Strategic Planning Analogy #466: You’ve Got Personality

THE STORY

Over the past year or so, I’ve been splitting my time between looking for clients for my strategy consulting business and looking for a full-time strategy job.  This has given me the opportunity to talk to a lot of executives at a number of companies.

In the vast majority of cases, I eventually received a rejection.  Now, one might at first think that these rejections would make me feel more negative towards these companies.  After all, they rejected me.

However, just the opposite is true.  After meeting with the people at these companies, I like the companies a lot more.  I feel that I’ll be more likely to patronize them than before and I even feel a bit more loyal to them—even though they rejected me.

 

THE ANALOGY
Before I met with these companies, they were just faceless, impersonal businesses—just words and numbers.  There wasn’t much of any reason to feel any personal connection with them.  But after I met and talked with people in the business, that all changed.  I got to see the people behind the company.  I got to hear the passion in the voices of the leaders.  I got to see people enthusiastically working at the company to do something great.  I got to see the awards in the lobby display cases, hear the chatter in the lunch room.

In other words, the company was no longer a faceless, impersonal entity.  Now it was a real living breathing entity with a personality.  I could feel the drive and the passion.  I could see there were people who cared.  Now I could relate to the business on a deeper, more personal level.  The emotional bonds became stronger, because now because there was a deeper connection.

Most businesses would be tickled to death if they could create these deeper, more loyal ties with their customers.   In my case, these great feelings continued in spite of being rejected.  Wouldn’t it be great if customers had such strong feelings towards your business that it could even overcome an occasional consumer disappointment?

In most businesses, it would not be practical to fly all of one’s customers to headquarters to talk to senior leadership about the business, like I was doing for interviews and business pitches.  But anything a company can do to move from being a faceless, impersonal entity to being a personality that customers can relate to is a move in the right direction.

 

THE PRINCIPLE
The principle here is that the personality of the brand or company matters.  If done properly, it can help deepen the bonds between company and customers.  If done improperly, it can create an image that will turn people away from the company.  Therefore, as part of a strategic plan, one should consider the proper personality for the business and tactics for bringing it alive to the potential consumers.  The personality needs to be managed, just like any other asset.

Example: Best Buy

I first realized the importance of this fact when I was working at Best Buy.  I was shown some research Best Buy had done before my time there.  I believe the research was from the early to mid 1990s. 

The research was asking customers their opinions of the various consumer electronics retailers in the US.  At the time, there was a dozen or so regional retailers in this space who wanted to become national leaders.  It included retailers such as Circuit City, Silo, Highland, Fretter’s, Best Buy, and many others.  Today, all of them have long since disappeared—except for Best Buy.

Did Best Buy survive when others failed because consumers saw it as a far superior consumer electronics retailer?  This research at that time would say no.  In fact, consumers saw all of these retailers as pretty much the same.  On all of the rational variables of retailing (price, selection, etc.), all of the brands were rated fairly equally.  There wasn’t much of any reason to prefer one retail brand over the other.

As I say in my book “The Most Important Question,” one of the most important tasks of strategy is to discover and strengthen reasons for customers to naturally prefer your company or brand more than the alternatives.  In this case, the consumer electronics retailers were failing on this most important point.  There was no reason to prefer a particular store because they were seen as indistinguishable from each other.

That is, except for one little difference.  At that time, Best Buy had a person who would dress up in a costume which looked like a giant price tag.  This walking price tag would interact with customers in Best Buy’s advertising. 

According to the survey, people liked this giant walking price tag.  Why?  Because it helped give Best Buy a personality.  They liked the way it interacted with the customers.  It seemed to enjoy the same fun, entertaining things they did.  It had a personality as being like one of them.

In a sea of faceless competition, the personality which came from the giant Best Buy Tag gave customers deeper, more positive feelings towards Best Buy than towards any of the competitors.  It gave a reason to like Best Buy more, to prefer it.

Now I’m not claiming that all of Best Buy’s success was due to that giant price tag.  Success comes from doing a lot of things correctly.  But I do believe that the uniqueness of having a personality gave Best Buy an edge at a critical time when industry consolidation was about to occur.  It bought time in order for Best Buy to improve a lot of other variables, so that Best Buy could be the superior brand which survived the consolidation.  Without that personality edge, I am not sure Best Buy would have survived the transition.

Lately, however, Best Buy’s future seems to be under threat.  There are many reasons for that, and it will take many changes to return strength to the Best Buy brand.  But I am willing to bet that if you asked consumers to describe the personality of Best Buy today, you would get a lot of negative attributes.

