Value-based pricing

Many companies selling industrial products employ value-based pricing. By that, I mean they calculate the economic benefits for the customer of their product vs rivals' products. Many of those benefits occur over time, not just at the point of purchase. In those instances, firms must be very aware of the time horizon and discount rate of their customers. If they have a short horizon, if they are going to upgrade to a new product in just a few years, then that limits the benefits your product will provide, and limits the price you can charge. Similarly, if the buyer has a high discount rate, they will devalue benefits in the out years, decreasing their willingness to pay for your product. If a firm is selling it's product in developing markets where buyers have less access to capital, they may not be able to charge as much, because buyers will have much higher discount rates.

Should leaders NOT be brand loyal?

Should a business leader be completely loyal to his or her firm's products? That may seem like a stupid question. You might think that it's obvious that they should be loyal. After all, if they aren't dedicated to their own products, why should customers be? However, if leaders want to keep their thumb on the pulse of the competitive marketplace and stay in touch with key trends, they must purchase and consume competitors' products on a regular basis. They can't just observe those products from afar. They need to dig in and understand the purchase process for those products, and then they need to understand what's it like to be a typical consumer of that product. That means you have to do more than just casually handle the product once or twice. You need to become a regular user of some competitors' products or services. Regular use proves critical, because you often do not understand the key benefits and disadvantages of a product or service at first glance; you may learn the key advantages, as well as pain points, as you consume the product or service over time.

Your New Venture: Try Selling Aspirins, not Vitamins

The Heath brothers have another terrific column in Fast Company magazine this month. In their article, they describe how entrepreneurs must not just build a better mouse trap, but make it clear why that mouse trap addresses a "felt need" of the consumer. Here is what they say:

If entrepreneurs want to succeed, as venture capitalists like to say, they'd better be selling aspirin rather than vitamins. Vitamins are nice; they're healthy. But aspirin cures your pain; it's not a nice-to-have, it's a must-have.

The must-have vs. the nice-to-have: it's a wonderful distinction that all entrepreneurs must keep in mind. Find those pain points for consumers and then design a product or service that addresses that well. The Heaths have some nice examples in the article, including NetFlix, which discovered a felt need when it eliminated late fees. As an another example not found in the article, consider Commerce Bank. It created a very different kind of bank, one much more focused on providing a pleasant customer experience. In fact, that experience was so satisfying for consumers that it could attract savers without offering higher interest rates than rivals. Commerce Bank, for instance, discovered that one pain point for many consumers was the limited hours during which banks were open. Thus, Commerce became one of the first consumer banks to have extended hours during the week, as well as hours on weekends.

GM IPO

This article from Fortune suggests that financial planners are fairly negative on the forthcoming GM IPO. The article raises several good points, including the fact that GM employees and dealers might want to be cautious about buying some of the 5% of shares set aside for them in the IPO. After all, they already have their livelihoods tied substantially to GM's performance and survival. Adding to their level of risk by purchasing large amounts of stock would not be prudent at all.

Overall, the article raises legitimate questions about the IPO, including the issue of whether an investor will be comfortable purchasing shares in a firm that is now on its fourth CEO in the past year or so. When you invest in a stock, you don't just invest in that firm's technologies, products, and strategy. You invest in its leadership team. It's hard to invest in this team, given the turnover over the past year. Perhaps they will do a fantastic job, but a great deal of uncertainty exists. All of these issues point to the big overarching question: Is this really the best time from a financial standpoint for an IPO? It's hard to answer that question affirmatively given all these concerns and questions.

After Action Reviews

I spent yesterday at the US Air War College at Maxwell Air Force Base in Alabama. During a series of seminars, I had the opportunity to discuss a range of leadership topics with some of the best officers in each branch of our military. One topic involved After Action Reviews and examinations of near-misses. We discussed why they are so effective in the military, and why it's been difficult for companies to emulate this practice successfully. A number of issues arose. First, the military handles the lesson learned exercise separate from any examination if potential wrongdoing. Second, leaders are taught from their first days in the military how to examine themselves critically and how to accept a critique of their actions. Third, they don't rest on success. They don't let a successful outcome reduce the level of scrutiny applied to processes and decisions. The outcome is almost irrelevant in terms of how they go about evaluating a mission with a critical set of eyes. Finally, they never avoid doing a review simply because "they are busy" - something business managers say all the time. Those are just a few of the key ideas that emerged. I'm quite sure many firms would benefit if they made lessons learned as high of a priority as these soldiers do. What a pleasure to learn from these fine men and women who defend our freedoms. May God bless them and keep them out if harm's way.

