Archive for August, 2013|Monthly archive page

Customer fees spark a backlash

Millions have enjoyed Seinfeld’s “The Library Book” episode, in which an aging library official zealously pursues Jerry for an overdue book from 1971.  Though a parody, the plot’s sub text – the perversity and unfairness of an organization’s penalties – clearly resonates. Managers that heed this message can reduce business risk and improve customer satisfaction.

Understandably, firms look to cover extra costs and encourage certain behaviors by imposing supplemental fees.  Many consumers, however, resent the use and fairness of these practices and will quickly desert (and bad mouth via social media) a brand when they believe they have been treated unfairly.  New research published in Business Horizons, a journal of the Kelley School of Business at Indiana University, discusses how companies can prudently employ extra fees to cover reasonable costs without inciting a popular backlash.

A tough habit to kick

Today, many companies especially in the Telecom, Airline, Retail, Banking and Credit Card sectors, rely on extra fees – for late returns, cancellations and service changes – for a significant portion of their revenue and profits.  For perspective, penalties for late payments in the U.S. credit card industry almost tripled from 1997 to 2007, generating approximately 10% of profits over that period. In 2009 alone, airlines in the U.S. reaped about US$2.4B (or roughly 3% of their overall revenue) from fees assessed for changing or canceling flights.  For some enterprises like Blockbuster Video, these revenues represented the difference between profit and loss.

Fee-addicts are not irresponsible or stupid; they understand they will lose customers and suffer from a reputational hit. However, they believe the short-term benefits outweigh the long-term pain.  What many companies do not realize is that the era of consumer passivity may be coming to an end and the risks have increased, particularly given the power of social media and activist groups.

The survey says…

The study’s authors surveyed a representative sample of 200 U.S. consumers who had been charged a penalty of some sort over the past six months from a variety of industries.  Not surprisingly, almost 75% of the respondents who previously had a positive impression of a company reported being upset with the way they were treated.  More importantly, 18% of those surveyed reported bad-mouthing the firm to their on and offline friends and co-workers.

There are many reasons for this anger.  Firstly, 64% of the respondents thought the charges were unfair.  Almost 50% claimed they were unaware that they would be penalized, either because the penalty notice was buried in the fine print or because it was never communicated.  Secondly, 74% of those surveyed considered the penalties excessive, especially when they resulted from an unforeseen emergency or because they felt the penalties were applied punitively.   Finally, only 27% of the consumers reported that the company waived the charge out of courtesy or to appear fair.  Given these findings,  organizations run a major risk of treating (or appearing to treat) consumers poorly.

Prudently avoiding risk

A number of steps can be taken to soften the blow of applying extra fees:

Get your data

Policy changes should not be made in a vacuum.  Managers need to understand the true revenue and profitability contribution of extra fees.  On the cost side, they need to know the revenue loss from customer churn and the negative impact of a decline in brand image. If costs exceeds revenues, then the policies should be reconsidered.

Moreover, every customer is not the same and should not be handled with a blanket policy.  For example, some people are habitual late payers while others through their loyalty have earned the right to make an honest mistake. Managers should segment their consumers through qualitative research and gauging call center interactions.

Provide flexibility to staff

Prudent managers know when to cut their losses in certain situations. To a point, they should properly train and empower front line staff to waive fees for emergencies, one-off cases or when dealing with a valuable customer.

Be transparent and explicit

The majority of people do not read terms and conditions, particularly if they are confusing or tough to find.  Companies should simplify and make more transparent their messages around fee changes and penalties.

Revisit some policies

For every possible penalty clause, ask yourself a simple question:  Would the policy really upset you, if you were the client?  For the clauses that carry a ‘yes’ answer, it is likely they do not pass a fairness test and would not be suitable.  Companies should also consider fixing touch points in their customer experience that are needlessly frustrating such as long phone queues and multiple customer representative hand offs.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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Dos and don’ts of content marketing

It has never been more difficult to connect brands with customers. One of the best ways to break through the clutter and add value is through content marketing.  Content marketing (CM) is the creation and sharing of relevant and unique content to attract consumers, promote engagement and build brands. Billions of dollars are being spent every year on content marketing.  Are companies getting adequate returns?  If not, what must they do to get their programs right?