Based on the chatter I read on the internet, Best Buy appears to have lost control over managing that personality.  It is being redefined by disgruntled customers in a negative way.  That is not a good thing.  Now Best Buy has to fight an additional war.  Not only does it need to fix the problem of becoming irrelevant in a changing marketplace, it needs to overcome a bad personality.  It would have been easier to transition to relevancy if it had the advantage of a likeable personality on its side.  Then people would be more forgiving during the transition, just as I liked companies even though they rejected me.

Suggestions

So how can we manage the personality for our benefit?

1.      First, think about personality strategically.  Decide which personality is most in sync with your strategic point of preference.  Figure out how to instill that personality into everything you do.

2.      Consider a more public profile for the leadership, so that they can bring their face and personality to an otherwise faceless firm.  Richard Branson is a great example of this.  His strong personality is very public and has helped give a strong personality to all of the Virgin divisions.

3.      In lieu of real employees, one can use symbolic representations to make the personality come to life.  This can be things as crazy as a giant price tag, or the Geico Gekko. 

4.      Actively manage your interactions with customers.  Some lowly sales clerk on the front lines may be the only human interaction a customer has with your firm.  If that clerk has a bad personality, it can reflect negatively on the entire brand, since it is the only human reference point.  Work to instill the proper personality into all employees based on the way you hire, the way you train, the way you reward.  Zappos provides a good example of this.  They were so intent on having a staff with the right personality that they only hire people with the personality which fits their culture and mission.  It  a huge part of the interview process.  To make sure employees are there for the mission and not just the money, after someone has been employed for a week they offer them $2000 if they want to leave.  That weeds out the people who only work for the money.

 

5.      Actively manage your interactions with society.  Society expects businesses to be good citizens.  They want you to give back.  This is particularly true with the younger adult generations.  If you are not seen as a good corporate citizen, it will damage your personality and you will lose business.

6.      React quickly to threats to your personality.   Monitor what people are saying about you.  As soon as your personality is being threatened, act to rectify the situation.  Don’t let little issues grow into big negatives.  Be fast and aggressive in protecting that reputation.  Cisco is a company which takes this very seriously and has developed tools to help others do the same.

 

SUMMARY

Personalities help companies build stronger bonds with their customers.  These company/brand personalities need to be managed like any other strategic asset.  Incorporate personality development/management/protection into your strategic planning.

 

FINAL THOUGHTS

Ask the marketplace this question:  If my company were a person, what type of personality would it have?  You might be shocked at what you hear.

 

 

 

Strategic Planning Analogy #456: Who Do They Love?

THE STORY
When I was in college, I was a DJ on the college radio station.  Every day the radio station used to get a pile full of new albums from the record labels.  I was shocked by the huge amount of music being issued.  And pretty much all of these albums were selling at least in some quantity to the public.

I understood why most of the top selling albums sold.  It was pretty good music.  What baffled me were the less popular albums.  Who was buying them?

At first, I thought there just must be a lot of people out there with unusual tastes, who loved a different kind of music than the mainstream.  And to a small degree, this was true.

But when I did my investigation in the sales of these lesser albums, I found out that most were not sold to people who loved these bands more than normal people.  No, most of the people buying their records agreed with the majority that they were lesser albums.

The difference was that these people really, really loved music and loved buying music.  They happened to buy more music than normal people.  As a result, these people first bought all the popular music and still wanted to buy more, so they also bought the lesser albums (because that is what’s left to buy after you already have the popular ones).

So, for the most part, people weren’t buying music from these lesser bands because they loved these bands, but because they loved having as much music as possible.

I don’t think that information would have encouraged those lesser bands.  It implied that even though they sold a bit of music, they really didn’t have many avid fans.  They were just getting money from people who would spend it rather indiscriminately on almost ANY band.  So they didn’t get the money out of love, but out of convenience.   

THE ANALOGY
In the business world, a successful business needs a stream of income.  That’s why we get so happy when sales go up.

But let’s not fall into the trap of thinking that every purchase of our goods and services is an indication of their undying love for us.  As we saw in the story, lesser bands weren’t receiving a lot of love with their sales.  Their customers still loved the popular bands more.  The lesser bands were just getting some of the leftover money from heavy spenders after they had already purchased music from the bands they loved more.

In fact, people often make purchases from companies they hate.  For example, when AT&T was the only service connected to the iPhone, people who loved the iPhone purchased their mobile services from AT&T, even though many of them hated the AT&T coverage and service levels.

So, when considering the sales component of your strategic plan, don’t automatically assume a direct correlation between sales and love.  Otherwise, you may create the wrong strategy.

THE PRINCIPLE
The principle here is that just because your business has an income does not mean that people love you.  And depending upon the type of love relationship you have with your customers, you may need a different strategy.