The Cost of College Tuition

Everyone is very focused on the cost of college tuition these days. Some say we are in the midst of the next bubble to burst. Are there any good ideas for reducing costs? After all, to get prices down, we have to get costs down. One intriguing idea offered by several folks is to operate colleges on a 12 month calendar, as opposed to the current 8-9 month calendar, whereby the campuses are underutilized in the summer months. The key benefit, of course, is that you could leverage fixed costs more effectively by better utilizing expensive assets.

Does Groupon Help or Hurt Businesses?

The Street.com reported recently on a new study by Utpal Dholakia, associate professor of marketing at Rice University's business school. He conducted a survey of 150 businesses that had signed up with Groupon in 19 different cities. Interestingly, and rather surprisingly, 2 in 5 businesses reported that they were not likely to use a Groupon promotion again.

What happened to cause dissatisfaction at a number of businesses? Well, it turns out that some firms aren't well-equipped to handle the huge surge in customer volume. As a result, some customers have a rather negative experience. Moreover, employees can become frustrated by the hectic situation. Interestingly, some of the customers who may be the most dissatisfied are the loyal, local customers who visit that business regularly, and who may not even be aware of the Groupon promotion. They are not used to waiting for a table at the restaurant, for instance. Now, they find themselves with a long wait, delayed service, and the like.

Firms, then, must take great care when using a Groupon promotion. First, they have to be ready for the surge in volume. That means taking a close look at core business processes as well as manpower levels. Second, they have to consider how their most loyal customers will respond to the sudden surge in new customers. Of course, it's not just the increased volume that may turn off new customers. Companies need to be mindful that the customer responding to the Groupon promotion may be different in kind from the core loyal customer. Those differences, if substantial enough, can cause challenges in providing high levels of service. Clashing customer expectations, needs, and wants must be considered carefully, as this new set of customers arrives.

Can a Product Recall Help Your Brand?

New research suggests that how your firm handles a product recall cannot only help preserve brand equity, but perhaps even enhance it. Consider these findings from research conducted by Chris Malone and his colleagues at Relational Capital Group, in conjunction with Dr. Nicolas A. Kervyn at Princeton University and independent market research provider Candice Bennett & Associates. Here is Chris Malone's description of the findings:

In September 2010, my firm, the Relational Capital Group, collaborated with Dr. Nicolas A. Kervyn at Princeton University and independent market research provider Candice Bennett & Associates to conduct an online survey of 1,000 U.S. adults regarding several recent product recalls. Importantly, we examined customer beliefs about the handling of these recalls, as well as the purchase intent and loyalty for each recalled brand relative to its key competitors.

Overwhelmingly, respondents indicated (93 percent) that product recalls reveal the "true colors" of companies and brands, presenting a unique opportunity for them to demonstrate they care more about the safety of customers than their own profits. Moreover, 87 percent agreed they are more willing to purchase from, and remain loyal to, a company that handles its product recall in an honest and responsible way. These startling findings fly in the face of our instincts to hide our mistakes from customers.

Luxury Brands and Online Customer Reviews

Interestingly, many luxury brand firms have resisted allowing customers to post on-line reviews of products for many years. Things have begun to change though. As the Wall Street Journal reports today, some luxury brands have followed the lead of Nordstrom, which began enabling customers to post feedback about products last fall.

Why have luxury brand firms been late to the customer review party? Well, they like to think of themselves as being on the leading edge of fashion. They do not want to be seen as developing products simply by focus group and customer survey; instead, they want to be pioneers who bring new creative ideas to their customers, ideas that perhaps would not have even come to the usual customer's mind before they see them on a store shelf.