These days, consumers are shutting off the traditional world of sales and marketing, and shunning much of the digital variety. For example, their PVRs enable them to skip television advertising; they often ignore magazine and newspaper advertising and; email filters and online surfing habits allows them to avoid banner ads and pop-ups.   Sales reps that don’t add unique insights are being shunned.

Ron Tite, CEO of content marketing agency The Tite Group says, “Consumers are skipping advertising that interrupts or gets in the way. You know what they’re not skipping?  Great content.  If it’s worth watching, they’ll watch it.  And they don’t care if a brand paid for it, either.”

Simply put, CM is the art (and increasingly science) of communicating regularly with your customers and prospects without overtly selling them.  According to The Content Marketing Institute (CMI), 91% of B2B Marketers and 86% of B2C marketers already use CM in their marketing mix.  The premise is simple: firms that provide interesting and helpful content will deliver more value and a better brand experience, thereby generating higher awareness and purchase intent as well as stimulating word of mouth advertising and community building.

Firms are flocking to CM for many reasons.  For one thing, it works.  Julie Fleischer, Kraft’s Director of CRM Content Strategy & Integration says, “The ROI on our content marketing work is among the highest of all our marketing efforts.” Secondly, CM is meeting the needs of today’s demanding customers. Google research finds that consumers require twice as many sources of information before making a decision today than they did just  a couple of years ago. Roper Public Affairs, a research firm, found that 80 percent of business decision makers prefer to get company information in a series of articles versus an advertisement, while 60 percent say that company content helps them make better product decisions.

Some companies are using CM in powerful ways that deliver strong financial returns.  For example:

McDonald’s – Created an online Q&A site that has fielded over 10,000 questions (including all the tough ones), successfully educating consumers and delivering key corporate messages.

Open Text – Built a personalized new customer onboarding site offering a variety of assets and content to welcome new clients and provide upsell, cross-sell opportunities. Over 1,700 new contacts were identified along with 31 new opportunities worth $1.8M.

Xerox – Developed a premium magazine (in partnership with Forbes magazine) targeted at top 30 accounts, yielding $1.3B in new pipeline opportunities.

These success stories, however, are the exception and not the rule.  A CMI survey of 1,400 companies found that only 36% of respondents considered their CM initiatives effective.  According to Tite, “To be blunt, a lot of brands are just doing it incorrectly.  A content approach isn’t a campaign or quick hit viral video.  It’s something you do every day.  Marketing departments aren’t typically built to support that type of commitment.”

What separates the leaders from the also-rans?  The leaders really understand their client’s preferences, develop the right capabilities and track the right metrics.  To be world-class, content marketers should heed these Dos and Don’ts:

Dos

  • Focus on the objective – CM should be about inciting readers or viewers into doing something desirable like purchasing a product or requesting a quote.
  • Have a systematic process – Organizations should cultivate, track and engage customers through their CM journey. To drive efficiency, marketers need to ensure they are using and measuring the right metrics like leads by content, on page conversions and share ratio by content.
  • Maximize SEO – To maximize CM’s impact, companies should periodically refine their search engine optimization programs including keyword choice and site design.
  • Stress quality – Poorly crafted and executed content can detract from your CM program and brand image. CM benefits from an iterative approach that regularly explores customer preferences and tests out new creative executions.