Let’s face it.  We can’t all be the best or the most popular.  We can’t all even be above average.  And if your offering is not the best, then “best at” strategies won’t work.  For example, if you are not the lowest cost operator, it doesn’t make sense to pursue a lowest price strategy.  It won’t work for you.  Strategies designed to exploit strengths don’t work very well if you do not have a strength to exploit.

So what should you do if you find yourself in such a situation?  Listed below are four tactics to consider doing and two tactics to not do.

“To Do” Option #1: Connect to Another Love

If people don’t love you, then find ways to get yourself associated with something people really love.  As we saw earlier, in order to get sales AT&T connected itself with the iPhone, something people really loved.  AT&T hid themselves in the package.  If you wanted the much-loved iPhone, you had to take the “unloved” AT&T. 

The more and the tighter you can bundle yourself into packages with other items people love, the better you are.  Kmart is not one of the most loved retail brands, so it tries to tie itself to brands that are more loved.  It has done so over the years by creating exclusive selling arrangements with names more loved than its own, like Sesame Street, Martha Stewart, Jaclyn Smith, Selena Gomez, and Sofia Vergara.

“To Do” Option #2: Become Most Convenient

Sometimes being “good enough” is good enough.  That occurs when you exceed the minimum threshold of acceptance and are more convenient than superior offerings.  In other words, it you create barriers making it more difficult to get the superior product, people may say the extra effort isn’t worth it and then settle for your slightly inferior offering. 

For example, you can pursue a distribution strategy which makes it easier for customers to stumble upon your product than the competition.  You can try to tie up shelf space in the most popular stores to block ease of access to competitors.   You can buy up all the key words on search engines to make it more convenient for people to click to your site.

If you are not loved enough to get people to come closer to you, then go out to become closer to them.  For example, those unloved bands can sell more music and more tickets if they get closer than other bands to where the music lovers are.  They can hang out at the music festivals where you can find the people who have more desire for and are more in the mood to spend on music.  Seeking out these people will work better than waiting for them to seek you. You imposed more convenience through your efforts to get closer.

In both option #1 and #2, the idea is to make it harder for a customer to substitute a competitor’s product for your own.  Product bundling, exclusivities, and other such tactics can often serve both purposes—get you closer to where customers want to be and make it harder for competitors to do the same.  

“To Do” Option #3:  Find a Niche

Sometimes, if you narrow your focus, you can find a way to become the best alternative to a niche audience.  You won’t be the best option for everyone, but if the niche is large enough, you will be the best with enough people to make a good profit.  You can then use a “best at” strategy within that targeted niche.

To do so, you may need to change your business model a bit.  You may need to move away from more conventional approaches and make bigger trade-offs.  This could even make you less desirable to the masses.  But if it makes you more loved by a niche, then it can be worth it. 

Many retailers found they could succeed against Wal-Mart by going after the niches Wal-Mart left behind in areas such as superior quality, superior service, a higher level of fashion taste, etc.  Becoming best for a niche ignored by Wal-Mart was a better strategy than being an inferior Wal-Mart imitator. 

“To Do” Option #4: Exit the Business

One of the first questions I like to ask in a strategy session is this:  Why should anyone naturally prefer your offering over the competition?  If you cannot think of a meaningful reason for people to naturally prefer you, I have a second question:  Why, then, should you stay in business?   If you are unloved now, and the first three options aren’t viable, the best option may be to exit the business.

“Not To Do” Option #1: Get Overconfident

If you think that your sales are there mainly because people love you, then you may try to exploit that love by raising prices, cutting features, etc.  But if that love is not really there, then attempts to exploit it could backfire.  For example, if one of those lesser bands charges too much for their music, the money will go to a different lesser band.

Most of the time, customers have alternatives.  Even if you think you have a monopoly, there can still be alternatives.  For example, even if you own 100% of the rail business, people can use other forms of transportation, or maybe telecommute via Skype.  And if you haven’t been using the options mentioned above to curtail alternatives, these alternatives may be even more abundant with easier switching than you think.

Therefore, think it over carefully before trying to exploit the love you think you have. 

“Not To Do” Option #2: Assume Unwavering Loyalty

The marketplace continues to evolve; circumstances change over time.  If you are not well loved, those changes could work against you to cause massive customer defections from your offering.

For example, you may be the most convenient option now, but that does not mean it will always stay that way.  Blockbuster video rental stores used to be the most convenient way to get video.  But then Redbox put video vending machines in far more convenient locations and Netflix let you download video from the convenience of your sofa.  Suddenly, Blockbuster went from most convenient to less convenient.  And since Blockbuster did not have much of any superiority anywhere else, people switched away from Blockbuster in droves.

Similarly, AT&T lost sales opportunities when the iPhone became available on other systems.  Kmart lost business when Martha Stewart took her brand away from Kmart and put it in Macy’s. 

