Archives for August 2010

Back in May, David Streitfeld wrote this article about how, and why, people in the US aren’t paying their mortgages.  While it was one of the most troubling articles I have read in a long time, since then, I have spoken with a lot of people who think it’s crazy to make mortgage payments these days.   The thinking is that it takes at least two years to foreclose, and when they do foreclose, the house will be sold at auction for a fraction of the cost, and if people have the money, they can pay cash for the house and not need another mortgage and have saved a lot of money.

But as I thought through that, I realized that it meant that people don’t care what their credit rating is.  If just about anyone can get a credit card, which seems to be the case, then it starts to look like the credit score the some of us have worked so hard to keep high, is starting to matter less and less in transactions.  I realize it’s not quite that simple, but the trend is hard to deny, or ignore.

So just as the once sacred credit rating is now becoming junk, it’s not so surprising that a different way to judge us is emerging.  The “reputation score” –  that is, how trustworthy we are to participate in a particular transaction.

Jenna Wortham touched on this subject in this article last week, talking about companies like GroupOn, SnapGoods, NeighborGoods, ShareSomeSugar, AirBnB, and KickStarter that allow you to rent things from friends and neighbors in your community.  In the specific case in the article, Wortham rented a robotic vacuum cleaner for something like $10 a day.  This starts to sound a little bit like Ebay for rentals, and I think it is in many ways, and just as Ebay keeps track of feedback about things you sell through their site through what amounts to a reputation score, these other sites have to do the same.

That all makes perfect sense to me, but there seems to be one problem/opportunity here that’s being overlooked.  First of all, a site like SnapGoods only exposes things you want to rent to friends of yours on FaceBook and people you know through MeetUp.  That’s probably OK for the younger crowd that has thousands of Facebook friends, but for people in their 40s (like me) it’s more common to have 500 or fewer friends, and I don’t think there’s enough of a marketplace in a pool that size for the model to work.  The other side of that is for people in their 20s with 3,000 friends, they can’t know and trust all of those people, so there’s a flaw in the model on that end.

But the bigger issue is that if all of these sites have their own reputation score tracker, shouldn’t there be some reputation aggregation going on, like a credit rating, so we can go to one place to see what the person can be trusted to do.  In this case it has to be a little bit more complex, because there’s reputation for paying (large amounts, and small amounts), being on time, taking good care of the things that they rent, and so forth, but it’s not all that complex.  So there needs to be some rethinking there, but I would suggest that there be something like MyIDPal (a little bit like PayPal) that allows you to protect your identity, and transact while adding more nuance to your reputation.

I bet in a year or two there’s a service (even a standard?) for managing reputation scores that places like SnapGoods will have to, well, snap to, so that people can trust the transaction.

-Ric

Lots of things can go wrong in business, but for an established organization, it usually takes something really big.  We saw the big US automakers all almost go out of business because they lost touch with their customers, and that’s unsurprisingly fatal.

Juice maker Odwalla almost went out of business because some E.coli got into their juice and killed some children.  That’s also not a surprise that a major health issue could end a business life.

Companies have big issues and in a lot of cases, it’s how the company reacts to the problem that leads customers to decide whether they will keep buying the products or services of a company.  Tylenol is probably the biggest success story when cyanide was found in some bottles, they immediately did a total recall even though we later learned that it was product tampering in stores that had nothing to do with Tylenol.  But it sent a clear message to consumers that Tylenol cared.

This weekend Peter S. Goodman published this article about three companies that have really made a mess of things recently, namely Toyota (pedal sticking caused accidents and some deaths), BP (oil spill in the Gulf), and Goldman Sachs (selling things they knew weren’t great for their customers but were good for their shareholders).   Goodman’s article is very thorough in explaining many of the things that make them case studies in what not to do, but I think he missed a fairly key point.  He used the Tylenol example, and he also talked about the Audi acceleration problem in the 80s that essentially killed the Audi business in the US for 20 years even though Audi proved it wasn’t their fault.  I think there is a common thread in all four of the failure cases that is a huge danger in a lot of organizations today, which is quite simply that they are selling to people who have a very different set of values, who come from a different culture and when responding to an emergency, you have to do it on their terms, not yours.

I will start with the oldest one.

1) Audi.  It’s pretty uncontroversial for anyone who knows Germany to say that culturally there is a huge value on precision and facts and method.  They are a lot less sensitive than Americans, which is neither good nor bad.  Audi responded in a very German way when it very defiantly shared the evidence that they were right, when the American public just didn’t, and doesn’t respond to that sort of “in your face” discussion.

