If caveat emptor is seen as a dominant business principle by both producers and consumers then the legitimacy of capitalism and market organisation will not long survive.
July 5, 2011 11:00 pm
The $10 minibar beer is no basis for capitalism
By John Kay
If you plan to fly with a low-cost airline this summer, you will have discovered that the final bill was not so low cost after all. Additional charges, not just for baggage but for payment and even for checking in, have prompted a super complaint from the UK consumer organisation Which? and spurred the Office of Fair Trading into action.
And have you struggled to understand your mobile phone bill? Bought a cartridge of ink that costs almost as much as the printer? Do you fill in your personal details on an insurance comparison website every year, or just accept uncompetitive renewal terms? Have you used the internet or the minibar in a hotel, or watched the teaser offer on a mortgage revert to a standard variable rate?
Products are complex, and time is scarce. Consumers focus on a few headline prices and features when they make their choices and so competition is focused on those headline prices and features. Economics 101 teaches that markets work best when competition leads to prices in line with costs, but in markets like these, competition has the opposite effect. Producers do not necessarily make excessive profits overall because the prices of key features are forced down to uneconomic levels. No one can really give you a free mobile handset, or fly you to Bratislava for 99p.
But the retailer with simple, honest pricing must seek to match these offers. If the winner of the competitive race is the company that is most innovative, not in productive efficiency or customer service, but in the ingenuity and opacity of its tariff structures, consumers will not be happy, or well served, in the long run. Ryanair is simultaneously popular and despised.
Almost everyone, consumers and producers, would benefit if these practices stopped, despite the feeble attempts of lawyers, public relations people and economists to justify them. These hired guns argue, often correctly, that consumers can, with sufficient diligence, obtain all the information they need. But most of us have better things to do than to engage in line-by-line scrutiny of our mobile phone bills, or undertake a discounted cash flow calculation of the lifetime cost of a £50 document printer. Thank goodness. Show me the person who has actually read the “important information” you must understand before entering the website of an institution regulated by the Financial Services Authority, and I will show you a man who has difficulties with girls.
Small regulatory and legal changes might help. A general principle that charges for making payments must be related to the transactions’ actual costs would both end some abuses and stimulate use of the cost-effective debit card system. Many people thought the law prohibited penalties in consumer contracts – disproportionate charges for minor infractions, such as late payment of credit card bills – until the courts decided otherwise. Legislation could reverse that position. Richard Thaler and Cass Sunstein have usefully suggested that utility providers present bills in standardised machine readable form to facilitate price comparisons. In some cases, agreements between firms, brokered by the OFT and negotiated under the threat of extended regulatory investigation, might do the trick.
Many people may think the problem of the $10 minibar bottle of beer is unimportant in the context of financial crisis and global macroeconomic imbalances, or that the costs of a regulatory drive would exceed the likely benefits. I disagree. Encouraging bad decisions through teaser mortgage rates was a central contributory factor in the financial crisis. Business practices whose rationale derives from consumer ignorance and producer knowledge create a larger problem. When people see many examples of minor exploitation of consumers in their daily lives, they will conclude that extensive exploitation is characteristic of business as a whole. And they may be right. If caveat emptor is seen as a dominant business principle by both producers and consumers then the legitimacy of capitalism and market organisation will not long survive.
As the battle for customer loyalty in the card industry became increasingly fierce, Amex recognised that its core competitive advantage had to be something that would be difficult to replicate: superior everyday customer service.
When Jim Bush, a company veteran of 24 years, assumed leadership of the Amex World Service organisation in 2005, he became concerned that the company was focusing too much on managing service as a cost centre – rather than as an opportunity to build customer relationships.
Mr Bush and his team knew they needed to reinvent Amex’s approach to service.
So starting in the US and expanding globally, Amex shed its traditional call-centre approach, which included monitoring whether customer care professionals (CCPs) adhered to a script. Instead it focused on whether customers would recommend Amex to their friends based on each interaction they had with the company. It also took its CCPs off the clock – letting the customer decide how long to spend on each call.
Amex can now link a customer’s satisfaction with a specific call to the CCP who took that call. It provides constant feedback so each CCP can improve.