Since preferences are more fickle with unloved brands, one needs to be more vigilant in holding on to whatever small advantage one can maintain.  If convenience is your advantage, keep on top of any developments that can become even more convenient.  If tie-ups with others is your advantage, make sure that you are always tied up with the best deal of the moment.

Never get comfortable in thinking the loyalty is locked in forever.

SUMMARY

If your offering is not the best in the industry, then don’t try to win with a “best at” strategy.  Instead, look for ways to bundle with others more popular, become more convenient or create a niche.  

FINAL THOUGHTS
It’s human nature to think well of our own offerings.  We may love the products and services we sell.  But our opinion is not the one that matters.  In many cases, the consumers may hold a much lower opinion of them than we do.  So pay attention to their opinion and don’t get caught up in your own sense of loyalty.

Strategic Planning Analogy #431: More Efficient "Bribery"

THE STORY
Moneyball is the story of Billy Beane, the general manager of the Oakland Athletics baseball team in the early 2000s. Billy’s problem was that he managed a team in a small market. As a result, he did not have as much money to spend on baseball talent as teams from larger markets. For example, his total athlete salary budget was about a third the size of teams from large markets like New York.

Since Billy Beane could not outspend the other teams to attract talent, he needed to be smarter about how he spent his money. To become smarter, he turned to detailed statistics and analytics. Billy learned that certain athlete statistics were better correlated to baseball success than others. Then he went after signing up players who were great on those statistics but would otherwise be overlooked by the big-market teams (because the players appeared weak on subjective issues not well correlated to success).

As a result of becoming smarter on talent, Billy Beane was able to put a competitive team on the field while spending a lot less money than the big-market teams. The story is so remarkable that in 2011, it was made into a movie.

THE ANALOGY
Most athletes are not very loyal to their team. They will go play for whoever is willing to pay them the most money. The money is like a bribe. Whichever team bribes them with the most money gets the player.

This is a lot like the retail business marketplace. Consumers are not very loyal when it comes to where they shop. Instead, they shop at whichever store gives them the best deal. That is the bribe which gets them to the store.

This was pointed out in an article in the January 9, 2012 edition of Marketing Daily. The article talked about a study of 6,000 shoppers by Pricewaterhouse Coopers. The study found that consumers really don’t care much about retail loyalty programs. Loyalty programs were ranked last in a list of reasons for choosing a store. Only 1% of the shoppers cited loyalty programs as a reason for their store choice.

What was the #1 reason for store choice? It was price, mentioned by 55% of the shoppers. In other words, shoppers are like those athletes—not very loyal and can be bribed by being offered a better deal.

Yet about 92% of retailers have a loyalty program and many spend huge sums of money on their program. My keychain has three keys on it, but seven loyalty cards. I should probably call it a “loyalty chain” instead of a keychain. My wife is even worse. She carries two wallets—one is for credit cards and money and the other just holds loyalty cards.

Now, smart phones are making it even easier. They allow you to store all that information digitally, so you can, in essence, conveniently carry an infinite number of loyalty cards. If you are carrying a card for every store, then those cards are not making you very loyal to any particular store.

So what should retailers do? They should take a tip from Moneyball. Instead of offering ever larger “bribes” (deals) in the futile attempt to create loyalty, they need to get smarter. They need to use statistical analytics to make their spending more efficient.

THE PRINCIPLE
The principle here is that many marketing expenditures have more in common with bribery than they do with loyalty. This is particularly true in retailing. Therefore, when creating marketing strategies, we should be more focused on increasing the “efficiency of the bribe” than the “effectiveness of the loyalty.”

Principle #1: Just Because it Looks Like Loyalty Does Not Mean it is Loyalty
At first, great bribery can look like great loyalty. Great bribery allows you to lure people back to the store, time after time after time (each time caused by a great bribe). Great loyalty means that customers voluntarily come back to the store, time after time after time. Since the behaviors appear similar (repeat purchasing), one may look at the behavior and mistakenly think that they are witnessing great loyalty when in fact they are witnessing great, sequential bribery.

Why is this distinction important? If the motivation is bribery, then the favorable behavior will stop when you stop the bribe, or a competitor offers a better bribe. If the motivation is loyalty, then you are better insulated from competitive attacks and less reliant on bribes for success.

If you get these two motivations confused, then you may create the wrong marketing strategy. For example, if you think you are building loyalty, then you may create a strategy with unaffordable discounts in the beginning, which you justify by saying that those discounts create long-term loyalty. Once loyal, you can then cut way back on the deals later and still keep the customer.

Terms like “lifetime value” are used to justify this approach. They say you can lose a lot of money up front if it creates a lifetime of loyalty. Then you make up for the losses in the beginning during the later years of the lifetime by cutting back on the size of the deals.