While I can understand the rationale of the luxury brands, I think they ultimately must embrace customer reviews. Whether it's on their site or not, customers are talking about their brands and products on-line. Ignoring the power of customer reviews seems a perilous move. After all, reviews can not only provide the company important feedback; they also create network effects. By that, I mean that customers will derive more value from a luxury retailer's website as the number of users go up, if many users are offering interesting reviews. Amazon, NetFlix, and others all benefit from that network effect phenomenon. Why should the luxury retailers miss that opportunity? Finally, just because customers are offering that feedback does NOT mean that luxury retailers can't still be fashion pioneers. What it does mean is that they can't simply blame the customer when a new product falters. In the end, fashion isn't leading edge unless someone chooses to actually wear it. Blaming the customer never gets you anywhere.

New JetBlue Ad Campaign

Some funny new ads from JetBlue, which make a powerful point...

Job Rotations: Too Fast?

Generally, I'm a proponent of developing leaders within an organization by rotating individuals through a series of increasingly challenging assignments, particularly early in their career. However, some firms' practices concern me, because they seem to move people at a very rapid pace. Why worry about fast rotations? As people advance in their career, they work on increasingly complex projects. These projects, from conception to complete execution, often take quite some time. If their job rotation is too short in duration, then individuals may not see a plan that they conceived all the way through to completion. In that type of situation, we may actually not be maximizing their learning and development by moving them on to a new assignment so quickly. Moreover, it may become very difficult, if not impossible, to judge their performance, if they have moved on before an project has been implemented fully. To some extent, then, fast rotations encourage and reward people with big ideas, but don't actually examine whether they have the skills and capabilities required to translate those ideas into action.

Starbucks: Better Drinks, Longer Lines?

Starbucks has announced some changes in the way it makes coffee drinks in an effort to enhance quality, reduce errors, and increase consistency over time and across locations. For instance, the firm has instructed baristas to not make more than two drinks at a time, to steam milk for each drink individually (as opposed to making a whole pitcher and using for multiple drinks), and to use only one espresso machine at a time. Today's Wall Street Journal reports that some baristas worry that the wait times could increase.

As a frequent Starbucks customer, I certainly applaud the efforts to enhance consistency and quality. The quality vs. speed issue raises some interesting questions though. In many ways, Starbucks has two types of customers. Some devoted fans are coffee aficionados who care about quality above all else. Others are more "casual" coffee drinkers who place a priority on speed, particularly in the morning on their way to work. Starbucks wants to maintain its brand credentials with the coffee aficionados, and thus it's taking these steps to enhance quality and consistency. On the other hand, a large stream of revenues comes from the "less expert" customer who just wants their drink quickly. To some extent, meeting the needs of one subset of customers may come at the expense of the other. Many companies face this type of tension as they grow from their original differentiated niche strategy toward a mainstream brand.

Now, the article today also mentions though that Starbucks has been working on many process re-engineering efforts to reduce waste, eliminate unnecessary steps, and streamline key processes. All these efforts may have the "double benefit" of increasing quality and enhancing speed. To the extent that these efforts prove successful, Starbucks customers may not face longer wait times. What Starbucks seems to be doing is slowing the baristas down in a few key areas where it can really enhance quality, while trying to offset that impact on wait times by eliminating other steps and processes that do nothing to contribute to increased quality. If it works, everyone wins - Starbucks, its baristas, and its customers.

More on the Sun Chips, Gap Logo Backlash

There is more news regarding both the Sun Chips and Gap logo controversies that I blogged about last week. As you may recall, Sun Chips pulled most of its biodegradable bags off the market because of complaints, many via social media, about how loud the bags were. Similarly, Gap faced a major backlash via social media in recent weeks. They had launched a new logo, which was criticized widely on many social media platforms. Gap responded by saying that they would use crowdsourcing to see if consumers had better logo ideas.

Now, Sun Chips has faced a counter-reaction via social media. Many people are now coming forward to criticize the company's decision to pull the biodegradable bags from the market. As you can imagine, many of these people think that the environmental benefit should outweigh concerns about noise. Similarly, Gap faced a counter-reaction about the use of crowdsourcing to design a better logo. The firm now has abandoned the crowdsourcing idea.