To transform calls from basic transactions into opportunities to build relationships, Amex also developed “Relationship Care”, a service ethos based on the idea that the company’s most powerful loyalty-builders are the thousands of CCPs who speak with customers daily.
Amex now selects, trains and incentivises staff to get customers more engaged, creating an emotional connection and discussing the ways customers can benefit from their relationship with Amex.
To cultivate Relationship Care, Amex focused on its employees. It improved talent management and work/life balance – from flexible scheduling and a more robust career development path to additional benefits such as on-site health screening. It also changed the compensation structure, connecting a portion of incentive pay to customer feedback.
Company policies were improved to help CCPs better assist customers. This was a cultural transformation that required a new approach to managing information technology. Amex invested in new technology to enable CCPs to personalise every conversation with recommendations for each individual customer.
For example, an improved database for Amex CCPs could indicate that a customer had an Amex card but was using it only to make retail purchases. The system would prompt the CCP to explain to the cardholder how they could accumulate extra reward points if they also used their card for travel or at restaurants.
Customers increased their spending on Amex products by approximately 8-10 per cent as CCPs reinforced product benefits through Relationship Care. Customer satisfaction improved substantially too.
Amex also saw its CCPs become more efficient: they were able to reduce the average time of a call because they resolved issues more effectively. Service margins widened as a result.
Customer service is not just a cost centre. By focusing on delivering better service, companies can achieve greater customer loyalty and improved profits.
Customer service starts with the people who deliver it. Amex focused on its front-line employees to ensure they had the right training and compensation.
IT is only a means to an end. Amex designed its technology to balance efficiency with flexibility in order to meet varying customer needs and build relationships.
The author is the Joseph Handleman Professor of Information Systems and Innovation at the Ross School of Business, University of Michigan. The case study is based on work done with C.K. Prahalad
Published: May 2 2011 21:32 | Last updated: May 2 2011 21:32
Built-to-order: the BMW X3 in production in Spartanburg, South Carolina
Last November, Mike Romano went to BMW’s website and, with a few clicks of a mouse, assembled his own car.
Mr Romano, a salami factory production manager who lives in Lodi, New Jersey, speaks lovingly of the features he chose for his X3 compact sport utility vehicle: a titanium silver exterior, with dark Vienna wood trim and chestnut-coloured leather inside. The car arrived built to order from BMW’s factory in Spartanburg, South Carolina, in mid-January.
But the high point of the experience – which Mr Romano still talks about – was the film he received in the mail . It showed the SUV at various points on the line, from the installation of its “moon-roof” and wiring to the attachment of its trademark twin-kidney front-end grille.
“It shows the vehicle identification number in the corner, so you know it’s your own car,” Mr Romano said recently, talking via the vehicle’s speakerphone. “Without paying a dime extra, this gives you the chance of building your own car.”
BMW has long built cars to order for its German customers – who are closer to its main plants – as have its premium competitors Mercedes-Benz and Audi, although none of them yet offers the added perk of a film of the car being built. But in the US, where Henry Ford famously made the Model T only in black for a decade, there is a longer tradition of buying cars from what the dealer has available. Even BMW’s high-luxury Rolls-Royce brand, known for its handcrafted, bespoke limousines that sell for £200,000-£300,000 and more, has US dealers ordering cars ahead to allow for a bigger number of impulse purchases from the showroom floor.
Now BMW is seeking to wean Americans off this culture of instant gratification with its “Dream it. Build it. Drive it” programme, timed to coincide with the recent production launch in Spartanburg of the X3.
The Munich carmaker is pushing the concept hard. In December, BMW invited Martha Stewart, the US television lifestyle guru, to design her own X3 on air, using its “Build Your Own” design tool. Ms Stewart chose a sparkling bronze metallic exterior for the car and sand beige Nevada leather seats, with “fineline” wood trim – one of 70m possible configurations BMW says customers can choose for the car.
In April, Ms Stewart handed the keys of the car to Jody Lunsford of Roanoke, Virginia, a crafter of felt animals who won her “Simply ReMarthable” talent contest. (BMW will not discuss financial terms of its deal under which the service appeared on Ms Stewart’s show.)