Of course, if your tactics are only creating a series of bribes, then you can never stop the bribery. If lifetime loyalty is a fallacy, then you will not only lose a lot of money up front under such a program, but you will lose it forever if you want return visits.

Therefore, if behavior is more bribe-induced than loyalty-induced, you need a way to bribe over the long term which is profitable. That requires a focus on bribe efficiency rather than lifetime loyalty value.

Principle #2: Loyalty Programs Aren’t Bad, They Are Just Misnamed
So, if loyalty is virtually non-existent, does that mean that loyalty programs should be abandoned? In general, I’d say no. They can still have great value as a bribery tool. It isn’t that the tool is bad; it is just misnamed. They should be thought of as “bribery programs” rather than loyalty programs.

Think back to Moneyball. Billy Beane could afford to pay less for quality baseball players because he was smarter about how he pursued players. He studied the statistics related to success and used that knowledge to find valuable players who could be lured with a lower bribe.

You can do the same. Those loyalty cards can provide a lot of data. They can help you get smarter about your customers. You can learn from their behavior. Analytics around this data can provide knowledge about which bribes are most effective with that customer. Using this knowledge, you can offer bribes more appropriate and more luring to that individual. And, in most cases, because the bribe is more specifically targeted to that individual, it will be more effective at a lower cost.

For example, you may find that a particular customer is easily lured by a small discount on cat food. Therefore, instead of offering huge bribes on lots of things, you can narrow your expense to a small bribe on cat food to get pretty much the same end result.

In other words, by using the data from loyalty programs, you may not make the customer more loyal, but you can make your bribery more cost efficient and more profitably effective. And that makes the program worthwhile.

Now, if you are NOT using the data from a loyalty program to get smarter, then you may be wasting a lot of money on that program. You’d probably be better off shutting down the program and using all that money to pay a bigger bribe to people at the cash register when they check out.

Principle #3: Metrics Are Valuable Only if You Use the Right Ones
In Moneyball, Billy Beane was successful because he focused on the right metrics. He looked at the statistics which really lead to wins and ignored the rest. By contrast, the big market teams were often evaluating the wrong metrics, things like how a player looked or their demeanor. By looking at the wrong metrics, the big market teams were paying too much for the wrong players.

The same problem applies to marketing. If you are looking at loyalty metrics instead of bribery metrics, you may end up rewarding the wrong behavior. Set up metrics to measure and reward efficient bribery rather than nearly non-existent loyalty.

SUMMARY
Although businesses want loyalty from their customers, usually the primary customer motivation is not loyalty, but bribery. As a result, we should convert our loyalty programs into bribery programs. That requires using data and analytics to discover the most efficient ways to bribe, and then keep using the bribes forever in order have superiority over the competition.

FINAL THOUGHTS
Just because bribes may be the most effective motivator, that does not mean that you can ignore all the other operational variables. Bribes are more efficient when the other operating factors are working well, because then you have less negativity to have to overcome with a bribe (so the bribe can be smaller).

Strategic Planning Analogy #393: Laziness is Not Necessarily a Bad Thing

THE STORY
There are a lot of old fables and adages about the benefits of being active/industrious versus the pitfalls of being lazy. Aesop talks about this many times in his fables. And in the Bible, wise King Solomon said, “Lazy hands make a man poor, but diligent hands bring wealth.” (Proverbs 10:4)

However, consider this. We tend to praise the industriousness of the worker bee. It is held up as something to be admired. Yet, the average worker bee lives only about one to four months. Similarly, the Mayfly is a very busy insect. Yet it only lives one day as an adult. It is a very busy no-nonsense day, full of a lot of flying around and mating, but it lasts only one day—then it dies.

By contrast, the three toed tree sloth is considered to be a rather slow and lazy animal. Yet it lives for about 30 to 40 years. The giant tortoise is also known for being rather slow and lazy. Yet it has lived up to 177 years in captivity.

In fact, the general rule in the animal kingdom is that the faster you live, the shorter you live. You can see this with the rate of metabolism in mammals. Generally, the faster the metabolism, the shorter the life. That is why squirrel-like rodents live about two to three times longer than mouse-like rodents. The squirrel-like rodents have a slower metabolism.

So maybe laziness isn’t such a bad thing after all.

THE ANALOGY
Many strategies are built around trying to go after the heavy user segment. Heavy users tend to be what I call “active” customers. They love (or are highly interested in) the category. It is important to them. They love to talk about it and think about it. They may consider themselves experts in the category. And most importantly, they tend to buy a lot of the products in the category, moreso than anyone else. Isn’t it a good thing to have customers who enjoy buying large amounts of what you have to sell?

Not necessarily. There are many reasons why capturing customers who are active in the marketplace buying a lot of product may be a terrible thing for a business’ profitability. Because they are really active in the marketplace and are highly interested in the product, active customers pay more attention to what is going on.

