Archive for July, 2010

Business operating models are a funny thing.

If you look at a given industry, say the restaurant business, you look around, you see expensive restaurants in nice locations, and you see low cost restaurants in convenient locations and you can pretty much assess how much a nice restaurant charges for a steak (maybe $35) and you can see how much a pizza costs at a neighborhood pizza place (maybe $12).  If you want to start a business, drawing up a business plan comparing how others in your industry charge is a pretty commonsense way to go about it. From there you figure out your costs, a nicer place will be more expensive, but you will be charging more.

But then come the big disruptions in industry where all bets are off in terms of defining a business operating model when someone comes up with a radically different approach.

Pizza by the slice was a hugely disruptive idea at the time, scoffed at by many people who couldn’t fathom why a person might buy one slice.  But obviously it was a great idea.

Then came fast food and take out.  The notion of being in a hurry and being able to eat on the go were introduced as possibilities in the restaurant business that really shook up some fundamental assumptions about what customers wanted and what they were willing to buy.

Buying an individual song from an album was also a hugely disruptive idea, and Napster tested the boundaries of intellectual property and how to make money in that industry.

Still in music, the band Radiohead  posted an album on the internet for people to download and pay whatever they thought it was worth.  A huge risk that paid off handsomely for them.

Alice.com sells packaged goods over the internet at cost with free shipping and makes their money through advertising in a unique model.  Costco is the only other business I can think of that doesn’t make any money from the goods they sell to their customers (their profits come from membership dues).

And now, Conde Nast takes a turn at it.  Conde Nast owns popular magazines like Vogue and Vanity Fair and they are ready to turn their industry on its ear as described in this article by Jeremy W. Peters.   In short, the model for the glossy magazine business has been to get lots of ad pages and then charge the customer as little as $12 a year for a subscription, and have a pretty high newsstand price for people like me who buy them at the airport.  It has gotten harder and harder to get ad page revenue, making the basic model riskier and riskier.  Ad revenue is declining because more people are getting their content online, so the solution Conde Nast is going to,which is pretty radical, is to charge customers a lot more and give them access to both print and online content for their fee.  Charging for online content is largely going against the trend in the world of content.  They seem confident that the customer will buy into this more expensive model with CEO Charles H. Townsend pointing out

“They pay $180 a month for a cable bill.”

Hmm.  Comparing cable to Vanity Fair doesn’t really work for me.

TV for most people is a viewed as a necessity, Vanity Fair is not.  For many people, the fee they pay is because there is only one cable operator at their location, so they have no choice but to pay this rate, and in addition to it being a necessity, a lot of people watch TV every single day – people don’t read Vanity Fair every day.  So comparing Vanity Fair to cable TV is a non starter.  Does that mean that I think they will be able to charge more than $12  a year for a subscription?  Probably.  And one place they might take a page out of the cable company play book is to charge a monthly fee.  $180 a month for cable is over two thousand dollars a year, but you don’t see that number in any of their marketing literature even though most operators require a minimum one year contract.  Do I think it’s smart for Conde Nast to get away from dependence on advertisers, sure.  Do I think they should do more experimentation with the direction of content and how people want to pay for it and who they compare themselves to?  Yep.

The bottom line is that we are seeing basic assumptions in industries being tested because of the way people are consuming information and entertainment these days.  Publishing is currently one of the most up-in-the-air industries and it’s still the wild wild west when it comes to figuring out business models.  The key is staying in touch with what your customer values and what they are willing to pay for it = and keeping a very open mind about where you may need to do some rethinking.

As Warren Buffet said “price is what you pay, value is what you get.”

-Ric

The title of this post was the original working title of the Harvard Business Review article that I co-authored that was published in 2008.

I still use the phrase often, for the simple reason that it is very frequently the case that where a company makes its money isn’t where we would expect.  The fact that McDonald’s is the largest landlord in the world (they buy the entire block their restaurants go on so they control who is next to them) is one of the simpler examples that I cover in the book Rethink.  Alice.com is another company I talk about a lot because they (like Costco, but in a very different way) don’t intend to make any money selling the goods that they sell – they make money by taking the age, gender, and ZIP code data of their customers and make that part of the transaction with the people who buy ads and give coupons on that site.

