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

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

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

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

Wow.

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

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

-Ric

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

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

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

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

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

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

E-mail

Fax

Overnight mail (FedEx)

Voice mail (telephone answering machines)

ATM

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

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

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

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

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

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

-Ric

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

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

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

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

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

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

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

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

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

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

-Ric

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

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

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

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

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

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

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

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

-Ric

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

Building a business that depends on the products of another company is risky for starters, and then if you look at the margins that people often get for “accessories” for products, that’s not always a great business story either.

The story of SDI Technologies, formerly Realtone electronics, is a great story, and it’s well told in this article by Eric A. Taub in the paper today.

Back then, Realtone made radios when they were a really big deal and they make a lot of the clock radios that are in hotel rooms.  Today as SDI, the kids of the founders of the company run it, and they have successfully turned the company back into a booming business by attaching themselves to Apple products.  They have a line of iHome products that are docks for iPhones, iPods, and iPads, which do some pretty cool things that are described in Taub’s article.

What’s the big takeaway from the success of SDI?

Pretty simple, -when a company has a runaway success story as Apple has in recent years, think about what you could make to compliment it in an already established industry.  The hotel clock radio has been a bad experience for the last 20 years for some really simple reasons, and SDI fixed all of them with these new docks, mostly leveraging Apple technology.

Really great to see.

And Now I know that there are 4.9 million hotel rooms in the US, I don’t know what I would have guessed if someone had asked me, but I guess that means that about 1 in every 100 people is in a hotel room every night, and I guess that makes sense.

-Ric

This article about Knights Apparel by Steven Greenhouse appeared in the paper not too long ago, and I have been thinking about it.

There’s some great rethinking going on at Knights Apparel, and CEO Joseph Bozich is trying to take a “how” trap view at employment practices and wrap his brand around it.   He thinks it matters “how” he treats his factory workers, unlike lots of other manufacturers who infamously run sweatshops (and people keep buying their products).

The short of it is that his company is making college logo clothing but they are bucking the trend of using sweatshop conditions and wages.  While I think that’s admirable, and the right thing to do, and I think it’s great that they are going to get so much promotion from third party labor organizations to buy these products because of their labor policies (mentioned in the article), I don’t believe that alone is going to sell hats and sweatshirts when one with the Nike swoosh is right next to it at the same price.

Why?

For the same reason people didn’t stop buying Patagonian Toothfish (AKA Chilean Sea Bass) when word got out that the population is at risk.  It tastes good, and that fish economy doesn’t directly affect our lives.

For the same reason cars like the Prius aren’t anywhere near as sought after as the Tesla Roadster.  Sure we want to help the environment, but if it’s funny looking and slow and it’s not really going to be cheaper in the long run (Prius), then I will go for the Tesla which is really fast and good looking (which also isn’t going to be any cheaper in the long run).

For the same reason Newman’s Own wasn’t primarily successful because it gives 100% of its profits to charity.  It was successful because it is a really good line of products and Paul Newman is a great brand.  The charity is nice, but that’s not the number one reason they are a big success.

For the same reason that customers don’t care that Costco isn’t making any money selling the products that they sell.  They make their profits from their membership dues.

For the same reason that customers (except me) don’t care how alice.com makes money when they are selling consumer packaged goods over the internet at cost with free shipping. See earlier posts about Alice to learn about their model.

So what is the #1 key to success at Knights Apparel?

Just like Newman’s Own, the product has to be good in its own right, and if the product is as good or better than its competitors, only then will secondary issues like working conditions of the employees come into consideration.  Thankfully, that appears to be the case as indicated by this quote from Greenhouse’s article:

“Mr. Bozich says the plant’s T-shirts and sweats should command a premium because the company uses high-quality fabric, design and printing.”

If that’s true, then they have a great shot at making a go of this.  I can’t help but see the admittedly awkward irony that this is the one place that makes sweats that isn’t a sweatshop. . .

I am rooting for you Knights Apparel, and the next time I am in a college clothing shop (probably not Duke’s – mentioned in the article, since I went to Georgetown), I will look for it.

-Ric