As a result, these active, involved customers may be giving us a lot of business because they have figured out how to beat our system. They know how to only buy our loss leaders. They only buy when on deep discount (and then buy a lot). In other words, they may provide us with a lot of sales volume, but volume without any margin.

Second, high active customers can also often be very demanding customers. They tend to be more involved in the negotiations. They may ask for additional services, special orders, return privileges, free delivery, volume discounts, customization, etc. All of the added costs to meet these demands can wipe out any profitability.

Third, because they are so demanding of discounts and added services, they may be quick to leave us when a competitor provides even more discounts and services. Their active involvement makes them more aware of competing offers and more prone to switch. Because of the large volumes they purchase, small differential benefits add up quickly. Therefore, they actively seek out better alternatives. This starts a downward spiral where we keep making our offer increasingly less profitable in an attempt to keep this customer “loyal.”

This is starting to sound like the animal kingdom. Just as active animals tend to live shorter lives, highly active, heavy user customers may have shorter loyalty. Their lives as a customer dedicated to us may be very short indeed if they find another who offers them more.

Compare that to the lazy customer. They may not consume as much as the active shopper. They may be a lot less interested in what we are selling. Yet, at the same time, they tend to be far less demanding and far less likely to seek out alternatives. Their life as a customer of ours may last a lot longer (and be a lot more profitable).

Therefore, instead of trying to create loyalty among the active heavy users, we may want to consider a strategy aimed at the lazy customer. The top line sales might be lower, but the bottom line return could be very high. And the lifetime value can be very large, because they stick around longer (a longer life).

THE PRINCIPLE
The principle here is not to confuse activity with profitability. Lots of sales from heavy users may just be increasing our losses faster. In fact, lazy customers may be preferable to active, high volume customers. Customers who are slow to move are slow to move away. And because they demand less, they are usually more profitable to serve.

HBS Article
I was reminded of this when reading an article published on the Harvard Business School Working Knowledge web site. The article, published May 16, 2011, looked at loyalty among bank customers. What they learned was that:

1) Banks focusing on offering high levels of service to high-end customers were most vulnerable to losing their clients to competition.

2) Banks rated lower on service were pretty much immune when new challengers entered the marketplace (especially new challengers entering on the high service side).

The Harvard researchers appeared a bit shocked by the results. They said, “Customers you might expect to be the most 'stuck' are the ones who are disproportionately vulnerable to service competition.”

I was not shocked at all. High-end banking customers tend to be “active” customers. Banking is an important part of their life and they are highly interested in it. They like getting involved in the banking process. Because they tend to be highly demanding, they are drawn to those banks specializing in high levels of service catered to them.

Of course, because they are active, high end banking customers will also be most aware of what is going on in the competitive space. And because this is important to them and they want the best, they will be among the first to see the benefits of switching when they find something better.

By contrast, low service banks tend to cater to more of the “lazy” customer. Banking is not their passion—just a necessary evil. They want to think about it as little as possible. They don’t want to be coddled—they want just get their banking business done and over with, with the least amount of hassle.

As a result, they are not actively looking for a better banking experience. Switching is a lot of work and a hassle to them—it makes them have to think more about their banking. As a result, they tend to stay put and not leave the comforts of the old routine.

Other Examples
This point also seems to be behind recent moves at the Kroger supermarket company. Kroger is quietly phasing out their practice of double-couponing—where Kroger would discount the retail price by double the value of the manufacturer’s coupon (at Kroger’s expense). Double-couponing appeals most to the active grocery shopper. These are the people who enjoy the challenge of trying to “Beat the System” and win at the game of getting the absolute lowest prices on their food. Of course, when these active shoppers “win,” the retailer typically loses, since there is little to no profit margin in the transaction.

All the blogs dedicated to active grocery shoppers are angry at Kroger for doing this. But Kroger’s job is not to help active customers beat the system. It is to make money.

Kroger’s new emphasis is on emphasizing having the shortest check-out lines. They are claiming leadership in helping you get your shopping trip done faster than anywhere else. This is an appeal to the lazy shopper. The lazy shopper doesn’t see grocery shopping as a game where you try to beat the system. No, to them it is an awful chore—to be minimized as much as possible. Nothing would make them happier than to get out faster—so they will love the shorter checkouts.

And since lazy shoppers are less into cutting the coupons and reading the ads and all that other active-shopping stuff, their purchases tend to have higher profit margins. And they are less likely to switch.