My friend Mike reminded me of another example that most of us have encountered – rental car company insurance and gas.  I will admit, the first time someone asked me if I wanted insurance and if I wanted to pre-pay the gas, I felt really dumb and figured that if they asked, most people probably did it, so I went ahead and paid for them.  As I get older and grayer, I now realize that in a lot of cases the rental car companies are simply preying on the fact that their customers don’t know if their own insurance covers them (or their company insurance if it’s a work trip) and correctly assume that we won’t want to risk it and pay the extra $15/day or whatever it is.  The gas up-sell is a slightly different trick (and I do mean trick), where they are making you wonder if you are going to be running late and won’t have time to stop for gas on the way back to the airport, or if you really know how much driving you will be doing on your visit (for a lot of cars, a full tank of gas is over 300 miles worth – I haven’t driven 300 miles in two years of rental cars).

Somewhat similar to this is the cartoonishly expensive items inside the hotel rooms (movies, local phone calls, internet, mini bar).  Especially when I am staying in a nice hotel, I am really offended that they want to gouge me when I am in my own roof.

But all of these cases make you wonder if all of these nickel and dime charges are really gravy on top of an already profitable business, or if the rental car or the hotel room are really where they cover their costs and they make their real money on what we think of as incidentals.

I don’t think there are simple universal truths to these questions, but I do think their are some basic guiding principles that organizations can follow.

1) If your brand is about being a bargain, then customers shouldn’t be surprised to have to pay extra for incidentals, especially if there is clear incremental cost for the product or service in question.

2) If your brand is luxury, people have already agreed to a price that’s very high, if there are actual costs in the incidentals, just bake that into the room rate or the car rate.  If I am at The Ritz paying $400/night on business travel, I really feel like I am being taken advantage of when I am asked to pay $15 a night for internet access when I know there’s no incremental cost to the hotel for that service.

So is Thrifty car rental an insurance company that uses rental cars as the way to get business, or is it really a rental car that happens to also sell insurance for its cars?  Great question, but an even better question to ask yourself if you are really clear about your brand promise and what your customers want from you.

-Ric

Bynamite

Reputationdefender

MyIDPal

Abine

Foursquare

. . .even Zillow

Not familiar with these companies?  You should be, because they are plotting the course for the future of internet privacy and how we interact with people and merchants.

Bynamite is just the latest and there is a very good article about them here.  In short, Bynamite has (correctly, in my opinion) seen that each time we conduct a search on the internet, the search itself is a transaction because it gives merchants and the search engines more information about our interests, tastes, and needs.  Bynamite also thinks that this sort of profile information will in short order play a very real role in the prices we pay for goods and the kinds of coupons we get.  I think they are right about that as well – and this by itself is one of the most fundamental changes in the world of commerce to come along in a very long time – a set of one, or many, micro transactions prior to the primary transaction(s) that then inform the price we pay for future transactions – in essence context-rich transactions.

This is already a reality in grocery stores, but that’s fairly two dimensional compared to what we are going to see in the future.  By that I mean that the grocery store knows about the food decisions of our household (and gives us GREAT discounts based on that) while merchants want to know everything about what we buy so that they have a sense of whether to flat out ignore us or whether to woo us, or something in between.

In the context of Zillow, the web site that aims to keep track of the value of every house, allows the owner of the house to correct information about the home, such as updating the number of bedrooms after a remodel, which has a direct impact on the value of the house.  Only the current owner of the house can make these changes, but it’s a very similar concept to Bynamite in the sense the people get to update information about “themselves” with Zillow being limited to our houses.

But there’s a big problem.

While on the one hand, we see people putting themselves out in public like never before, from blogs to YouTube, even Facebook, that is a side of “us” that has given us privacy. I will concede that it’s much more true of the younger generation than the older generations, with some crossover on both sides,  but the notion of “We Live In Public” depicted in Ondi Timoners film seems to be getter more true than ever.

But how do we balance this intense growth in the desire to be out there in public to have the 15 minutes of fame, not just once, but every single day as Josh Harris says in Timoner’s film, with this seemingly equally strong drive to be as private as possible?