What do these two stories illustrate? Perhaps most importantly, they tell me that firms have to be careful about how quickly they react to commentary via social media platforms. They have to consider the response bias question: Are the folks who are commenting actually representative of typical customers? Moreover, firms have to consider the new and varied reactions that will emerge from any decision made in response to an initial batch of feedback from social media users. What will the chain of events be that might be unleashed by a reaction to social media feedback?

Bryant University Open House

I look forward to seeing many prospective students and their families at the Bryant University Open House on Saturday, October 23rd. Learn all about Bryant's business programs. I like to say that Bryant offers a business education that extends "Beyond Books, Boundaries, and Borders." By that, I mean we engage students in learning well beyond the standard textbooks; we offer real-world applied education with lots of active/experiential learning experiences involving various kinds of companies and organizations. We extend beyond boundaries because we offer an interdisciplinary education, including the arts and sciences alongside business education. Finally, we extend beyond borders with our global focus, various study abroad opportunities, and diverse international faculty. Come learn more about us on October 23rd!

What makes a group intelligent?

Anita Woolley of Carnegie Mellon and several of her colleagues have conducted a fascinating new study on group intelligence, which they just published in the journal Science. The scholars found that a group's ability to perform certain cognitive tasks is not correlated with the individual intelligence of team members. (It's also not correlated with motivation or happiness of individual members.) In fact, groups that deferred to an apparent expert in the group tended to not do so well on these tasks. Instead, groups with more balanced participation tended to perform well. Moreover, they found that groups with a higher proportion of women tended to do well.

Why do groups with more women perform better? Woolley explains that it's not so much about gender in and of itself that drives performance, but the fact that women tend to have a higher degree of social sensitivity. By that, she means that they are more able to identify and react to emotional cues during a group conversation. That social sensitivity tends to insure that people with diverse perspectives and knowledge all speak up and contribute to the team conversation. That balanced, open dialogue enhances group performance on cognitive tasks.

The Gap: Crowdsourcing to Correct An Error?

This week, the Gap introduced a new brand logo. The response, via various social media platforms, has been quite negative. How did the company respond? It posted this message on its Facebook page:

Thanks for everyone’s input on the new logo! We’ve had the same logo for 20+ years, and this is just one of the things we’re changing. We know this logo created a lot of buzz and we’re thrilled to see passionate debates unfolding! So much so we’re asking you to share your designs. We love our version, but we’d like to... see other ideas. Stay tuned for details in the next few days on this crowd sourcing project.

What do we make of this rapid reaction by the company? At first glance, it seems quite ingenious to turn to crowdsourcing to address the negative feelings many consumers have about the new logo. They certainly have created a ton of buzz about this logo change. On the other hand, the move raises some fundamental questions. First, how does the company know if the negative reactions are coming from loyal customers, or just folks who like opining on various topics via social media? Second, how does the firm know if the negative reaction will translate into any lost sales? Third, will this move make it difficult for the firm to work with professional designers in the future? Won't they be upset by the rapid abandonment of something created by one of their professional colleagues and the turn to free crowdsourcing instead? Initial reactions from some in the design community have not been positive. Finally, won't the very same people who chose this logo be sifting through all the submissions in this crowdsourcing effort? What makes the firm feel that they will make a better decision this time. Clearly, the Gap needs to think carefully about its criteria and its process for selecting a new logo before it starts to pour over these submissions. Otherwise, it may make yet another error.

Hasbro's New TV Channel

Hasbro will be launching its own television channel on Sunday, according to the Wall Street Journal. The network, called The Hub is a joint venture with Discovery Channel, and it will target boys in the six to twelve year old age group. That segmentation strategy fits with Hasbro's product portfolio, which has many products targeted toward young boys (vs. Mattel, which is more girl-oriented with its product line).

Is this a wise move? We can debate whether Hasbro can succeed in a somewhat crowded market, up against rivals such as Disney and Nickelodeon. We certainly know, however, that firms such as Disney have succeeded by driving synergy between a consumer products division and a stable of television networks.