2) BP.  Similar thing.  England still has a much more pronounced class structure than we have in the US, so when their chairman pronounced, repeatedly that BP cares about the “small people” my guess is that a lot of english people would have been OK with that, but in the US it was far too condescending and adding a thick John Gielgud-like british accent on top of it didn’t help.  They finally figured out that they needed some american voices behind the microphone, but that was too late for Tony Hayward, the CEO who made more than his share of gaffes, including wearing much too formal clothing at the scene of the spill, and saying things like “I want my life back.”

3) Toyota.  Ditto.  Goodman mentions this in the article, but I think he makes too light of it.   The leaders of Toyota did what would be expected in Japan, to try to save face and try to find some other explanation.  They should have looked at the Tylenol case to get a sense of what makes sense in the US consumer world, and they would have fared far better.

4) Goldman.  This one may seem like the odd one out, but it’s actually pretty much the same, only this time the cultural difference isn’t a national one.  Executives at Goldman know that their #1 goal is to deliver shareholder value, and they know that certain types of banking are really complicated.  The average american doesn’t realize how complicated banking can get, and they also don’t realize that the #1 goal of companies not to deliver huge profits (if that were the case Microsoft stock would be doing a lot better), it’s to deliver shareholder value.  Even though what Goldman did still seems pretty dodgy, they still delivered shareholder value.  Their big mistake was not figuring out a way to communicate with the general public in a way that would resonate with them.  They stuck with the Wall Street speak and that really got them in trouble.

So the big risk is that if you are selling to people who really come from a different culture or have a different set of values, when you make a mistake that effects them, your response has to be on their terms, reflecting their values and expectations or you could be in real trouble.   It takes some real rethinking, but it’s worth it in the long run.

-Ric

One of the core points in my book Rethink is to help people on getting really clear about who their customer is and what the customer does, and doesn’t, value.

That may seem like an obvious and simple point, it actually can become pretty complicated pretty quickly.  That’s because companies don’t just have one customer, and quite often they don’t even know their name.  If the majority of your customers are 13 year-old girls in low income households, what they value is probably going to be radically different from a group of 44 year-old affluent male customers.  Then to complicate things further, what if both of those segments are actual customers of yours, for the same, or different products?  Do they care if you raise the price of the product by a dollar?  Will they notice, and leave you if you switch to a lower quality ingredient or raw material?  Are they buying it because they like the packaging?  Are they customers purely because of the location of your store?  What would cause them to stop being your customer?  What would it take for them to recommend you to their friends?  If they are buying different products, maybe one of the customer segments is more profitable to you so you might spend more marketing money on them than the other segment(s).  If you decide to make some change, if that causes one segment to away, will you get enough new customers from the other segment(s) to make up for it?

One of the reasons I like the company alice.com is because they capture all of that information and give it back to manufacturers so they can know exactly who their customers are and what they are, and are not responsive to, in terms of ads and coupons.

I heard that the restaurant chain Pizza Hut just decided to lower the price of their smallest pizza to $8, from $10.  I couldn’t help but wonder who cares about saving $2 on dinner so much so that if the pizza was $10 yesterday they would have chosen something else for dinner, but now that it’s $8, they are there.  Of course it’s an incomplete math problem if you stop there.  Unless a person is in a food court where they are choosing between Pizza Hut, a teriyaki chicken place, and a Mexican place, that’s one thing, but in most cases, there is time involved in going to the Pizza Hut, and probably the gas (if you aren’t taking the bus).  These things add up, and while I doubt many people calculate all of these things when they make their decision, it strikes me as a bold assumption on the part of the Pizza Hut folks that by changing nothing else, lowering the cost of their product will bring more customers.  No change in the quality of the ingredients, no change in the recipe, no change in the location of the restaurant, no change in how clean the restaurant is, no change in how friendly the employees of the restaurant are, or the hours of operation.

Wow.

I for one am not a regular at Pizza Hut and the $2 price change isn’t going to get me there any time soon, but I will be very interested to see how successful this change is.  I will be surprised if it has a big impact.  Whoever their customers are, Pizza Hut seems pretty confident that the exact price of their product is vital to the decision about whether to eat there. For me, time is most valuable, so if they offered free delivery, that would be a lot more interesting to me but I still don’t think I would order one.

Do you know who your customer is and what they value most?

-Ric

Credit cards, in their current form, won’t exist in 10 years. “How” we pay for things won’t resemble how we pay for them today.

But I am going to work my way up to that point.

I was reading this article in the paper last weekend by Susan Saulny about the fact that lighthouses have become nothing more than ornamental tourist attractions.

