back to considering incremental improvements to the as-is process.   “Let’s consider a new way to X” is followed very quickly by “We’ll start by looking at what we do today and considering ways to improve it.”  Because that’s easy, and because that’s safe.

To go a bit further, I will posit that this is the reason nothing good is ever created by a committee.  When people get together in groups, the fear of the unknown becomes a constant refrain in the “innovation” process – anyone with a bold, new vision is corralled back into the herd – and herds are characterized by a desire for safety and skittishness in the face of the unknown.  

But this is a transition to a much different line of thinking.

Friday, November 7, 2014

Estimating Lifetime Value

A colleague recently asked me to help determine the “lifetime value” of a customer, which is a bit finicky and tedious but not terribly difficult unless you obsess over minor details.   I’m consolidating some of the correspondence and substituting a different examples, as it seems useful for making a case for the value of solutions to acquire customers, increase share of wallet, or influence consumption habits – which are all germane to customer experience design.

In its most basic sense, lifetime value represents the amount of money a customer will spend on a product during the course of their lifetime.  This is significant, and often overlooked in transactional approaches to marketing because they focus only on a single sale, which in turn leads them to employ tactics that are geared to getting a single sale – and discourage repurchasing.   I could elaborate on this quite a bit, but it would be a diversion from the present topic.

The relationship company does not seek to make a quick buck through a single sale, but instead seeks to establish a lifetime relationship with a customer and capture all sales over the course of their lifetime.  As such its basis for determining the value of the customer should not be the revenue of a single sale, but the revenue of all sales that can be made to the customer over the course of their lifetime.

Example: Spectacles

Let’s take spectacles (glasses) as an example: it’s plausible to assume that a customer will purchase a new pair of spectacles every two years from age 18 to 80.  And yes, this is a “plausible assumption” as will be all figures in these examples – research could derive a more precise number, but for now I’m merely ballparking, so a plausible assumption should suffice.

And so, a pair of spectacles every two years for a period of 62 years (ages 18 to 80) results in the purchase of 31 pairs – which I’ll round down to 30.   If the average price of a pair of spectacles is currently $400, the customer represents $12,000 in lifetime value to the company that succeeds in forming a lifelong relationship with him, such that he returns to them for every pair of spectacles he will ever need.

That is a basis for his lifetime value to the vendor – and it should already become clear that a firm that considers the customer to represent a $12,000 stream of revenue should value him more and be willing to invest more in cultivating a relationship than does a firm that sees this customer’s value as a single $400 transaction and ignores the lifetime value of the customer.

The Basic Elements

I’ll pull the basic elements of the equation together in a general sense, which is a bit tedious but necessary to applying it to various products:
  1. Duration of use – How many years will the customer purchase the product?
  2. Frequency of use – How often will the customer purchase the product?
  3. Unit price – The current price of the product
The equation, then, is to multiply duration of use by frequency of use (which derives the number of units they will purchase over that duration) and multiply that by the unit price to derive the total lifetime value of the revenue expected from a customer if you can manage to capture it.

That’s all you really need to know (or estimate) to calculate lifetime value of a customer for a given product.   A few examples show how it can be applied to various products:
  • Automobiles – If the average customer purchases a new car every four years from ages 18 to 80, this means they will buy 15.5 cars in their lifetime.  And if the average price of a car is $30,000 then customers have a lifetime value of $465,000.  The equation is: ((80-18)/4) * 30,000
  • Coffee – If the average office worker purchases two cups of coffee from the cafeteria in their workplace each working day (200 per year) from ages 22 to 65 at a price of $1.89, then the lifetime value of their coffee purchases to the cafeteria is $32,508.  The equation is: (65-22) * 2 * 200 * 1.89)
  • Diapers – If the average household has two children, for whom they purchase 24 diapers per week for the first two years of their lives, and a 24-count package of diapers costs $12.50, then the lifetime value of that household to a diaper brand is $2,600.  The equation is 2 * 2 * 52 * 12.5
These figures are, again, approximations – and would need to be fine-tuned by research, but the basic calculations should be good enough for a ballpark estimate of customer lifetime value.

Adjustments to Duration

From these examples, it’s already plain that certain products require adjustments to the basic equation.  For example, the office cafeteria captures only 43 years worth of business (because people don’t begin work until age 22 and retire at age 65) and the diaper brand sells to a household for only four years (because the product is only purchased during the first two years of life for each of the two children).

The duration of use is somewhat hazy and is the most influential factor in the outcome of the equation, so it’s worth a bit of nitpicking to get it right because small differences in duration can result in significant differences in the estimated lifetime value.

Primarily, when a firm seeks to acquire new customers, their full lifetime value is less germane than their remaining lifetime value – as any purchased made in the past cannot be won.   So if a premium automobile brand accepts that most people can’t afford its products until age 40, it must start its equation at that age rather than at age 18.

I would be more cautious about adjusting the age at which a customer ceases using a product, as many firms look to current customer behavior to conclude that they only keep a customer for a limited time – if your current customers stay with you for eight years, then switch to another brand, that should not be accepted as inevitable in all cases.  Unless there is a plausible reason that a customer will stop using the product altogether, you should not passively accept that you will eventually disappoint them into switching to another brand, but instead work very hard to prevent that from happening.

Adjustments to Frequency

Frequency of purchasing is another factor in the calculation of lifetime value that is based on the assumption of constant and consistent use.   For a ballpark estimate, it is likely sufficient to look at customer behavior in aggregate – e.g., a person purchases a new car every four years is an estimate based on all car buyers.

In some instances, this can be adjusted by market segment: by definition, the average customer exercises average behavior – but if the customers that a given brand attracts are skewed to purchase more or less frequently than the customers of other brands, then the equation must be adjusted.