Factory tours and premium cars
While BMW’s films of its X3s being “born” take custom-built carmaking to new levels, the premium end of the industry has been building cars to order for several years.
As part of their service, top-end marques – not just the German brands but Rolls-Royce and Aston Martin too – typically offer a full programme to customers picking up their cars, including factory tours.
Volkswagen’s famous “glass factory” in Dresden crafts the brand’s top-end Phaeton before the eyes of visitors. VW’s Audi brand offers people picking up cars from its plant in Ingolstadt, Bavaria, a full programme, including a factory tour and a visit to the company museum.
Rolls-Royce says that an increasing number of customers visit its plant at Goodwood, England, and some come several times during the production process to see their cars being built.
Behind the high-profile product placement, BMW has some less glamorous but very powerful back-office commercial considerations relating to inventory management as it prods more Americans to customise their own cars.
“The situation today is determined by: ‘Here’s a car, where’s the customer for it?’” says Holger Groitzsch, a BMW executive. “We want to turn it round and say: ‘Here’s the customer, where’s the car for him?’”
Building cars to order is easier than ever these days, thanks to the high degree of flexibility at automobile plants – not just BMW’s – which can cope with seemingly endless variety. Any state-of-the-art car factory can roll vehicles with sharply different vehicle specifications – or, increasingly, entirely different models – down the same production line.
While BMW does not charge extra for building to order, the company says customers who use it tend to order more extras on their vehicles, and thus pay more overall. Mr Romano went for optional features including a premium navigation package, and paid $49,000 for his car.
The US culture of buying from car lots saddles retailers with steep costs, too. A good dealer learns to anticipate what customers will want but, if he makes the wrong bet on, for example, a red convertible that sits too long on the lot, he will need to discount it to move it on. “The average dealer in the US has 300 cars in stock – you figure out the capital tied up in that,” Ian Robertson, BMW’s global head of sales, told the Financial Times recently. “We need to change the mindset that this is good.”
But BMW’s Spartanburg factory makes only the brand’s larger “X” SUVs, and cannot cope quickly with an off-the-cuff order for, say, a 3-Series saloon, made only in Germany.
To cater to US customers who want personalised vehicles that the brand does not build locally, BMW has since 2009 offered a “virtual” build-to-order service via more efficient management of its pipeline of cars in stock.
Under this, BMW in effect allows dealers to pool their stock on a nationwide basis. A car that has not found a buyer in Iowa, for example, goes into a “Dutch auction” and will be dispatched to Florida if a dealer there receives a customer order for a similar car. Mr Groitzsch describes this process as “liquefying” BMW’s pipeline of cars in stock. “It gives the customer the impression of getting an individualised car without us having to build it individually.”
He learnt the difficulty of anticipating what customers might want at Rolls-Royce, which makes just a few cars a day and thus faces even higher risks relating to inventory.
BMW and its German premium rivals are reporting record sales but they also fight hard for customers. In this context, the company’s build-to-order film is a powerful tool in its arsenal.
“Watch while the German-engineered powertrain is married to the body of your vehicle,” an assertive male voice says on the clip. The script is standard but the films do, in fact, feature original footage of individual cars being made.
Conrad Meyer, a credit risk manager at an investment bank and another early customer of BMW’s new US build-to-order service, says he recently chose the X3 over Audi’s rival Q5 because he could get it sooner.
Mr Romano, also the proud owner of a new customised X3, liked the service so much that he recommended it to two friends who have since ordered cars. He says he would not go back to buying off the lot. “You wouldn’t have the pleasure of saying: ‘This is the car I built,’” he says.
Stuart Aitken, the chief executive of Dunnhumby USA, a leading force in the growing field of data analytics, says he keeps this vision in mind as he uses the latest technology to provide companies with insights about their customers. “This is back to basics,” he says. “What we’re seeing is that businesses have driven out costs, they’ve got the scale in their operations, but they’ve forgotten who their customer is. What we do is allow businesses to reconnect with their customers, to become the corner store on a large scale.”