There are lots of business opportunities in the lazy shopper space. Just find people who view a category as a necessary evil and help them avoid having to deal with it. For example, there are people who hate shopping and are willing to pay lots of money to have someone else be their personal shopper. There are people who hate having anything to do with paying taxes and will gladly turn it all over (at a healthy profit) to someone else. There are people who hate having anything to do with maintaining their house (either inside or outside). It just isn’t important to them. They will outsource it to others without blinking an eye.

In all of these cases, the lazy customers are far less demanding than those highly interested in the topic, which usually makes the lazy customer more profitable to serve. And they are less likely to leave, because leaving is too much work.

This also works in the industrial space. A manufacturer may be highly interested in the procurement of a few key components in the process, but much less interested in some of the minor components. This could cause the manufacturer to get actively involved on procuring the key components (aggressively trying to extract they lowest possible price), but gladly outsource procurement of the minor components to someone who will take all of the hassle off their hands. Hence, a manufacturing supplier might make more money serving the minor needs than the major needs.

SUMMARY
Heavy users are not necessarily your best customers. Heavy users tend to be active customers in that segment. Their activity tends to make them more demanding and more likely to leave. This can make them less profitable, in spite of their large volume. By contrast, the lazy customer may buy less, but be more profitable to serve and less likely to leave. So when developing your strategy, consider the appeal to the lazy customer.

FINAL THOUGHTS
Rather than admiring the busy worker bee, maybe we should be admiring the lazy tree sloth.

If You Want Loyalty, Get a Dog

THE STORY
Every so often, someone will talk to me about the merits of various customer loyalty programs. One of the benefits they will point to with a loyalty program is the ability to use “differential pricing,” which is a fancy way of saying that some customers will be charged more for the same product than others.

So then, my first question to them is “Who deserves to have to pay more for the same product?” If you make the light users of your company pay more, you will get them upset with you and they will go somewhere else, so you lose the chance to convert them into eventual heavy customers. Over time, it is not a good idea to alienate potentially good future customers because you are cutting off your growth and older customers will eventually need to be replaced.

In addition, if your best customers start paying too little for your offerings due to special loyalty discounts, you are making your best customers no longer your best customers, for they can start to become a financial burden. For example, if all the airline frequent flyer points were suddenly redeemed, the airlines would go bankrupt. If you need to have your non-loyal customers pay even more to subsidize the discounts to the loyal, then you probably have a non-sustainable model.

But let’s say you do it the other way. You give large discounts to get new customers into your program and have your loyal customers pay more. Loyal customers will be upset that their loyalty is not being rewarded. It could cause them to take their loyalty elsewhere.

People will find out that others are getting charged different rates on the same product. Just ask Amazon. They tried an experiment on differential pricing. People caught on very quickly and the internet buzz against Amazon occurred almost immediately. It wasn’t long before Amazon abandoned that experiment and issued an apology.

So again, I ask them, “Who deserves to pay too much for the item.”

At this point, they usually change the topic and say something like, “Well, there are other benefits to loyalty programs…”

THE ANALOGY
“Loyalty” is a big word in business circles. We want to create loyal customers, because loyal customers supposedly spend more, making them more valuable. As a result, there are a lot of companies out there who will try to see you something to help you create a loyalty program for your business. Most of these programs involve giving someone some form of personal identification so that we can track their behavior. In return for this data, we give them some form of discount—everything from paying lower prices on your products to getting points that can be redeemed on things you do not sell.

It all sounds well and good until you start asking a lot of questions, like I do. Some of the claims do not stand up under tough scrutiny. This blog will try to expose some of the problems with current loyalty programs.

THE PRINCIPLE
Listed below are a few principles you should consider about loyalty programs.

1) There is a Difference Between Loyalty and Bribery
A lot of programs called loyalty are really about bribery. In most of these programs, you are providing a financial incentive to participate. In my mind, that is a bribe. If these people were truly loyal to you, then you would not have to bribe them. The mere fact you have to bribe them shows that they are not loyal—at least not loyal to you. What they are loyal to is their own personal greed. As long as your bribe is the biggest, their loyalty to greed will belong to you. But if someone offers a bigger bribe—away they go.

Studies have shown that the people who are most likely to carry a loyalty card for one retailer also are people who typically carry a large number of loyalty cards for competing retailers. The cards don’t create loyalty. The just create fatter wallets full of cards.

Bribery is a useful business tool. Sometimes we call it a “sale.” Sometimes it is called an “Introductory Offer.” Other times it is a coupon. I’m not against the occasional legal bribe. But don’t mistake a bribe with loyalty. A bribe is a good tool to get people to experience what you are offering. Once they get to experience your offering, you have a shot at converting them into a regular customer. But getting customers through bribery is not the same as creating loyal customers.