There are also overall trends in society that can be observed.  For example, the recent economic downturn has people holding onto their cars for longer, and it is now more typical to purchase a new car every six years rather than every four.   There is some debate over whether behavior will return to normal after the economic crisis has passed, or if six will be the new standard – but at least for the present, the frequency of purchasing should be adjusted.

Share of wallet is another factor that affects frequency, and it is adjustable.  For example, a customer may dine in restaurants 150 times a year, but only visit your restaurant 25 times a year.  A marketing initiative to get them to come to your business more often can have a dramatic effect on their lifetime value to your brand.

There are even initiatives that can increase frequency of use for a product category – convincing customers to change their purchasing behavior in general, such as to dine in restaurants more frequently in total and not just at a specific location.  But both this and share-of-wallet are factors that can be changed, so the difference in lifetime value is only germane to a project if the goal of the project is to increase frequency of consumption.

And finally, frequency may not be perfectly linear.   A customer may purchase more frequently at different times in their life.   Sticking to restaurants as an example, people in their early twenties may not have the financial resources to dine out as often, when they get married and settle down they tend to dine out less often, when their children leave the nest they may dine out more often, and once they are retired and living on a fixed budget they may dine out less often.   If these variances are significant, they should be accounted for.

Adjustments to Unit Price

For the sake of comprehensiveness, I’ll mull over the adjustment to the last factor: price.   This does not seem to be quite as significant, because prices do not tend to fluctuate much from a point of equilibrium with the market – and though poor pricing strategy can be harmful to the revenue of a given brand, it generally does not affect consumption.

While it is true that nominal prices tend to increase gradually over time, this is generally in pace with the decrease in the value of money over time.  Accountants use discounting rates to reflect that a dollar that will be earned in five years is worth less than a dollar that will be earned today.   But if you expect that increases in price and debasement of money are more or less in balance, the difference ought to be negligible.

It is likely far more important to consider not merely the lifetime revenue to be received from a customer, but the lifetime profit that will be derived from this revenue.   For example, it’s all good and well to predict that customers will spend $400,000 to purchase all of a given product they will ever consume, but the suppliers will generate different levels of profit from that amount based on their cost of providing the product to the customer.   One firm might make a net profit of 8% ($32,000) from that revenue whereas another might make only 6% ($24,000).

Ironically, cost accounting is an idea with which most firms are already familiar, and they project their costs and revenues into the future when determining ROI and making efficiency improvements … to cut costs by 2% means generating a specific amount of revenue per year.   For projects whose primary benefit is decreasing costs rather than increasing revenue, this becomes very important.

And That’s About Enough

I’m going to stop grinding on this for now – and possibly for ever – because there is a great deal of elaborate and intricate detail that can be applied to perfecting the calculation of lifetime value of a customer, and it’s really something that accountants should be enlisted to help with if you need your figures to be precise.

But insofar as deriving a figure that’s reasonably accurate for the purpose of considering whether the investment in customer experience is worth the cost, this will likely give CX professionals a good way to derive a ballpark estimate as a quick test as to whether a proposal is worth undertaking.

Monday, November 3, 2014

Prestige Brands

I noticed someone using the word “prestige” in the context of brands.  It was a memory slip, I’m certain, as she was referring to the level of quality between standard and luxury brands, which is more commonly referred to as “premium,” but the use of the word “prestige” was interesting in its implications.

Prestige is usually in reference to a person or an institution, not a product or a brand, but as brands are often spoken of as if they had a personality or were synonymous to a company, it’s not so farfetched to consider a brand to be prestigious.   Prestige implies respect and admiration felt for someone on the basis of our perception of their characteristics or accomplishments.

We feel respect for brands for the very same reasons.   But it seems to me that respect and admiration are independent of their categorization: premium and luxury products have significant prestige, but a standard or economy product may be prestigious when we feel some degree of respect for the accomplishments of firms that produce mass-marketed goods.  Ford, Microsoft, Walmart, and Coca-Cola are all brands that have prestige, but do not fall into the premium or luxury categories.

In practice, prestige confers a kind of domination: we defer to prestigious people and institutions without question because we presume that they have merit, simply because they are prestigious.   A brand’s prestige may have the same effect: once it has become “the leading brand” in its category or gains a significant reputation, consumers no longer consider its merit through any deliberate process, but simply assume that it has prestigious qualities.

But on the other hand, prestige also relies upon distance.   We are more likely to have admiration and respect for legendary people whom we have never met, whether they are remote to us in distance or in time.  A person, after their death, often accrues greater prestige than they ever had in life.  And celebrated persons are often more greatly admired from a distance than by the people with whom they interact regularly.   The more intimately you know someone, the more familiar you are with their flaws, and the less you are likely to idolize them.

That’s not to say that familiarity always breeds contempt, but merely that it dispels the romantic notions we may hold.  It is very often so when the “real” person fails to measure up to the legend that has granted them prestige.  And again, the same may be said of brands: we admire a brand because others seem to admire it – but when we purchase the product we may find that it does not live up to the expectations that were set.

Perhaps a better way to distinguish this is considering the assumed versus earned prestige of a brand.   Before a consumer uses a brand, he assumes it has a level of prestige - this is belief without proof.  After he has used it, the brand may have earned prestige through his experience.   And more to the point, a brand must meet expectations in order to maintain its prestige.   When the brand falls short of expectations, it loses prestige.

There’s also the relationship, in conspicuous consumption, between brand and user: we believe a person who has prestigious brands has earned them, or believe that we can be perceived as better than we are by associating ourselves to prestigious brands.

In all, this has been a meandering post, jotting down some early thoughts and impressions about the notion of prestige as it applies to brand.   I’ll likely write something a bit more focused when I have it better sorted out.