Enter the modern day Madonna-Whore complex, which in the simplest terms is the case of the man who wants to be sleeping with the most sexual woman possible (whore), but publicly wants to be the woman who is so pure that you wouldn’t think if her in sexual terms (Lady Madonna, not the singer . . .).

That seems to be where we are with privacy today.

On the one hand we want to have total control over our privacy, but at the same time we want to be as public as possible.  While these notions seem to be in conflict, I think this is at the heart of who is going to be successful in this arena.  I think the way it will work is that we will have a “public” persona that will reflect whatever level of privacy we decide to have with the outside world and our friends, but on a transactional basis, that will be the “private” person that we keep to ourselves and whether that links to the book we buy on amazon or something more private, the “private” persona will not have our actual name attached to it, but instead will be an ID or a user name (much like a PayPal concept for our ID – which is what the highly secretive MyIDPal seems to be all about).

I expect this to be a moving target for some time, and the public/private line will be drawn very differently for different age groups in different cultures, but that’s where this is all going.  Despite their 2 million users, I still think foursquare has drawn the line in the wrong place, but time will tell.

-Ric

Another case of simple is better.

Testing credit card security starts before you think. And it can be done manually, without even a phone.  And this has always been true because of the use of the Luhn Formula

If you are like me, you hadn’t ever heard of the Luhn Formula, named after Hans Peter Luhn, who according to this article played a tangential role in the creation of the world wide web.

It turns out that just looking at the number of the credit card alone you can tell if it’s an actual credit card number.  Back in the days where there were those sliding mechanisms that used carbon paper (some taxis still use them) there was no good way to test if a card was active, but they did have a way to check if it was a valid number, and that test is still in use today.

It turns out that by going through four simple steps that end with some simple addition, if the number you arrive at ends in anything other than zero, it’s not a real credit card.  Here’s the test.

What a clever and simple way to check if a number is valid that requires no technology whatsoever.  A great “how” to check a number for validity.

As for the reference in the title to kanban,  I can’t help but think that in this day and age it’s time to add another simple level of security that would eliminate credit card fraud.

Kanban is a term that’s used a lot in business, but it’s literal translation from Japanese is “show card” and how it’s used is that the card is a signal that means it’s OK to proceed with the next step, and the work can’t start until the signal is given.  I learned this recently when I read the book Kanban, by David J. Anderson and I really enjoyed it – and I recommend it.

My rethinking on the credit card is that most people carry cell phones around with them, it would be so easy for the credit card company to shoot out a text message at the point the credit card transaction is taking place to ask you if you are making a purchase at Blue C Sushi (or whatever the place is called where you are shopping), and if you say “Yes” the transaction proceeds, and if you say “No” it stops (so the “Yes” is the kanban signal).  You would probably want to set up some preferences and threshold amounts, but that would be easy.  Even better, if the credit card company sent a second message, asking what per cent gratuity to apply, you could send that number back and there would be no need to even sign anything since you have validated and authenticated everything right then and there.  Don’t you think it’s time for something like that?

-Ric

Every so often I feel like I am the last person to learn about something.

Groupon was like that.  I heard about them the week before they closed a $150 million venture round.  You have to have accomplished a lot to land that kind of money in 2010.  I may have also been the last person to learn about Skype.

The latest is one I learned about called Techmeme, and there was a good article about them in the paper today (here).  Evidently, Techmeme is where a most people in Silicon Valley go to get their news.  It’s a news aggregation site so that we don’t have to all keep track of all of the various news sites that we like to go to, which is often more than 20 sites per day for some people.  As Claire Cain Miller points out in the article, the reason Techmeme is so popular is because they have done some rethinking in terms of how to get the best content that saves them the work of “crawling” all over the web to aggregate the best content.  Specifically she points out:

“Unlike RSS feeds, which gather everything on preselected sites or blogs, Techmeme groups stories according to importance, and clusters other reporters’ and bloggers’ perspectives on the same topic.”

The trick with all of this is that while some percentage of the content will be interesting to most readers, every reader is different and we are going to start to see more companies with smarter aggregation engines so that we get to a “MyTechmeme” notion for content that’s not so different from the way I track stocks on my “My Yahoo!”page. As organizations get smarter about collecting data about what we like and don’t like (Netflix remains the best at that – and then using that information to be much smarter about making recommendations).  It’s already starting to happen with location based services – now that FourSquare has two million users it’s hard to ignore, while I still think they have the wrong model, that space is really ripe right now.