2) Loyalty is the Wrong Goal
In its strictest terms, loyalty is a lot like unconditional love. It is the expectation that someone will give you preferential treatment just because of who you are. In this day and age, it is unrealistic to think that you can create a great deal of loyalty. There are too many choices and there is too much information out there causing people to question each decision. It is increasingly rare to find a consumer who patronizes a retailer blindly out of some sense of loyalty.

As the old saying goes, if you want loyalty, get a dog. If you want profitable customers, look for symbiosis. Symbiosis is about two entities coming together because there is something mutually beneficial that occurs when they are together. The biology example people like to use for symbiosis is the Plover and the Crocodile. The plover is a bird that eats harmful entities that get in between the teeth of the crocodile. In this relationship, the plover gets an easy meal, while the croc gets healthy teeth. The croc does not open his mouth for the plover out of a sense of loyalty. He does it to get a benefit. The same goes for the plover.

If you truly want to succeed, you are better off looking for opportunities for symbiosis than opportunities for loyalty. In other words, what benefits can I offer a group of customers that will make them so happy that they are willing to give me something that I want in return? This is not about slapping a bribe on top of my current offering. It is about changing the offering itself—the bundle of goods, services and the attributes associated with the transaction (convenience, price, atmosphere, image, etc.).

3) Sometimes we get the relationships reversed
Loyalty programs can be very expensive to operate. Some of the expense is related to the size of the bribe. Some of the expense is related to the computer technology and the analytics that go along with it. To help justify the expense, people compare the spending of the “loyal” customers to the non-loyal customers. In most cases the “loyal” customers spend more than the non-loyal. Then, these people make the assumption that the loyalty program caused these loyal customers to spend more than then non-loyal, and use the incremental difference in spending to justify the cost of the program.

I would beg to differ with this math. In many cases, the relationship is actually the reverse of this. The program did not make the people spend more. Instead, it is the people who were already spending more than average who have more to gain from the bribe. Therefore, they have a greater incentive to join the program. In other words, instead of creating people who spend more, all the program does is help you identify who is already spending more. Yes, there is value in knowing who these people are, but you cannot use all of their above average spending to justify the cost of the program. Most of that higher spending was already occurring.

In fact, a lot of that higher spending was already occurring prior to the new bribes put in place with the loyalty program. Therefore, the program has actually made many of these customers less profitable, rather than more profitable. When you look at programs this way, the high costs become much more difficult to justify.

4) Loyalty programs work best when the customer base consists of people with widely different needs
If you are essentially a mass marketer who appeals to a large sector of the population which behaves relatively similarly, then there is little need for spending the money to identify your customers. Instead, just find out what are the most important universal needs and desires of the masses and do the best at offering them to everyone. Even if you are in a small niche business catering to a small sector of the population, if that niche tends to be similar in their needs and wants, then you will not get much benefit out of the costs of identifying them as individuals.

I’ve seen a lot of mass retailers, like grocery stores, go after these loyalty programs. In the end, there doesn’t seem to be much loyalty going on. The people carry cards from multiple grocers, so it really doesn’t impact their behavior all that much. There isn’t enough difference in behavior to cause the grocer to go to the trouble of treating each customer differently when they enter the store, just because of who they are. The only real purpose in getting to know them appears to be so that they can use the data to get manufacturers to pay them to offer targeted coupons.

In the end, however, the biggest profit boost for the mass retailer might come from getting a few extra pennies from the person who is too lazy to get a card. Although I have noticed at one of the large drug store chains that even if a customer does not own a card, the cashier will swipe a generic card at the register, so that everyone gets the discount, card or no card. Like I said earlier, in the world of mass retailing, the differentiation is of dubious value.

However, if your business caters to a wide variety of customers with vastly different needs and who are looking for vastly different solutions, then a loyalty program makes sense. The program allows the company to keep track of which segment you are in so that you can offer the right bundle of goods and services to the right people. A good example of this tends to be the banking industry. There is a wide variation in the way people use banks and their variety of services. It is often worth the effort of getting to know which type of bank customer a person is, so that you can more efficiently channel your resources in serving them.

SUMMARY
Although the idea of loyalty programs sounds good, once you dig in deeper, one finds out that they may not be as good as they sound. Some thoughts to keep in mind:

1) Bribery is not the same as loyalty. Bribery is only effective when you pay a bigger bribe than someone else.

2) If you want loyalty, get a dog. If you want more profitability, create symbiosis with your customers.

3) Loyalty programs often do not create as much extra business as we think. Instead, they may just be a way for us to identify the people who were already larger than average spenders.

4) Loyalty programs tend not to work cost effectively with mass markers or with companies catering to customers with similar needs/desires. Instead, the programs are best suited for firms selling a variety of goods and services to customers with vastly different needs.

FINAL THOUGHTS
At the end of the day, if you have the most compelling offering and execute it well, you are usually better off than trying to cover up your weaknesses with bribes.