Data management might sound like a dry field, where statisticians and computer programmers haggle over terabytes and p-values. But as it becomes more sophisticated and yields ever richer portraits of customers and their behaviours, helped by social networking, it is increasingly becoming central to executive decision-making.
“Historically, companies used data for transactional purposes, to make sure they had an accurate customer record, or to calculate employees’ vacation balances,” says Tom Davenport, professor of information and technology at Babson College and author of Competing on Analytics: The New Science of Winning. “But once they had that down cold, they thought, ‘Gee, maybe we should analyse this to make better decisions.’ ”
The pioneers have reaped tremendous rewards. Sir Terry Leahy, former chief executive of Tesco, leaned so heavily on the customer portraits delivered by Dunnhumby that he ended up buying the company. Dunnhumby ploughed through the data yielded by Tesco’s Clubcard programme to build ever more detailed customer profiles, to the point where, according to Prof Davenport, it now has 12m unique profiles of its 15m customers. Its work is widely credited with helping Tesco open a wide lead over its UK supermarket rivals.
In the US, the lender Capital One built its business on rich consumer profiling through tracking buying habits and credit scoring. Universal banks like Citibank and Bank of America can use data on their customers’ spending patterns to make bets on equities, fixed income and currencies. There are risks, however, to exposing too much of this kind of activity. A few months ago, Prof Davenport says, it leaked out that American Express was lowering credit limits and raising rates for people who had moved to Florida and were paying divorce lawyers, on the grounds that they would soon be involved in a costly divorce. The negative publicity forced the company to drop the policy.
Confidentiality issues, and the enormous competitive advantage yielded by good data analytics, means that Dunnhumby restricts its work to one client per sector per geography. Its US operations are 50 per cent owned by Kroger, the supermarket chain, which hopes to replicate Tesco’s success.
Purely online retailers have the advantage of easily gathering the browsing and purchase history of every one of their customers. Amazon demonstrates the power of this with its recommendation features. Zappos, the retailer bought last year by Amazon, goes even further, suggesting products based not only on what you looked at last time, but how long you have been away and the time of year. They use a third-party recommendation engine – ChoiceStream, based in Cambridge, Massachusetts – to do the work.
New fronts in the battle for customer data are opening every day. Apple announced last week that through its iTunes, App Store and iBooks retail platforms, it has 200m customers with Apple ID accounts, linked to credit cards and one-click purchase access. And this is not the kind of data set Apple is going to give up easily. It is now battling publishers who sell content through Apple for control of customer information. Many publishing companies are weighing up the advantages of staying on the iPad platform with the cost of yielding so much control over their customer data. Competitors such as Google’s Android and Amazon’s Kindle see an opportunity here to dig into Apple’s lead in the tablet sector.
“When I hear the term data management, what resonates with me is the collection of data,” says Mr Aitken. “The growth in that field has been enormous. But where companies fall down is in leveraging all that data, and how strategically they change all the decisions made in an organisation based on that data.”
Treating customers more respectfully, so that they reward you with loyalty and thus higher profits, should be the primary purpose of all that data gathering. And yet often companies use data the wrong way. Mr Aitken gives the example of US cable and satellite providers who publicly pester new subscribers with tremendous incentives, in the process “slapping their loyal shoppers in the face”.
“The technology to do all this is easy and cheap,” says Prof Davenport. “The hard thing is getting people who are both good at analytics and at working closely with decision makers. Someone once called them PhDs with personality. It’s a pretty small intersection of people.”
Matt Keylock, senior vice-president for client solutions at Dunnhumby, says that amassing consistent data from the various fragmented systems and databases run by companies is just the first step. “The whole technical landscape can lead you down a path which makes it actually harder to be customer-centric,” he says, because acquiring ever more technology can distract you from the real goal, which is a proper view of your customer, right down to the one who comes in late, once a fortnight for that unusual jar of jam.
iPad impact touches restaurant menus, gas stations, schools
By VICTORIA HO
(SINGAPORE) The much- awaited iPad 2 became available in the US last Friday and is expected to hit Singapore in a couple of months' time. Apple's offering has caught the attention of Singapore businesses as well.