Don’ts

  • Choose the technology first – Technology is an enabler not a strategy.  Get the right structure, people, and value proposition in place before choosing any CM tools.
  • Under-invest – Producing quality requires the right people and resources, as well as a creative license.  CM capabilities need to be nurtured for long-term success.
  • Ignore organizational implications – Leveraging CM requires the buy-in and collaboration of many parts of the company to unlock key knowledge.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Create categories and profits

Many CEOs grapple with a fundamental problem:  how do you profitably build revenues in low growth, hyper-competitive markets?  Grabbing business from a competitor is a difficult and expensive proposition.  Raising your prices — unless delicately handled — can be risky.  Driving incremental product innovation is a common strategy but one with low odds of success when the value-add is minor and the product remains comparatively undifferentiated.  There is a better approach to reigniting growth:  create your own category.

Pursuing incremental innovation is a tough road to travel.  Various estimates put the success rate of each new product or upgrade at only 10%-20%, resulting in wasted investment, unhappy customers and damaged careers.  However, there is a superior alternative for exploiting innovation.  It is called Category Making (CM).  This proven innovation approach combines cutting-edge product and business model innovation to create an entirely new offering, which by itself establishes a new category. There have been many successful examples of CM including ultra-low-cost, portable ultrasound machines for the Chinese market (GE), Minivans (Chrysler), Xbox Live Gaming system (Microsoft), Greek-style yogurt (Chobani) and iTunes/iPad (Apple).

According to research published in the Harvard Business Review, category makers generate much higher financial returns than incremental innovators.  Specifically, 13 ofFortune’s 100 fastest-growing U.S. companies between 2009 and 2011 were considered category creators.  They alone accounted for 53% of incremental revenue growth and 74% of incremental market capitalization growth of the top 100 over those three years.

Category creators do many things right to produce their industry-leading returns.  First and foremost, they appeal to consumers by:

  • Providing a unique offering that delivers compelling packaging, convenience, functionality or experiential benefits.  Xbox, for example, enables friends to play each other over the Internet.
  • Creating a new pricing model that is attractive to consumers.  For example, iTunes allows consumers to buy only what they want (i.e. individual songs) at a low price.
  • Re-engineering how a product is delivered and distributed.  Consider how Netflix revolutionizes the delivery of movies by leveraging internet-based, home delivery.

Secrets of their success

As a go-to-market strategy, pursuing CM innovation makes a lot of sense for companies:

Less competition

Most incremental innovations launch into existing categories — and right into the teeth of competition.  Category makers seek to outflank competition by introducing a new product into new market space.  This enables the innovator to secure ‘first mover advantage,’ thereby rapidly attracting customers while establishing barriers of entry around distribution, brand image and business partnerships.

Differentiated value

Incremental innovation often comes up short because it does not add enough extra value (or incentives) for consumers who are typically reluctant or unwilling to change behaviour.  On the other hand, category makers rely on a novel customer offering and value proposition. These products can more easily get the market’s attention and deliver compelling benefits previously unavailable.

Better use of scare capital & time

Often, the scope of innovation is dialed back in order to minimize capital outlays, limit market risk or because of managers’ risk aversion.   This  “penny wise and pound foolish” approach can hamper the initiative, reducing its chances of success. Category makers see risk but cope with it differently.  They focus on fewer but bigger ideas, and make sure they are properly supported by the organization’s culture and systems.  Raising the internal stakes ensures adequate investment, diligence and management attention.

Making it work

Becoming a CM requires firms to alter their visions, change the way they view risk, and allocate sufficient resources and capital.   Not surprisingly, they will look at innovation in a comprehensive fashion.  For example, category creators:

  1. Use financial, distributional or technological constraints as a catalyst for breakthrough thinking (GE)
  2. Investigate offerings that exist at the intersection of different but complementary technologies and business models  (Apple’s iPad).
  3. Look beyond existing consumer requirements to explore unmet or emerging needs, future trends and adjacent segments (Chobani, Chrysler, P&G).
  4. Seek out the best delivery and distribution model, either by building in-house, purchasing another company or partnering with a complementary firm.  It is not uncommon for organizations to leverage all three (Microsoft)
  5. Think creatively around how they generate profitable revenues without alienating consumers (Apple iTunes)

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Pay people more

My late father used to say that when you pay peanuts you get monkeys.  He may have been on to an old management idea beginning to percolate again. The idea — at odds with conventional wisdom — is that paying people more may boost productivity and reduce cost by increasing employee engagement, reducing attrition and attracting new workers. Though this approach would be unrealistic for many companies, it may be worth pursuing for certain industries and some minimum wage jobs given the problems with traditional approaches.