The broader question, though, is whether it makes sense for Hasbro to be in both the toy and television business. After all, Hasbro's ultimate goal here is not simply to have a popular television channel. It's goal is to sell more toys. The central issue is whether Hasbro will be able to sell more toys and games by owning its own TV channel than it could otherwise do through partnerships with established television networks, who have extensive experience in developing children's programming.

Moreover, another issue will be whether Hasbro's strategy will lead to conflicts with other TV networks, such as Disney, with whom it regularly works on licensing deals. For instance, Hasbro sells a great deal of Marvel merchandise. Yet, Disney now owns Marvel. Presumably, Disney will want to air many Marvel-oriented shows on its own channels. This article in the Wall Street Journal suggests that Hasbro is unlikely to show Marvel programming on its new channel. Will other issues such as this arise moving forward? Will it hurt Hasbro's core toy business if they are now increasingly competing with companies that have been strategic partners in the past?

How Companies Solicit Ideas from Inventors

The Wall Street Journal has an article today about how companies are soliciting new product ideas from inventors. According to the article,

In an effort to better connect with inventors, some large manufacturers including Clorox Co., Kraft Foods Inc., , General Mills Inc., Staples Inc., Procter & Gamble Co. and GlaxoSmithKline PLC, have launched websites in recent years for soliciting product ideas. Some of the sites occasionally feature specific requests from the companies' research-and-development teams.

Several years ago, a Bryant University Honors student (Taryn Beaudoin) and I worked on some research at Gamewright, an innovative game and puzzle company based in Massachusetts. Gamewright similarly solicits ideas from outside game inventors from all over the world. What we found, though, is that one of the crucial tasks in this process is the filtering mechanism. Several people sifted through these thousands of ideas, looking for gems. We found that this process often relied heavily on the intuitive judgment of those performing this filtering task. Moreover, the ideas that came from inventors often needed substantial refinement.

Thus, the task of the creative folks at the company was to not only filter out the best ideas, but then to figure out how to take the idea to the next level. The research showed us that mass collaboration and open innovation can be quite powerful, but companies must master this "filter and refine" process if they wish to truly derive innovative new products from these efforts.

The Stand-up Economist

Sun Chips: The Law of Unintended Consequences

In the rush to make their products more "green," lots of companies are adapting their products and packaging. The story of Sun Chips offers a cautionary tale to those rushing ahead with efforts to burnish their green credentials. Several months ago, Sun Chips came out with biodegradable bags for their chips. The company marketed the bags as 100% compostable, as they were constructed from biodegradable plant material. Unfortunately, the new bags are very loud, which annoyed many customers. Talk about an unintended consequence. What's interesting, of course, is that the noise level of the bag turns out to be very important to the consumer. That's not something that one might readily consider as a crucial product attribute. In fact, it probably wasn't top of mind at all for either the firm or the consumer, until the technology changed. Suddenly, this became a critical attribute to the customer.

How did the consumer backlash grow? Social media, of course! Here's a funny story from the Wall Street Journal about how customers complained via social media:

It is louder than "the cockpit of my jet," said J. Scot Heathman, an Air Force pilot, in a video probing the issue that he posted on his blog under the headline "Potato Chip Technology That Destroys Your Hearing." Mr. Heathman tested the loudness using a RadioShack sound meter. He squeezed the bag and recorded a 95 decibel level. A bag of Tostitos Scoops chips (another Frito-Lay brand, in bags made from plastic) measured 77.

Flagship Retail

My students and I received a tour of the Toys R Us flagship store in Manhattan today. We learned a great deal about the keys to running a successful flagship. These include:

1. Provide product demonstrations to encourage trial of new and exciting products.

2. Create entertainment opportunities to draw people to the store (the Ferris Wheel at Toys R Us).

3. Partner with product companies to create special events for product launches, movie openings, etc.

4. Partner with firms to create special products tailored to that particular city.

5. Use the store to experiment with concepts and ideas that might then be rolled out to all regular stores in the chain.