It reminded me of an old (probably untrue) story about an overbearing Navy commander ordering someone in its path to change course or face getting run over.  Back and forth they went over the radio, “you change course!” “No, YOU change course” back and forth and then the final remark in the conversation was “this is a light house, your call.”

These days, with GPS and real time weather reporting, vessels don’t need the light of the lighthouse, they don’t need the fog horn, and they don’t need the nautical flags indicating wind conditions.  They are so outdated now, it borders on funny.

That got me to thinking about some of the things that didn’t even exist when I was little (I am 44):

E-mail

Fax

Overnight mail (FedEx)

Voice mail (telephone answering machines)

ATM

Home video (Betamax, to VCR, to DVD, and now streaming)

The list goes on and on, but the way we pay for things has also changed quite a bit.  Do you remember traveller’s checks and the old Karl Malden TV ads “Don’t leave home without them!”  Well credit cards were still a pretty new thing when I was little, and it was a pretty big deal to get one, especially an American Express card.

Today I get 3-5 letters a week asking me to sign up for this credit card and that credit card.  What that says about banks and consumer behavior is a topic for another day.

But I got to thinking, carrying around a physical piece of plastic with a little magnetic strip and poor excuse for a signature on the back is a pretty poor form of security and in the world of Purell Nation, having all of those other hands on our card, think of all of the germs on those cards . . . it’s almost as bad as the phones they supposedly never clean in hotel rooms (one more reason to love Skype).

So what’s the solution?What’s the future of payments?

Our mobile devices will be the “credit card” of the future.  You would “beam” some information to the merchant about yourself (it could even be your Paypal account – which, at a restaurant you could include in your OpenTable reservation and skip the “beam” step) they then transmit to you the amount you owe, you click some sort of “agree to pay” button and that’s it.  It would also ask you if you want to pay a gratuity, which you could also have pre-programmed to calculate percentages so you don’t have to do that math in your head after a glass of wine.  It’s easy to password protect cell phones, so if you lose it you aren’t going to get hijacked by whoever finds it.  The way things are going, we will be having mobile devices with us for a long, long time, and I really think it will happen swiftly that the credit card will become even less useful than a lighthouse.

-Ric

P.S. I would be very surprised if there aren’t already a handful of companies in Silicon Valley who have already figured this out.

Talk about some great rethinking in the world of health care. . .

$14.1 billion is the current annual cost of child obesity in the US in terms of direct costs according to this article by Natasha Singer.

The new program that is aimed at reducing childhood obesity is really clever and I think that it will succeed on many levels.  Doctors in Massachusetts started this program where they write prescriptions for fruits and vegetables at local farmers’ markets, in what amounts to about $1 a day per person in the household.  The premise is that kids are eating so-called “empty calorie” foods that are the causes of the obesity.  Why do I think this is such a great idea?  There are several reasons:

1) We don’t really know what it will take to cause people to eat healthier foods. This will at least test if the cost of the healthier foods is a major factor in the decision about how much to buy, especially in low income areas.

2) We don’t know how much encouragement is needed to make long-term dietary changes. If people only get the vouchers for a month, will that be enough for them to make the switch and eat a little bit healthier?  Is there any difference between one month and six months?  This program can test that.

3) Raising awareness that this something insurance companies should cover. Wellness is an increasingly large expense in corporate America, as companies educate their employees and offer fitness and diet programs to help them stay healthy and avoid obesity, which is the gateway disease to diabetes, which is the gateway disease to heart attacks, stroke, and a long list of other things.  Wellness should start with children and if these programs can prove anything about what does and doesn’t cause children to lead healthier lives, and as we learn about that, we should start to see insurance companies funding these programs.  Diabetes costs $14,500 per patient per year in the US, you can buy a lot of fruits and vegetables all year long without coming close to spending that much.  And insurance companies are undoubtedly covering a lot of that $14.1 billion that Singer talks about in her article.

4) Kids will be happier. I am not a psychologist, but my bet is that when a doctor sits down with a kid  and talks to them about how to be healthier, I am willing to bet that kid will love the attention and know that there’s another person (beyond parents) who cares about them.  And if it’s done right, my guess is that the kids will be very motivated to make the doctor proud of their progress, and a lot of kids see the same doctor growing up, and I wouldn’t be at all surprised to learn that the longevity of the relationship plays a role in the long term dietary impacts of this program.

5) It’s just great rethinking. We all know how much attention health care needs, and there’s already a ton of awareness raising efforts around health and diet and obesity, and we all know that our doctor is someone we trust who has the ability to prescribe medicine, but to empower them to physically prescribe health, is just great because it makes so much sense.  The “what”, the outcome is very clear, and this is just a super “how” to do it differently.