Organizations are facing strong headwinds.   Margins remain tight, generating real innovation is difficult and consumer demand remains uncertain. Over the long run, managers face looming labour shortages and possible technological disruption.

The productivity puzzle

To cope, firms have implemented headcount reductions, wage freezes and supply chain rationalizations.  Though these have been successful they can only go so far.  The only fertile area left to significantly improve performance is to boost employee productivity.  Yet, increasing worker productivity is easier said than done, for many reasons. For one thing, most companies suffer from chronically low employee engagement (typically only 35% of workers are positively engaged). High employee turnover, poor or non-existent training and pervasive skills gaps also act as brakes on raising worker productivity and containing costs.

It would be naïve to think these problems do not have a compensation component.  Would a wage increase help address these issues?

A novel fix

In 1914, Henry Ford, the father of mass production, famously doubled pay at his factories in order to fight attrition but also so that Ford’s assembly line workers could afford to buy the cars they were making. This strategy paid off immediately and impressively, generating:  higher employee productivity, improved retention, a flood of new applicants and a major boost to the American economy.  The challenges faced by Ford in 1914 would be familiar to many executives today in the retailing, hospitality, construction and manufacturing sectors.

Some recent business cases support the notion that paying people more will generate higher productivity and help cut costs.  For example, Forbes magazine reported companies can reduce the high cost of employee turnover and retention (expenses that can run in the tens of millions of dollars), and job dissatisfaction by paying a higher starting salary and offering more benefits up front. They cite leading retailers like Costco, Trader Joe’s and Zappos as examples of firms that pay and train more, and in turn achieve significantly higher retention and performance levels.  All of these firms have done the math and figured out it’s cheaper and more beneficial in the long run to pay higher starting wages and deliver high value training. According to Lloyd Perlmutter, veteran retailer and president of The Beacon Group, a retail and organizational consultancy: “While base compensation is an important factor for front-line employees, people also respond to cash incentives, fun contests and any additional training and development to add to their skill sets.”

Providing more compensation to some employees can make sense for other reasons. Like Ford, offering higher pay signals to its workers and the market that the firm recognizes employees, values performance and is willing to pay for it.  This enhanced reputation may attract more workers than a company with a low-pay reputation. In addition, a pay increase for some employees may end up being less costly in the long run than the cumulative cost of multiple employee engagement initiatives (the dirty little HR secret is that most fail), dashed worker expectations and wasted management time.

Ask the right questions

Management should tread carefully; many employees are already at the top end of the pay scale or are in non-permanent jobs.  Before committing to a blanket pay increase, managers will want to explore two key questions: 1) what is the true productivity and cost hit of high employee turnover and dissatisfaction and; 2) If the answer to #1 is significant, what wage and/or benefit increase can move the needle without busting the corporate bank.

Dip your toe

Not every industry or business will be a good candidate for a wage-based fix. To test the hypothesis, managers should experiment first with low-performing business units, focusing on minimum wage jobs. Ideal situations will be companies that:

  • Feature high levels of turnover
  • Have difficulty finding employees with the right skill sets
  • Employ low-level workers who can directly impact revenue

Increasing compensation is not a sop to socialists, although one could make an argument that reducing pay disparities is a socially worthwhile goal.  Paying some workers more can make business sense by reducing costs in the long run and kick-starting revenues. Savvy managers should pilot this strategy in a contained department or business unit and carefully study the results.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.