Content aggregation will continue to be hard, but it’s exciting to see a company like Techmeme really approach the space from a different angle to get very different results.  As Miller’s article also points out, while some people worry that great journalism is going away because people want shorter snippets of news, the real art now is the orchestration and management of the content to the delight of their readers, whether they are brushing up for a meeting or a cocktail party.

-Ric

The easiest way to tell that this isn’t me on the cover of the latest Men’s Health magazine is that I have gray hair.

But that’s not what this post is about.

This post is about some thing that you can barely read on the cover and I can barely read when it is blown up to close to actual size (over on the right).  The person in the picture is evidently one of the actors in the new hit movie Twilight: Eclipse, and in this photo he’s wearing Calvin Klein Jeans.

Well this cover was the subject of this article by Joseph Plambeck talking about the fact that it’s unusual to give credit to clothing manufacturers on the cover of a magazine like that.  The clothing credit is usually mentioned on the inside, and Men’s Health has apparently been doing this for some time even though they say they don’t get anything back from the clothing manufacturer for this.  As the editor in chief of Men’s Health put it, it’s “an innovation” – a service to readers.

No it’s not.

The fact that Plambeck put the word innovation in quotes makes me think he feels the same way I do.

I think Roberta Garfinkle from TargetCast TCM (quoted in Plambeck’s piece) feels the same way – she said:

“They’re pushing the envelope here,” she said. “Are they tearing it? I don’t think so.”

This is a minor change, it’s not an innovation.  Whether you agree with my definition of innovation (which I will get to shortly), this is a very minor change, especially given how tiny the print is.  It seems like it’s every day I hear people throw the word innovation around and what they are talking about isn’t much more than a mild change, and there’s a good reason the word change is different from the word innovation.  The basic dictionary definition of innovate is “to introduce as or as if new.”  This is taking a piece of information and putting it in a different place.  There’s nothing new there.  The “what” they were doing was giving the credit (and “whats” tend to be pretty durable and not change a lot), “how” they did it changed a little bit in terms of the location of the giving of the credit.

Innovation to me means that a “how” you do something is so different that it doesn’t resemble “how” you did it before.  Some examples:

1) Get cash.  The ATM was an innovative way for us to get cash initially, but especially when they showed up in places that weren’t even banks

2) Watch movie.  Stores like Blockbuster were innovative ways for us to get movies by renting them, and then along came Redbox (like the ATM put the video rental in another store location at an incredibly low price), and Netflix which allowed people to rent movies using the internet and mail (and now streaming video).  Netflix also innovated in the areas of payment in the sense that people simply pay a flat monthly fee.

3) Buy goods.  Alice.com is a company I talk about a lot because they sell consumer packaged goods over the internet at cost with free shipping.  Their innovation is sharing age, gender, and ZIP code data with their advertisers (about who responds to ads and coupons) and that’s where they get all of their profits.

4) Send message.  Obviously e-mail was a very different way of sending a message.  No postage, but you still need an address (the e-mail address).  Facebook and LinkedIn have both created a situation where you don’t even need that – as long as you know the name of the person you can send them a message even if you don’t know their e-mail address, which is really powerful.

So those are some of my examples.

Having the conversation in an organization about where innovation is needed, or where it’s the necessary response to a particular problem or opportunity is something that needs to go on, but if you have a flimsy definition of innovation, the results you get may also be pretty flimsy.  So please define innovation before you start to use the word, and when you do, make sure you really are doing something new and also define it in the context of how you define other levels of change (minor change, medium change, major change, and innovation make up a good spectrum for describing the level of change). Once you have a spectrum like that, then you can get into more concrete cost/benefit discussions about what’s best for the organization.

Rethinking work is a lot easier and more successful if you have clear definitions like that.

I really couldn’t care less about the magazine or the credit (or the movie), but when I read about it in the paper, it turned out to be a decent example of an innovation that isn’t an innovation, so I decided to blow the whistle on them.

-Ric