Are there risks and asterisks with this program, sure.  Lots.  Singer talks about a lot of them in her article, but there’s also so much inevitable goodness and learning that will come from this, it’s well worth the experiment.  I really hope it catches on.

-Ric

P.S. If anyone knows the origin of the “Rx” symbol for prescriptions, I would love to hear about it.

There are a number of things in business that really make you scratch your head if you stop to think about them.

Annual fees, in most cases, are just a nutty thing that we have come to accept in certain industries, and this article by Virginia Heffernan talking about Amazon Prime is a good one (I will get to Amazon in a bit).

When I say annual fee, the first thing that may come to mind is credit cards.  The credit card business, as far as I can tell, has nine of the ten characteristics of organized crime, the tenth being the “crime” part.  How on earth they get away with charging annual fees is not only a mystery to me, as far as I can tell it’s really just a relic from another time.  20-30 years ago it was hard to get credit cards.  People would actually get rejected on their applications.  Cards like American Express literally advertised themselves as a “membership” such that paying an annual fee was like club dues that for all practical purposes are a privilege.  Fast forward to today and credit card companies throw themselves at us in the mail and on TV, and yet in most cases they still charge an annual fee.  It’s just nutty, and it really doesn’t have anything to do with their operating model or their brand to do it.

What is their operating model? The business model of the credit card company is pretty sound and simple, they charge merchants a fee for every transaction.  In most cases they charge a percentage, and that seems a little bit like organized crime because in this day and age, they don’t really have a choice and the use of cash in most industries is all but gone (a friend of mine was in an AT&T store the other day and was paying cash and the people in the store literally didn’t know how to process a cash transaction).  Beyond that money they make because of our buying decisions (so in that sense we are already putting money in their pockets), they charge insane interest rates on the cards when we are late making a payment.   Why they don’t just charge bank interest rates is really odd to me.  Unfortunately it seems a lot of people are bad about planning spending, and/or bad at math and the average American runs a balance over $6,000, and at about 20% interest that’s $1200 a year in interest (probably at least $900 of that is profit) which is a million dollars a year for every 1,000 credit card holder.  .  . so why the devil do they charge an annual fee? And why do people pay them?

Costco is a company that charges an annual fee to shop at their stores, which might sound as cuckoo as a credit card annual feel, but in their case it is entirely sane.  How so?  Costco, by choice, doesn’t profit from the goods it sells, and I have blogged about this before, but it’s not their goal to make money selling their products, which in general are a great deal.  All of their profits come from their membership dues – that IS their operating model and it works for everyone.  it makes a lot of sense and I am not surprised they have been so successful.

Amazon Prime is a little different. Amazon Prime’s fee is a little bit like paying for an upgrade on a flight when you don’t have enough miles or awards to do it for free.  If you buy enough from amazon, you get free two day shipping for everything you buy, which is GREAT.  If you don’t have enough purchases, they will charge you for the service.  In my case, I rarely care whether the products arrive in two days or ten days, so I would never pay for Prime.  It would be one thing if I were buying perishable goods or if I were a last minute gift shopper or something like that, but I would never pay to be a Prime customer.  Having said that, it makes sense to me that Amazon charges people for this if they don’t “earn” it, but there is an actual cost to shipping, and I wonder how they calculate how much to charge? They must crunch the numbers to look at the total actual cost and then divide that by some number of customers that don’t earn it.  You could also do it based on the number of packages, but because of the wide range of quantities purchased by customers, that’s probably not as good a metric.  Anyway  . . . I would be curious to know where the number comes from.

So annual fees for credit cards make no sense, Costco’s makes a lot of sense, and Amazon Prime’s also makes some sense, but I would love to know how they calculate the fee.  These are all good examples of rethinking where you need to be really clear about what your customer cares about and what they don’t care about, and based on that you should be able to make good decisions about when and where, and for what, you are going to charge your customer.  I do think/hope it’s just a matter of time before the credit card business gets a major overhaul or gets put out of business by some mobile version of PayPal.

-Ric

P.S. As an aside, speaking of the actual cost of things, I saw in the paper yesterday that Netflix paid about a billion dollars for digital movie rights for some of the big movie houses so they can stream the most popular movies.  A billion sounded like a gigantic amount until I read further in the article that they spend about $600 million a year on postage, so that makes the billion seem like a bargain when you look at it that way, and combine it with the enormous growth of streaming video at Netflix.