Local restaurant chain, Fish & Co, is in the midst of replacing its menu with iPad versions. It has placed iPads on each table at its Glass House outlet, allowing customers to send their food orders straight to the kitchen wirelessly from their seats.
The magic centres around a custom menu app, which Fish & Co commissioned Singapore- based app development outfit, Zimerick, to make. The app interfaces with the restaurant's point-of-sale system at the back-end in order to complete the order.
Jayss Rajashwary, Fish & Co's marketing manager, said this system has been a boon during peak hours, where customers struggled to catch a waiter's attention.
Fish & Co has installed 30 tablets at its flagship outlet and intends to place more at its other restaurants.
The F&B outlet is one of an increasing number of businesses looking to take advantage of the tablet phenomenon.
Bryan Ma, IDC Asia-Pacific associate vice-president of client devices research, said there has been an explosion of interest in the tablet form factor.
While the iPad was the only such device available for the most part of last year, tablets from HP and Motorola will join the fray this year.
Is the magic simply in the novelty? 'While a restaurant with a very big wine list could save on printing menus, you have to question the return on investment spending a thousand bucks on an iPad,' he said.
However, Zimerick founder Quek Choon Yang said return on investment goes beyond the differences in printing costs.
Fish & Co's app was designed with features intended to help upsell menu items, he said. The app is able to pair dishes with additional side order recommendations and set items, which are displayed to customers.
And there is an element of marketing worked into the app. It is connected to social media networks such as Facebook, and enables customers to broadcast their meal choices to friends - a subtle way of additional advertising for Fish & Co, he added.
A growing number of businesses are getting more savvy with what they can do on tablets, said Mr Quek.
Caltex, for example, commissioned an app which allows users to find a petrol kiosk nearby. It has released the free app in Singapore, Thailand, and Malaysia in the region, and uses the iPad's GPS chip to locate users.
Schools, too, are coming onboard the tablet craze with some innovative ideas on how to use the tablet.
Nanyang Girls' High School started a pilot project this year replacing textbooks with iPads for four classes of students.
The girls no longer sit in the traditional layout of rows of desks. Instead, they sit in a circle facing the teacher, their iPads perched on their laps as they participate in class work.
This has been a revolution for peer work, said the school's dean of curriculum, Seah Hui Yong.
She said the children complete most of their assignments in soft copy and work is submitted to a wiki- style collaborative space for peer evaluation.
Chinese language classes have employed voice recording apps and interactive titles in order to engage students. The audio recordings have helped many of the students who don't speak Mandarin at home to refer to how some of the words are read, she said.
The school, which did not negotiate a price discount with Apple, bought 150 Wi-Fi-equipped 32 gigabyte iPads for about $800 apiece. Most tablets out on the market at the time were going for over $1,000.
The school plans to extend the iPad project to a whole level of classes next year, and has plans to equip every teacher with a device within this year, she added.
IDC estimated that in the third quarter of 2010 some 60,000 tablets shipped in Singapore. This year, the number could hit 400,000.
BROADCASTER MediaCorp has issued an apology for sending out marketing e-mail last Friday urging advertisers to capitalise on breaking news about the earthquake in Japan.
The e-mail said its news channel would be carrying extended reports on the disaster.
It asked recipients to call its sales representatives to book advertising slots for the weekday evening programmes, which were expected to draw sizeable audiences.
Netizens were outraged when they read the e-mail, which popular blogger Mr Brown posted on his blog the same day he received it.
One of those who found the e-mail insensitive was Mr Benjamin Koe, who heads client leadership at JamiQ, a social media monitoring firm.
'I understand that they see it as a marketing opportunity, since I'm from the marketing industry myself, but for MediaCorp to blast it out this way is just exploitative and in poor taste,' he said.
On Saturday, the broadcaster released a statement from senior vice-president of marketing and sales planning Edwin Koh, who said the direct mail was sent to clients and agencies 'that had an interest in being part of 'breaking news' coverage'.
'The staff concerned has been counselled to be more circumspect; we hope the public will be forgiving and we can focus our attention and efforts on the affected victims of this most unfortunate tragedy,' he said.